Why working with financial tech firms is frustrating—and why doing so still makes sense
Fintechs are growing like crazy and deluging credit union leaders with new opportunities and risks. The fintech market has seen a seismic shift in the past 10 years, notes Sam Kilmer, senior director at CUES strategic partner Cornerstone Advisors, Scottsdale, Arizona. Fintechs are moving from competing with established financial institutions to partnering with them.
“New fintechs started out thinking they would provide financial services directly to the consumer,” he explains, “and cut out the bank or credit union in the middle. They had a cavalier attitude that they would displace banks, but that proved harder than they expected. They ran into security, regulatory and privacy constraints that financial institutions had already learned to accommodate, so they started to offer their technology through financial institutions to reach their customers.”
Chase, for example, encountered competitive challenges from digital lenders like LendingClub and found that fintechs could originate small business loans more efficiently than the bank could, so it signed a deal with fintech OnDeck Capital so that those loans are now originated on OnDeck’s platform but booked into Chase’s portfolio. Chase learned and incorporated what it could from its former competitor, and OnDeck gained a go-to-market partner for a time.
“Through partnerships more than direct relationships, fintechs are having real impact on how consumers and businesses bank,” Kilmer says. “Those partnerships are growing quickly.”
Established, legacy fintechs now have older technology, observes Sam Das, managing director of CMFG Ventures, the venture capital arm of CUESolutions Platinum provider CUNA Mutual Group, Madison, Wisconsin, so new players are trying to plug into the older ones and creating fintech stacks to bring new products to market.
Looking for Harmony
CUs and fintechs may be singing duets, but the harmony isn’t always sweet. It’s not that CUs have avoided fintechs as valuable potential partners, Kilmer observes. They are working together, but with some friction and a degree of frustration.
“The biggest complaint of the fintechs is that the credit unions lack the internal resources and accountability to make the fintech solutions work up to their potential. The biggest complaint of the CUs is that the fintechs are not living up to the road map they promised. The results continue to fall short of the expectations.”
Financial institutions and fintechs started out as antagonists and have moved to reluctant and suspicious partners, reports Finanser blogger Chris Skinner.
“A lot of fintech entrepreneurs thought banks were stupid at first, but they learned they had underestimated the regulatory and risk obstacles. Logically, they should work together on solutions, but the trust still isn’t there. Financial institutions behave like fortresses of confidential data, and they are reluctant to let any third party see deeply into their operations. Fintechs think financial institutions want to talk to them about their latest technology, then copy their solutions and leave them high and dry. Both feel they could be exploited.”
Jeff Chambers is one person who’s happy to implement fintech-like solutions but doesn’t like to partner with fintechs.
“We worked with a few small fintech startups in 2016 for things like automated account openings, but they were bought by our competitors and merged into their systems, so we don’t spend much time now working with startups,” reports Chambers, president of Lumin Digital, San Ramon, California, a three-year-old digital banking platform owned by CUESolutions Bronze provider PSCU, St. Petersburg, Florida. Lumin Digital now has 10 CU clients, five in production and four poised to launch soon. From Chambers’ perspective, a state-of-the-art digital banking platform provides better outcomes for most CUs than trying to wire together a bunch of fintech solutions.
A major irritant to happy outcomes, says Das, continues to be integrating fintech solutions into existing CU infrastructure.
“Legacy infrastructure still prevents or complicates bringing some attractive fintech services to members,” he notes. “It needs to be easy for credit unions to plug in new solutions, but it often is not. It can take months, if not years, to integrate some popular services into legacy core systems. We’re seeing new, digitally sophisticated cores and middleware providers built on an open architecture start to challenge the established providers because they can accept the latest solutions that CUs and members want.”
Startups are now getting direction from CU-savvy backers.
“We try to bridge the gap between CUs and fintechs,” explains Vasilios Roussos, managing director of the DCU Fintech Innovation Center, Boston, a proving ground for emerging fintechs. “Fintechs often have the talent but not the deep understanding of the problems CUs are trying to solve.”
Das adds, “The future is about getting this right, with credit unions and fintechs working together to better manage the ecosystem”—not just the risks and costs, but driving the kinds of member value outcomes that lead to CU revenue and growth. Clear communications upfront is the key to capitalizing on opportunities, he adds.
As far as working with fintechs, Brad Calhoun, CEO of $7.7 billion Teachers Federal Credit Union, Hauppauge, New York, a Happy Money client, likes the experience. “They’re cool people,” he says of the team at Happy Money, which seeks to help people have a happier, credit card-free, lower-debt relationship with their money. “They take a fresh approach and bring new thinking by people who are not bogged down in operational responsibilities. And those people have impressive skills. They incorporate ... more sophisticated analytics and complex models that can predict human behavior. They can show us new ways to solve problems.”
Monotto is one fintech that is helping to solve a real problem. It was founded four years ago by three college students—one of whom, Christian Ruppe, is now CEO. The students, typically struggling to make ends meet, decided there had to be a more automated way to “handle personal income and expenses and move money,” Ruppe says, so they looked into artificial intelligence and machine learning, turned to data-rich partners like CUES Supplier member Finastra, London, and started coding.
