Online Lenders Seeking Growth Tap Credit Unions for Funding
Focusing on the more stringent regulatory expectations placed on larger CUs will help a fintech prepare to enter the big leagues.
Credit unions and fintech lenders may seem like strange bedfellows, but, in recent years, they’ve been forming fruitful partnerships. Online lenders have been growing like wildfire and, along the way, selling their loans to many credit unions that see the value in diversifying their balance sheets and gaining access to lending products and programs that could be costly to establish from the ground up. These relationships provide mutual benefits – the online lender gets access to the capital they need to fuel growth, while the credit union unlocks the opportunity to acquire new members and put the deposits of existing members to work.
It’s important for fintechs to approach partnership discussions with their business goals in mind. If growth is the priority, the fintech can find great value from partnering with a large institution with a bigger balance sheet. Yet not all credit unions are the same, so it helps to understand additional regulatory compliance requirements that are tied to the credit union’s asset size.
For instance, institutions with at least $10 billion in assets are subject to the CFPB’s vigilant enforcement of consumer protection statutes and regulations. Accordingly, fintech operators that partner with large credit unions will also be asked to adhere to more stringent compliance, reporting, underwriting, data security and privacy requirements, and should be prepared for the staffing and processes required to meet these expectations. A successful partnership requires that larger financial institutions and fintechs work together to understand those requirements, creating a win-win for all parties, especially when you consider the CFPB’s recent consent orders involving fintechs.
Fintechs can expect to field several questions related to risk and compliance issues as they begin partnership discussions. Here are a few questions they can anticipate:
- How does the fintech lender source applicants? A potential partner will want to know what channels the online lender is using to originate loans, whether the marketing of its products is broad enough to reach all consumers, what loan-specific disclosures are made to the consumer and whether the fintech has adequate licensing to offer its products.
- How are loans funded? There are many possible funding paths to consider. For example, the fintech may fund the loan and then assign it to the credit union, or have a third party fund the loan and then purchase the loan from that third party. Alternatively, the credit union could fund the loan and pay a premium to the fintech for using its platform.
- What’s the secret sauce? A credit union partner will want to thoroughly understand an online lender’s market niche and differentiators. It may ask for historical data to demonstrate success of the business model, and because credit unions are subject to fair lending laws, they may also want to analyze the credit model to assure use of acceptable credit attributes.
- How mature are the online lender’s settlement, reporting, compliance, data security and accounting processes? A potential partner will be looking for established data and cash flows that facilitate easy settlements, reconciliations and accounting. It’s important for fintechs to be receptive to a credit union’s review of their compliance management systems. An institution seeking to protect itself from future regulatory missteps will likely perform a thorough due diligence review for all risk areas, including, but not limited to, the compliance management system, complaints program, information security and privacy programs, and anti-money laundering compliance program. It may ask to review process maps, disclosures, consumer communications, training, monitoring, complaints, policies, procedures and other program documentation. The ultimate goal is to get a detailed picture of the fintech’s compliance management system.
While it can initially seem like a burden to answer so many questions about privacy, compliance systems and other areas, growing fintech companies stand to gain much knowledge and experience by partnering with large institutions. Upping its game to meet the more stringent regulatory expectations placed on larger credit unions will help a fintech prepare to enter the big leagues of finance. Once that level is achieved, it will create a repeatable process that will open up additional opportunities at other large credit unions and speed up the onboarding process.
Above all else, it is critical to approach the arrangement as a true partnership. Credit unions and fintechs both have much to gain from working together – in the end, both partners will be better equipped to serve the needs of today’s financial consumers.
Charles Krawitz Vice President, Chief Capital Markets Officer and Head of Commercial Lending Alliant Credit Union Chicago