Credit Union & Fintech Leaders Move Critical Partnerships Forward: Part Two

For part two of this two-part Q&A with CU Times, Brian Kaas, president and managing director of CMFG Ventures, the venture capital arm of CUNA Mutual Group in Madison, Wis., shares more insights gained from the company’s first-ever Fintech Summit, including why it’s important to have the NCUA on board with credit union-fintech partnerships, how fintechs can help credit unions weather economic changes, and where the credit union industry currently stands on its journey with fintech companies. Read part one here.

Responses have been lightly edited for length and clarity.

CU Times: As you mentioned, NCUA Board Member Rodney Hood was in attendance to discuss the NCUA’s support and encouragement of fintech partnerships. What’s the significance of the NCUA’s support of credit union-fintech partnerships and why is it important for credit unions to have the agency in their corner?

Kaas: There certainly has been concern expressed by credit unions because this is new territory in many respects in terms of these types of partnerships, and that has created hesitation on the part of the industry to pursue them as aggressively as they might have otherwise. The NCUA obviously wants credit unions to be responsible about this and they expect the credit unions and fintechs to comply with all applicable laws and regulations. But at the same time, the NCUA sees this big shift in power that’s occurring when it comes to fintechs and large banks gaining more market share, and that market share coming at the expense of credit unions and smaller banks. They want to ensure that credit unions have the tools needed to stay competitive, and that really speaks to the long-term strength and solvency of the industry. They view fintechs as a tool that will help ensure the long-term strength of the credit union system, and they don’t want to create barriers to these types of partnerships. I think the NCUA has taken a very healthy approach to these partnerships, and in working with field examiners to provide training on how they evaluate these partnerships that don’t necessarily fit the mold of what partnerships looked like for credit unions 20 years ago.

CU Times: What were some top takeaways from the Fintech Summit presentation focused on cryptocurrency, blockchain and fintech?

Kaas: That was truly an educational session, I think many of us in the financial services industry are still learning what blockchain is and what it isn’t, and what cryptocurrencies are. You have to have a base level of knowledge to then determine, well what, if anything, should our credit union do with respect to cryptocurrencies? We have a few credit unions that are starting to dip their toe in the water by enabling their members to engage in certain types of trades in cryptocurrency, and we’re starting to see use cases emerge around blockchain that could have a significant impact on the financial services industry. We want to ensure that credit unions understand what’s happening, the potential implications for this and that they have access to information in real-time in terms of the opportunities that are out there.

At one of our mid-summer events with about 30 credit unions, we asked if they were tracking the amount of deposits that were leaving their credit union for Coinbase or one of the other crypto exchanges. For some credit unions, it was a significant amount of deposits that they were losing every month – in the millions. It’s probably cooled off a bit given that the crypto markets have struggled, but they will come back and now is actually a good time for credit unions to be developing a viewpoint and strategy around crypto and blockchain.

CU Times: CUNA Mutual Group Chief Economist Steve Rick gave a presentation on economic trends in turbulent times at the Fintech Summit. What is the connection between the economy and credit union-fintech partnerships, and how might a potential recession affect them?

Kaas: There are definitely some direct links there, with utilizing fintech partnerships to address some of the larger macroeconomic pressures, whether they’re headwinds or tailwinds in the market. For example, with the rising interest rates and significant spike in the cost of a home, mortgage lending has taken a pretty significant drop. If a credit union was relying pretty heavily on mortgages or mortgage refis, that business will have taken a significant drop – so are there fintech partnerships that can be utilized to increase lending in other loan classes to offset the drop in mortgage lending? When rates do come back down, there’s going to be a period of pretty significant refinancing, and there are some fintech partnerships out there that are great at automating some of the refinancing options. So there’s a fintech that can help either mitigate some of the headwinds that you face or create those tailwinds. [Another example is] some of the AI solutions that can be implemented on underwriting – how can you get better at your underwriting to reduce losses? All of those things become more important if we’re entering a recession. So there were some pretty good tie-ins that those credit union executives heard that layered into the trends that Steve talked about.

CU Times: What came to light during the Fintech Summit in terms of challenges credit unions are facing on their journey of partnering with fintechs?

Kaas: One of the comments I heard from a lot of the credit union attendees was it opened their eyes to a lot of opportunities they were never even aware existed in terms of how they can partner with fintechs. One of the challenges that the industry still faces is that it’s such a new world out there in terms of fintechs, so it can be overwhelming for credit unions that are trying to develop a strategy or game plan for working with fintechs. And once they have a strategy, [the question is], how do we go about finding companies that can help in that strategy? So getting familiar with the space, in addition to the historical concerns around regulatory compliance, is a challenge.

Another thing is, as we head into a bit of a volatile market here, I always tell credit unions to look at the investors behind the companies you might be looking to partner with, because you want to ensure that those investors have the ability to provide the financing needed during a period of volatility.

CU Times: What is your overall assessment of where the credit union industry is now on its journey of partnering with fintechs?

Kaas: The industry as a whole has crossed this step of realizing that these fintech partnerships are going to be a way of doing business as we go forward. That’s a huge step from where they were two or three years ago, when I think there was generally curiosity about fintechs but not a feeling or need to do something with fintechs – I think that has now shifted.

As far as where credit unions are in their journey, it’s all over the map. We’ve seen credit unions that are extremely sophisticated and have had these partnerships in place for five years – and coincidentally or not, they happen to be some of the fastest-growing credit unions out there – whereas others are just starting to have these discussions at the executive level.