Fintech Partners Bolster Credit Union Growth

The days when traditional financial institutions considered fintechs grave threats, poised to steal business by attracting tech-savvy and convenience-seeking consumers, are over. Now, there’s a consensus within the credit union industry that joining forces with fintechs is the way to go – in particular to boost loan and member growth.

One new initiative that has demonstrated credit unions’ growing willingness to partner with fintechs is the Fintech Forum, an online community and webinar series hosted by CMFG Ventures (the venture capital arm of CUNA Mutual Group), which has been educating credit union leaders on fintech partnership best practices and introducing them to potential partners.

Brian Kaas, president and managing director of CMFG Ventures, said the industry has reached an inflection point when it comes to fintech, with more credit union leaders realizing they must embrace such partnerships to stay competitive. However, many of them are feeling overwhelmed by the vast number of fintechs – there are currently about two ­fintechs for every credit union in the U.S. – and struggling with overall project fatigue. What’s more, Kaas said fintech leaders are eager to make connections with credit unions but have struggled to do so.

“I see tremendous opportunities for both sides, where you can leverage the strength of the credit union and the strength of the fintech company,” Kaas said. “One area that makes credit unions very attractive to a lot of fintechs is their large, loyal membership. What fintechs have is great technology oftentimes, but they are lacking the market share and trust. Pull these two together, and you create something very powerful. You enable credit unions to offer their members technology that they’ve come to expect from other industries – maybe even some of their other financial service providers.”

Kaas said since launching the Fintech Forum in response to credit unions’ and fintechs’ enthusiastic yet often unsuccessful efforts to connect, credit unions of all sizes have participated in the program, hundreds of introductions have been made, and some fintech leaders have said they acquired a year’s worth of leads after appearing in one webinar.

One key desired outcome for credit unions partnering with fintechs, according to Kaas, is loan growth. He said lending-focused credit union-fintech partnerships generally fall into three categories: First, a credit union can provide the funding for loans that were originated by a fintech, turning the borrowers of those loans into credit union members. The second entails more advanced loan recapturing, where a non-credit union loan is converted to a credit union loan. The third involves embedded finance and represents a key area of opportunity for credit unions that want to avoid seeing their loan volumes drop.

“There’s a larger disintermediation between traditional financial services and lending that’s occurring, so you see more companies looking at embedded finance, where financing is occurring at the point of sale. As auto purchasing moves online more, the financing of those vehicles will occur through those digital channels where consumers are engaging,” Kaas said in explaining the third use case. He added, “Unless we find ways to get credit unions embedded into the retail transaction, we’re going to continue to see an acceleration of declining loan volumes in the credit union space.”

As an example of how credit unions could leverage embedded finance, Kaas said CarSaver, a company in CMFG Ventures’ portfolio that runs an e-commerce platform for buying and selling automobiles, is powering an auto buying program for retail giant Walmart, and CMFG Ventures is exploring how credit unions could potentially provide financing for those vehicles.

“When you look at the expected car volume that could come through Walmart, it becomes a very large number,” Kaas said. “It’s easier for those players to deal with very large banks and have one partner, or maybe a small number of partners, that can provide funding for the loan volumes they’re going to see, versus managing 1,000 partnerships with credit unions. So we’re trying to think of innovative ways, through partnerships, loan participations and technology, to ideally help credit unions of all sizes take advantage of embedded finance solutions that are rolled out through various merchants.”

Another popular credit union-fintech partnership goal is boosting member attraction, attrition and engagement. For example, CMFG Ventures portfolio member Goalsetter provides an app with a TikTok-like feel that educates young consumers about finances, and enables them to open savings accounts and hold fractional shares in companies. This allows partner credit unions to develop relationships with youth account holders via a teen-friendly app that would be difficult for the credit union to develop on its own, Kaas explained.

