SAN DIEGO–A CUSO that has closed what it said is the largest single capital raise in credit union history will have its first product in the market by year-end.
The company said the strong response has come as credit unions realize that when it comes to technology they simply “can’t do this alone” and that the current vendor model isn’t working.
Constellation Digital Partners, Inc., a CUSO that germinated inside Raleigh, N.C.-based Coastal Credit Union, has raised $22.5-million toward its $28-million objective from credit unions and credit union organizations in underwrite what it is calling a “revolutionary software platform that will transform the future of digital banking for credit unions and members.”
Kristopher Kovacs
The company launched in May of this year and has already been awarded a rare patent. Earlier this year Constellation also won first place in The Next Big Idea Competition at the NACUSO Annual Conference.
'A Fundamental Problem'
The strong response to the CUSO at the same time the market is full of fintechs and new entrants is due to what Constellation Founder and CEO Kristopher Kovacs called a “fundamental problem in modern digital financial services.”
“Despite a recent boom of potential financial technology partners, credit unions cannot access them because of the legacy structure of credit union relationships with current digital banking providers,” Kovacs told the NASCUS Summit.
Constellation Digital Partners has launched after a three-year R&D effort, according to Kovacs. It is now building out its cloud-based financial services marketplace and platform that will allow credit unions and members to choose which services to use inside of a secure banking experience.
To date, CU partners from across the country totaling $12 billion in assets and 1.1-million members have committed to investing in the platform.
Kovacs said Constellation is continuing to offer investment opportunities to make ownership of the platform more accessible for a variety of credit unions.
How the Model Works
The company’s model calls for digital service developers to be involved and become service providers and partners on the new platform. Developers can create “tiles” or services, and if they pass Constellation’s due-diligence, credit unions can then seek out and purchase those services within the marketplace.
When it launched, seven service provider partners were already on board, according to a released statement: CUNA Mutual, CO-OP Financial Services, Telrock, Connect Financial Software Solutions, Obloco, Corporate One FCU, Gro Solutions, Xtensifi, and Insuritas.
The big investments have been made by a group of credit unions that have realized the sidelines is no place to be, according to Kovacs.
“Credit unions and service providers are waiting for an inflection point to make their investment. The inflection point is here,” he said. “Consumer expectations are skyrocketing for service. It’s being driven by all the great mobile experiences consumers are getting, and we’re not delivering it. Our supply as credit unions can’t keep up with the demand.”
The Inspiration
Kovacs said the new CUSO was inspired by an article he read on how Deutsche Bank had expanded its app store for its corporate clients to include 150 apps for small business customers. At the same time, in 2016 Bank of America invested $3 billion in mobile research.
“We are a $1.3-trillion industry. Are you telling me we don’t have the money to compete?” asked Kovacs. “We are closing out a $28 million funding round, the biggest in credit union history. Facebook raised just $12.7 million. So, we have money, that’s not the problem. The problem is how we spend the money. (Credit unions) spend (their) money with a small subset of providers for digital services, and those providers provide mostly the same services. They build walls around them to make them difficult to integrate, and they charge exorbitant amounts of money that we have to put on long depreciation schedules. We lock ourselves in for five or seven years with a really bad relationship.
“We aren’t failing because we don’t have great ideas. We are failing because we are locked up. For too many credit unions, an RFP is a digital strategy.”
Brainstorming prior to launch of Constellation Digital Partners, Kovacs said the team identified 180 things it wanted to do in mobile. Yet “the fact is we could consistently do five things, regardless of provider: Balances, deposits, content delivery, transfers, bill pay.”
Kovacs suggested the goals of credit unions today and those of vendors are not “aligned,” saying that buying a system means “you are buying their limitations. So, we believe there has to be a better way.”
Enter the Platforms
The answer he said, lies in “platforms,” echoing what an earlier speaker, John Lass, also had to say to the NASCUS meeting.
“When Tesla shipped (its first cars), they didn’t include Auto Pilot. They downloaded it later,” he said. “Everything has apps now. My truck has apps. But we’re still buying systems in the way we did in the 1960s. We took the idea of a platform and asked an important question: Could we separate content and delivery? Could we build a system that allows content to be built outside and bring it in in real time and in a secure way?”
To achieve that, he said the CUSO has built what it calls an “Application Container.” Any developer can develop a tile for inclusion in the Container.
“If you will build an application to our specifications we will allow you access to our data. And when there isn’t a platform out there, credit unions can extend their own,” he said.
'Secret Meeting'
Following what he called a “secret meeting” in Chicago that was attended by 35 credit unions in the Fall of 2014 and which was organized by Coastal Credit Union—where Kovacs was CIO–a number of organizations and credit unions agreed to kick in $200,000 each to build out a proof of concept.
Kovacs said he and his team took all its research and presented it to Coastal’s board, the chairman of which is an intellectual property attorney for IBM. The chair urged the group to seek a patent, and in early 2017 the U.S. Patent Office granted a rare software utility patent that highlights 27 unique claims provided by the solution that provides 20 years of protection, according to Kovacs.
“The key learning from that was too often credit unions run out and start a CUSO and start an argument over who is going to be the chair,” Kovacs explained. “We were successful beyond our expectations. We set out to build to the Apple platform, because Apple has the highest security expectations.”
Now, in addition to iOS app, it has also built an Android offering.
“We demonstrated ability to create, provision and integrate new services,” said Kovacs. “They were created by many developers, which means no requiring knowledge of core and core integration. We’re talking about a mind-shift. Instead of going to one provider, I’m open to a network of services from a variety of providers. We’re talking about creating a new service-based economy.”
Kovacs said Constellation will be publishing its specifications to get them in front of as many developers as possible. Participating credit unions will then be able to purchase the apps or tiles they want.
Phase I, known as the Unauthenticated Container, or Aquarius, is to release in Q4.
How to Invest
Constellation is now seeking to raise an additional $5.5-million in capital from either Class A or Class B investors. Credit unions interested in becoming part of Constellation and using its services will need to be prepared to write a large check, and the target market for initial investors is credit unions between $750 million and $5 billion in assets. To become a Class A Investor requires $3 million, while become a Class C investor requires $500,000.
To date, credit unions that have invested in the CUSO include Affinity CU, Georgia’s Own CU, Coastal CU, Nusenda, Farmers IG FCU, Meritrust, CFCU, and Teachers CU. There are also Class C investors: CO-OP Financial Services, CUNA Mutual, and CU Solutions Group.
The credit unions involved represent $16.3-billion in combined assets and 1.4 million members will be able to use the service “because we took the time to solve a problem.”
Nineteen companies have signed up for its Early Developers Program, said Kovacs: CO-OP, CUNA Mutual, CU Solutions, Jack Henry, Connect Financial Software, Narmi, Corporate One, Obloco, Insuritas, GroSolutions, Xtensifi, Telrock, Quarterspot, Rate Reset, Mobilco, Qcash, Microdynamics, and Geegeo.
Smaller CUs?
What about smaller credit unions that can’t make that kind of investment?
Kovacs said that practically speaking, in Phase I it has been necessary to obtain the larger investments. He said what the CUSO envisions, however, is some sort of future agreement with a corporate or another company that it could in turn resell down into the smaller CU marketplace.
“Credit unions have to respond to the digital demands of our members,” said Kovacs. “Our core purpose is to help credit unions survive and win, because digital is important.”