A common question we get at CU 2.0 is, should credit unions partner with fintech companies. Then, if the answer is yes, how should the partnership work and which fintech companies should credit unions work with.
The answer is in fact yes. However, as with most things in life, the question goes deeper than you would initially think. For example, if you believe your credit union can develop code better, faster, and more customized than a fintech, then this article is probably not for you. If you are a do it yourself shop, maybe this is not a path you should walk down. However, if you recognize that you exist in a pretty big space with tons of players, please read on.
It is important to realize that innovation rarely, if ever, comes from incumbent vendors. Very little innovation comes out of the traditional, legacy core providers. As the internet continues to age, some of the early providers of mobile and online banking have aged with the internet to the point that they have such large existing books of business and backlogs of development that they cannot be viewed as innovative anymore.
Before we get started, we want to ensure you have the full picture. It’s important to know the difference between being a fast follower and being a company that is not afraid to fail forward fast. Being a fast follower is just a polite way of saying that you have no original thoughts and that you follow trends as soon as you find them. Failing forward fast does not mean that you court failure. It simply means that you take ideas (your own and/or from others), implement them, measure them, and move forward, whether good or bad. Despite what you may have heard, integration, while important, is NOT innovation, and waiting for a legacy provider to help you remain relevant, is not something a credit union should depend on.
Now that you understand the key concepts, here are several fundamental points to use when evaluating new technologies offered through fintechs. Be aware that fintechs are not following traditional revenue models. A basic traditional model involves a credit union paying their legacy provider a large capital outlay to acquire the solution then 20% maintenance on that solution in perpetuity. Oh, and don’t forget the 3%-7% CPI increases each year. Think about that, if you have been on a core solution for 12 years, how much are you actually paying? I would have to say it is much more than the market would bear today. Meanwhile, fintech companies, at least the good ones, would rather participate in your success. When evaluating a fintech solution, pay attention to the revenue model. If the fitech gets paid when you make money that is a winning solution. If the fintech want a large upfront payment and “maintenance” or “per application” fees, be leery. Almost all the fintech companies that CU 2.0 works with have a model in place that pays them based on the success of the credit unions that deploy their solution. For example, a provider of alternate loan decisioning and offers should only take a piece of the loans made when they are paid. The per application model is dead. This is just one example of hundreds of fintech ideas out there. Do your due diligence before partnering up with a fintech.
If you are a credit union evaluating whether to adopt or partner with a fintech, choose a fintech that wants to participate in your success and your members success.