CUSOs are innovation platforms for credit unions, allowing credit union owners to share risk and expenses when building better and sometimes revolutionary systems, products or channels to serve their members.
Fintech firms are the very essence of innovation and through their entrepreneurial drive have created revolutionary changes (marketplace lending, new payment methodologies, mobile platforms, etc.) in banking. They have disrupted banking in ways we could have never imagined.
Over the last few years there have been a lot of discussions about how a marriage between these two innovation engines could and should be arranged in order to create the perfect retail banking business model. Credit unions come to the relationship with the best value proposition (lowest cost of capital) in financial services and fintech companies bring the sexy technologies that level the playing field with big banks and provide the innovative channels that all consumers are wanting. Together they are a super star couple that can build awareness, enhance service, deliver unprecedented value and dominate retail banking services for the foreseeable future.
Unfortunately, there are significant roadblocks that come to light after the infatuation wares off. Those often unreconcilable differences frequently lead to discontent, separation and sometimes divorce. The reason: CUSOs and fintechs have fundamentally different motivators and beliefs. One believes in a long, permanent marriage and the other in a series of partnerships and separations over its lifetime.
I recently found myself at the vortex of this challenge when I partnered with two incredible entrepreneurs who wanted to bring marketplace lending into the credit union space. We worked for a year researching platforms, talking to credit unions, setting up sales calls, demonstrating the system and working through different business models. Yet we ended up being somewhat incompatible. Why? I come from the mindset of the cooperative model, having been in the industry for 30-plus years. I wanted to build consensus with credit union partners, have a measured pace into the new model, and share ownership and risk evenly with the credit union investors. My partners, who were very successful, serial entrepreneurs, saw the opportunity in credit unions and wanted to build a model that quickly gained scale, was controlled by the founders, had outside investors and could be sold in a few years for a significant profit.
These very basic differences in beliefs, at least in our case, became insurmountable and our relationship ended in a friendly divorce. I still love them but we can't live together.
As I see it, this dysfunctional family scenario has played out in many attempts to create innovative CUSOs. The different worldly views between cooperatives and for-profit-minded enterprises is difficult to reconcile, and because of this, the industry has seen great ideas and disruptive technologies fall apart as the arguments between the partners have become more intense and the middle ground harder to find.
But there are successes, and we have seen many examples of these diverse marriages working. The solution often comes in the form of something similar to a prenuptial agreement where the challenges are worked out before the business is consummated. We have found that the best way to create a common definition of success for the new organization is to go through a process that starts with building consensus, defining the governance model and jointly building business plans. A process we have used successfully is known as “decision by design.” This process is organized so that the different parties devote themselves to a process (marriage counseling?) that builds a partnership that can stand the test of time and more importantly keep everyone happily engaged.
Kirk Kordeleski is Senior Managing Partner for the Edge Consultancy. He can be reached at 516-528-5057 or [email protected].
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