By Jeff Kline
Just one of the things we’ve learned from the pandemic is the critical importance of offering online services to American consumers, but even before this era of social distancing today’s consumers expected their financial institution to offer flexible services accessible anywhere, anytime and from any device.
It’s no surprise, then, that CUToday.info reported that experts predict the global fintech personal finance industry would reach $1.5 trillion this year—and that was before coronavirus required everyone to hunker down.
Today’s members expect online banking and remote check deposits as a given, and we continue to see that financial products themselves are commodities. In this age when customer experience is the true differentiator, it’s not enough to just offer the same basic products and services if credit unions expect to compete and build member loyalty.
In the meanwhile, fintech firms continue to develop innovative ways to offer more and better services that create a better experiences for the consumer, and if credit unions don’t find a way to engage with the fintechs leading this work, we are going to lose members to the companies that do.
Big banks have already been doing a much better job of working with fintechs than credit unions, and then there are the fintechs that compete directly with both banks and credit unions to deliver financial services. The FDIC just granted a bank charter to Square, Inc., a fintech founded in 2009 with deep market penetration within micro-businesses, signaling an ever-more competitive market. A recent Harris Poll commissioned from Ondot Systems reported that 64% of Americans would consider getting financial products from a tech company rather than a traditional financial services provider, and the percentage was 81% among people aged 18 to 34 years old. We can’t afford to wait while big banks, big tech and fintechs pick off the most profitable parts of our business.
Obstacles to Fintech Partnerships
Engaging with fintechs is one of MEMBERS Development Company’s (MDC) major initiatives, and we have identified three key challenges to doing so, as well as some opportunities we are developing to overcome those challenges.
Awareness. Part of the problem is fintech firms, like much of the rest of the country, aren’t very aware of credit unions and don’t view us as collaborators. To raise awareness of credit unions among fintech firms, we hosted a Fintech Expo last year. Fifteen fintech companies were invited to present their ideas and share insights. The Expo concluded with the announcement that MDC, Constellation Digital Partners, Payrailz and six founding credit unions had formed CU Railz, a CUSO that enables credit unions to deliver Payrailz's payments services. We are planning another Expo in 2020 to attract more interest from fintechs.
Regulations. While credit unions are increasingly motivated to seek partnerships with fintechs, the regulations regarding the investments credit unions and CUSOs can make are an impediment to our ability to compete and offer significant capital to fintechs seeking investors. While the industry has developed creative workarounds, they are not always an option and add overhead and complexity to the process.
Simply put, this is yet another roadblock that keeps credit unions from being seen as a desirable partner to fintech firms. In response, MDC is planning to work with the NCUA in partnership with other credit unions, industry partners and trade groups to focus on the regulations that govern these issues.
Funding. Larger financial institutions have the funds to invest in those fintechs they view as an asset, or to buy them outright if they perceive them as a threat. Few individual credit unions have those choices. However, by combining resources, credit unions can compete in this arena, and MDC is currently laying the groundwork for a credit union ventures fund. Once formed, professional investment fund managers will run the fund on the behalf of its contributors.
The goal will be to increase credit unions’ presence in the fintech field as sources of capital while spreading the risk of investing in fintechs across a broad base of credit union participants.
The Only Way to Success
Americans expect to be able to conduct nearly every aspect of their lives online. This expectation will only become more ingrained in the aftermath of the coronavirus pandemic, during which students are taking their classes online, families are ordering groceries for parking lot pickup, young children are attending dance classes via web conferencing and “eating out” means using your phone to order dinner delivered—and not just from a national pizza chain’s website, but from your favorite dine-in restaurants through third-party apps too.
Partnering with fintech firms to offer leading-edge financial services is crucial for the future success of credit unions in this age when consumers expect services via a path of least resistance, and pooling resources with other credit unions is how we can all make that happen. Without working together, we’ll all get left behind.
Jeff Kline is CEO of MEMBERS Development Co. For info: www.membersdevelopment.com.