Putting money into industry innovators might be right for your credit union and the movement.
How can credit unions get in on the fintech phenomenon rather than be left behind? One way is to make strategic investments in such startups to get a say in how the technology is developed as well as potentially attractive returns.
Determining a Fintech Strategy
Given the growing influence of fintechs, CUs need to think about the big picture.
“If your credit union doesn’t have a fintech strategy, it certainly needs one,” says Kathy Pearson, Ph.D., strategist, authority on decision-making and president/founder of Enterprise Learning Solutions in Philadelphia.
When CUs consider how to get the capabilities they need, “they should ask themselves, ‘Should we organically grow this competency, or should we buy it?’” Pearson advises. “Or you may decide, ‘I’m not going to ... invest in this company, but I’m going to partner with them.’ That’s a less risky proposition, in many cases, and can still meet your objective.” The relationship could range from providing capital to an informal app testing partnership, she notes.
Pearson points to several advantages of working with fintech startups, including the ability to influence product development from the ground up. However, investment in fintech startups comes with risks. “There’s uncertainty ... because we’re not sure which ones are going to be the winners—which ones are going to be around five or 10 years from now,” Pearson says. “There are also questions regarding how fintechs are going to be regulated. That’s why I would advise credit unions to think in terms of the ‘small bet’ as opposed to a big investment.”
Investing in a fintech company also needs to align with your CU’s priorities and risk appetite.
“I think it starts with the board and what your overarching strategic plan is,” says Kari Wilfong, chief financial and administrative officer at CUES Supplier member CO-OP Financial Services, Rancho Cucamonga, Calif., a technology leader with 1,200 CU owners. “It’s important to identify the critical factors that you look for in an investment opportunity.” Whether to invest or just deeply partner depends largely on your strategic drivers.
Is your CU motivated to invest by the innovation and quality services offered by the fintech? Or is the investment driven by the fintech's growth potential? Be aware that as the company gains value, its end game may be to attract a buy-out offer.
This underscores why it’s so important to have a clearly defined investment goal, including an exit strategy in case the fintech no longer aligns with the CU’s goals. “It’s almost like a prenup,” Wilfong says. “You need to know what would happen in the event that the company didn’t exist any longer.”
Another consideration, Wilfong says, is the uniqueness of the product or service the fintech offers. “Can you get the technology from somewhere else? If you’re trying to create a unique experience, it’s important to invest in … organizations that can deliver that,” Wilfong says.
When narrowing down their investment options, many CUs would be wise to turn to outside experts who can help evaluate the viability of a particular choice. “You want to make sure you understand what the true value of the organization is, and there are a lot of companies that can help you with that piece,” Wilfong explains.
Once a decision has been made to invest, Wilfong stresses that the CU has to ensure a strong relationship with the fintech: “Make sure you have ongoing representation to determine directionally if the company continues to be in alignment with your goals.”
A Fruitful Relationship
Investing in a fintech startup has gone well for $1.1 billion Collins Community Credit Union in Cedar Rapids, Iowa. The CU has previously participated in fintech investments as part of a group funded by several CUs, but just recently made its first direct investment—in LenderClose, Des Moines, Iowa, which offers a digital lending platform designed to empower local lenders and improve back-office efficiencies.
“We thought it was wise for credit unions to do what the bigger banks have been doing for quite some time, and that is invest in companies that could create and refine the technology for us rather than trying do to it on our own,” reports Scott Frost, chief lending officer.
Thanks to this investment, Collins Community CU has been able to influence product development decisions at the firm.
Frost says, “I have the ability to go to [the owners]—and I have already done so—to say, ‘I’m looking at this particular product, and here’s what I want it to do. Do you think it’s possible?’
“You have the ability to invest in these incubators for technology,” he adds, “and if it pans out, you’re able to continue your investment and possibly increase it so you don’t lose that technology to one of the big banks, which commonly come in and buy these companies out.”
Partnering Versus Investing
First Entertainment Credit Union, Hollywood, Calif., has exercised caution when it comes to investing in fintech firms. Dan Kinne, director/information services, affirms that the $1.5 billion CU is exploring the possibility of fintech investment to maintain its technological edge. “We would get the benefits of all the R&D that goes into this technology,” he notes.
But Kinne admits concern about making the leap. “We’ve been a little reluctant on venturing into fintech startups, because down the road, they may face some regulatory compliance issues,” he explains. “There are a lot of new technologies—with fintech payment systems, for instance—that are really compelling, ... but we are taking a bit of a conservative approach until we see what happens on the regulatory front.”
Instead, First Entertainment CU has developed deep partnerships without making an actual capital investment. The CU has, for example, implemented the Laserfiche enterprise content management system by partnering with Millennial Vision Inc., Salt Lake City, a value-added reseller.
The Laserfiche/MVi product suite “has all the traditional imaging features, plus a sophisticated feature set including automated workflow, e-forms, etc. This product set is what integrates our corporate environment,” Kinne says. He has found MVi, with its 20-plus years in the industry, to be a stable and reputable “wrapper” for fintech, providing additional solutions necessary for financial institutions.
“We liked what MVi brought to the table in terms of being very experienced working with credit unions,” says Kinne. “MVi was a very good fit for us. They’ve become one of our premier business partners ... . We really value the relationship, and our organization has flourished with it.”
Benefiting the Industry
Credit unions that invest in fintechs not only help themselves but also other CUs, in keeping with the movement’s “people helping people” philosophy. “Not every credit union can afford to invest in a fintech, so the way we look at it is that we’re not only helping out Collins Community CU, but we’re also helping out all the credit unions that LenderClose works with,” Frost says.
“As one of the larger credit unions ..., we think it’s important to invest in fintechs and help develop technology for the credit union space as a whole. That way, the technology will continue to be available to the smaller credit unions that otherwise couldn’t afford to develop it on their own.”
Diane Franklin is a freelance writer based in Missouri.