Innovation Center establishes familiarity with new financial technology firms from the ground up.
$8.2 billion Digital Federal Credit Union, Marlborough, Mass., has signed a contract with one fintech startup and is running pilots with three others, reports CUES member David Araujo, CIE, CCE, the CU’s SVP/innovation. But he has a head start on his due diligence, because he watched these fintechs sprout in the credit union’s backyard.
Twice a year, Digital FCU accepts 10 new startups in its Boston-based FinTech Innovation Center. “We provide them free space for a year and help them establish connections that they need with venture capitalists, attorneys and accountants,” he explains. DCU doesn’t provide any other financial support.
“Having familiarity is important, because startups don’t have the normal experience, references and financials a CU would expect to see when evaluating a vendor,” Araujo says. “You have to view them differently because they’re still trying to figure out what their business should be. As they attract venture capital, run tests with live data and begin to pilot with established financial institutions, their value starts to emerge.” Which is why Digital FCU is running those pilots with three ventures that are ready to do real work. “We help them learn, but they help us learn too,” he observes.
So far, one venture, Digital Onboarding, has graduated from the pilot stage and signed a contract with the CU, one of its first two clients.
“They’re helping us to provide our members with a more digital onboarding experience, rather than us mailing paper literature to new members,” he explains. “For members who join the credit union online, we want to keep the relationship digital. They still receive some traditional mail now, but we’re hoping Digital Onboarding will help us eventually eliminate the need for that.”
Because many fintech organizations are selling high-performance, narrowly focused applications that need to bolt onto big systems, integration is a critical issue. “It can be a real challenge both on the back end and with member communication,” Araujo notes. “You have to seriously question if the results are worth the time and investment.”
“Contracts with startups are shorter than traditional vendor contracts, he points out, typically for a year. Pilots usually run three to four months. “It’s important to establish milestones and take the next step only when the previous one has been reached satisfactorily,” Araujo explains.
Data security is a key concern, but a manageable one, he says. “Most of the startups run on cloud platforms that already have been vetted, so we just have to be sure they’ve put all the pieces in place.”
Because of its size and reputation, Digital FCU regularly receives invitations to pilot with fintech companies outside of its program. So far, it hasn’t accepted any.
“Those are harder to work with because we have to start from scratch with the due diligence. Reaching a comfort level is difficult,” Araujo notes. The CU does have one partnership with a larger fintech, CU Nexus, to automate loan application approvals and present the preapprovals to members whether they are banking online or through their mobile app.
Richard H. Gamble is a freelance writer based in Colorado.
Also read, “Fearing Fintech Disruptors?”
You may also be interested in CUES School of IT Leadership, Sept. 12-14 in Denver.