With lawmakers and regulators generally behind the curve when it comes to their oversight of fintechs, another reason why credit unions may hesitate to pursue fintech partnerships – aside from lack of direction and project fatigue – is risk. Kaas recommended that credit unions pursuing a new fintech collaboration conduct the same due diligence that they would for any new vendor relationship, but take it a step further by really getting to know the fintech’s management, finding out who its investors are and whether they’ll be around to support the fintech’s growth, and talking to the fintech’s existing credit union partners. “There’s still a risk aversion for some credit unions to working with an earlier-stage fintech, but what I tell them is the risk of not developing a strategy to work with fintechs is riskier than the status quo,” Kaas said.

He added that for a fintech partnership program to be successful, it’s imperative for credit unions to have buy-in from their CEO, senior executives and board. And if the credit union has the resources to do so, it’s helpful to appoint one individual to a role that is exclusively responsible for fintech partnership management.

One credit union that recently did just that is the $15.1 billion, Chicago-based Alliant Credit Union, which in January 2022 hired Robert Perrelli to take charge of sourcing, developing and incubating fintech partnerships as the credit union’s vice president of partnership development. Perrelli is new to the credit union space and brings over 15 years of experience building and managing products and partnerships, most recently for Huntington National Bank and TCF Financial Corporation.

Alliant, whose current and planned fintech partnerships are all for the purposes of loan growth, has five fintech partners in place today and a goal of adding three more in 2022, according to Perrelli. The credit union plans to originate a total of $800 million in loans this year – a combination of HELOCs and home improvement, solar and unsecured loans – purely as a result of its fintech partnerships.

At Alliant, the relationship-building journey with a new fintech partner typically begins with a qualitative assessment – including conversations that can help reveal the potential partner’s expertise, values, maturity and liability – and evolves toward the goal of transitioning the partnership into a line of business, Perrelli explained.

“So if it was a HELOC fintech provider, we would reach our critical milestones over X period of time, and throughout that process, from launch to transition, we’ll have someone from the line of business engaged with the partner so there’s a smooth introduction, relationship building, and ongoing management of opportunities or issues that need to be solved,” he said.

What might the critical milestones include? “They could be service related or credit performance related, or they could be tech-related milestones or deliverables as we really fully implement the relationship and automate certain aspects of processes,” he said.

When it comes to assessing risk prior to forging ahead with a new partner, Perrelli emphasized that to conduct a truly thorough assessment, credit unions must give those who are charged with the task ample time and space.

“I act as the shepherd between external and internal parties, and the fact that [fintech partnerships are] a strategic objective for the organization means it isn’t a side project. It’s a priority across the board. That affords me the opportunity to engage with partners – whether they’re info security, compliance, legal, credit risk or third-party risk management partners – on a very regular basis, and we can focus our efforts, solve problems collaboratively and really establish a strong cadence in assessing risk, controlling risk and mitigating risk.”

For credit unions that may not have as robust a fintech partnership program in place as Alliant, Perrelli offered three tips. First, because values and purpose differ from organization to organization, define what a successful fintech partnership looks like for your individual credit union. Second, create space for all the necessary groups within the credit union to focus on assessment and understanding of the partnership – and get those people involved as early as possible.

Finally, Perrelli recommended starting with the end in mind: “Have discussions with your finance partners and senior leadership on what the opportunities are for the credit union and how you can optimize your balance sheet. Take a more top-down approach, but with very clear goals and objectives.”

The path to establishing a successful fintech partnership might still look hazy to some credit union leaders, but one thing is clear: Credit unions and fintechs are on the same page more so than ever before. Perrelli recalled that in 2017 when he first began engaging in the space, traditional financial institutions seeing fintechs as competitors was a common theme, leaving him with the challenge of turning perceived threats into opportunities. Now, both he and Kaas agreed that the two industries have more commonalities than differences – and that their differences represent a chance for them to learn from one another.

“One thing I love is when we talk to a number of the [fintech company] founders in our portfolio, the mission of these founders and the mission of credit unions … I mean, they’re completely aligned,” Kaas shared.