“We wanted people to be able to set goals and make a plan that could run on auto-pilot,” Ruppe explains. “It’s easier for someone to commit to saving $5 a day than to $150 a month. We’re hoping to change how people think and make it easier for them to save. A CU member could use the program to build up enough savings to make a down payment on a house,” he suggests. The app currently has four signed customers and others testing the product. Early tests with one financial institution are promising, Ruppe notes.
Finastra is happy so far, according to Allan Brown, VP/general manager of mobile and online banking solutions for Malauzai, a Finastra company in Austin, Texas.
Technically, this is a fintech-fintech marriage—at least in Brown’s eyes. But Malauzai is hardly an entrepreneurial disruptor with a single focus on the latest potential best-of-breed app. It’s more of a new generation fintech-friendly core processing platform that partners with ventures that might provide such apps it can incorporate. Monotto and actual CU clients are still in the dating stage.
Serious relationships may be easier when fintechs and CUs share the same DNA. Fintechs’ success at technology innovation and their ability to disrupt traditional CU business has prompted CUs to start credit union service organizations and launch their own captive fintechs that would promote rather than disrupt CU business strategies.
For example, the new Origence brand from CUES Supplier member CU Direct, Ontario, California, has introduced an enterprise lending platform that can replace or work with legacy loan origination and mortgage loan systems, according to Brian Hamilton, CU Direct’s VP/innovation and insights.
“It’s a next-generation enterprise lending platform built on a new technology stack, micro components and APIs to enable credit unions to be more nimble, more sophisticated and more flexible with their lending strategies by plugging in functionality as needed,” Hamilton explains. “Traditionally, CUs have had separate systems for consumer and mortgage lending, and information like credit reports might have had to be entered separately in each system. With Origence, CUs can import and store information across all loan products in one system built to operate end-to-end but able to incorporate components of legacy systems.” The new platform went live in March and at this writing had five early credit union adopters.
Roussos cites appraisal management as a particular case of productive partnerships. “Reggora is one of our stars,” he says. “They provide a software platform that mortgage lenders at dozens of financial institutions use to manage their appraisal vendors. The platform can cut a process that normally takes about two to three weeks to just five to seven days, and it provides real-time visibility into the status so that anxious loan applicants and loan officers don’t have to keep calling the CUs for updates.”
CUs also have an industry fintech investment firm in CMFG Ventures, Das notes. The company has been funding fintech startups since 2016, shifting its investment strategy more to later-stage ventures closer to bringing products to market, he says.
Das cites the example of CUNexus, a popular fintech solution that can be made to sit on top of a CU’s infrastructure and remove a lot of the friction around getting a loan.
“It offers perpetual access to a member’s capacity to borrow,” he explains. “They can see how much they could borrow and apply for a loan with a single click. Then, as the member borrows more, the system can recalculate how much capacity remains. It was founded by credit union executives and is used today by over a hundred CUs.”
What will the next generation of fintechs look like? The road ahead is far from clear, Chambers says. “Will it be digital money? Artificial intelligence? Chatbots? There are lots of opinions but nobody really knows.”
Innovative technologies are feeding the surge in fintechs—12,000 startups, mostly cloud-based niche applications—over the past decade, Skinner reports. Biometric authentication is thriving. In India, a government-sponsored fingerprint program opened the door to a radical increase in the percentage of the population that has a banking relationship, from 35% in 2012 to more than 80% in 2019. Facial recognition in China—called “Smile to Pay” —is proving reliable even when a person wears a wig or makeup. It’s not just financial; police in China are starting to wear infrared smart helmets that can detect people with a fever up to five meters away to stop the spread of the COVID-19 virus, he reports.
The problems haven’t changed so much as the solutions keep getting better, Roussos concludes. “New technology is addressing old problems in new ways,” he says. “Artificial intelligence and machine learning are evolving quickly to make solutions even more efficient, more user friendly and safer.”
COVID-19’s Impact on Fintech Partnerships
Financial institution/fintech relationships will be impacted by the COVID pandemic in many ways, according to Sam Kilmer, senior director at CUES strategic partner Cornerstone Advisors, Scottsdale, Arizona.
On the one hand, he explains, demand for fintech relationships will grow because the top areas of fintech are digital lending, digital origination and digital payments—the very digital disciplines and capabilities most in demand by CUs and their members right now.
On the other hand, Kilmer says, supply (the fintechs themselves) was largely operating on a growth (vs. sustainable profitability) model, and the pandemic has destabilized the fintechs more than banks or credit unions. Many don’t have the capital to easily withstand a systemic economic hit. For example, LendingClub announced a 30% layoff amidst the COVID downturn to stabilize after projected earnings impact. “So, while CUs need to be even more mindful in their risk diligence, they also need to ensure that the credit union’s key fintech contacts haven’t been furloughed, reassigned or are otherwise unavailable to the credit union due to the pandemic,” he explains.
Another side impact of COVID is how to build credit union-fintech relationships in the first place. “With no in-person conference events or onsite meetings and sales calls not warmly received, fintechs—like their CU partners with their own members—must adapt their outreach mix to be more digital content- and help-based,” Kilmer says. “In turn, there is a rise in shareable research, white papers, webinars and other self-help content.”cues icon
Richard H. Gamble writes from Grand Junction, Colorado.