By Kirk Drake and Chris Otey
The financial services industry is undergoing a digital transformation driven by AI, machine learning, the Internet of Things (IoT), and blockchain. Quality of service is changing from traditional local branches and long-term relationships to digital solutions that are easy to use and cost less. Credit unions are at risk of losing relevance due to fewer products, lower investment in technology, and reduced brand recognition. To remain competitive, financial institutions must either transition to more agile operations or partner with new age fintech companies to provide digital solutions.
When I first started working in credit unions, I heard of CUSOs. I was 18, so I didn’t have much influence—but even then, the math said that if all credit unions got together and invested 1% of their capital, they could have bought Fiserv at the time. Imagine if the industry owned one of its key suppliers over the past 25 years!
As the industry has accelerated its digital transformation, credit unions’ competitive advantages have eroded in favor of advanced financial technology, bringing in new concerns over long term relevancy. In a study commissioned by CO-OP Financial Services and conducted by EY in January and February of 2021, 30% of the 3,000 credit union members surveyed said their primary financial relationship (PFR) is with a fintech firm.
The Solution: Collaboration
Nick Evens, President and CEO of CURQL Fund says, “the more collaboration the better.”
Louis Hernandez Jr., Founder and CEO of Black Dragon Capital, Founder of Payveris and former CEO of Open Solution says, “Collaboration is a founding element to the credit union movement and will serve as a beacon as we navigate the road ahead”
Collaboration is credit unions’ and their members’ secret weapon. Collaboration is tough; it requires putting aside our short-term agendas, trust issues, and individual needs. Most of us aren’t actually very good at it, but when we take the long-term view, put aside our differences and needs, and actually do it, we have created some amazing things. One example is the CURQL fund.
About two years ago the CURQL fund was created and has helped fund multiple new CUSOs in the industry. The fund raised about $250 million from over 60 credit unions to make strategic investments. To date, they have made 20 investments in fintech startups that are focused on helping the industry. More importantly in my opinion, they are providing growth capital. In my experience, when credit unions collaborate, they are great at providing angel or seed capital, but frankly they struggle to provide growth capital because by then, their problem has been solved.
Recently, Benson Porter, former CEO of BECU, and Louis Hernandez, Jr. teamed up to create a new investment fund for credit unions called Black Dragon Capital. Both CURQL and Black Dragon Capital funds are great for credit union innovation and are aligned on mission and purpose while having slightly different investment thesis.
Both are paving the way for credit unions to have a seat at the fintech table and to ensure their relevancy by both reinventing themselves and winning in the journey. Credit unions need venture capital funds to invest in fintech to diversify their investments and spread their risk across different companies and industries. By doing so, they can gain access to a variety of new technologies and opportunities that can help them better serve their members. Additionally, having multiple venture capital funds allows them to stay up to date with the latest trends in the fintech industry, helping them stay competitive and remain successful.
Oh, and this isn’t unique to credit unions. The banking industry has been doing this for years. Not only have larger financial institutions been outspending credit unions and community-based financial institutions for years, they have also pooled dollars and resources for decades, resulting in a substantial lead in pooling dollars by becoming LPs in venture capital and private equity funds to create a unique ecosystem that benefits big banks. These specialty investment funds are focused on fintech where all or most of the LPs are financial institutions. Unlike a typical VC or private equity funds, the bank LPs are the natural customers of the fintechs that these funds invest in, and the LPs become a useful testing ground for utility and market messaging. Most critically, they help the GPs in their search for companies that solve real problems. Some examples include FTV Capital, Canapi Ventures, Jam Fintop Capital, Banktech Ventures, Mendon Venture Partners, and Alloy Labs.
Credit Union Fund Examples
Black Dragon Capital recently announced the establishment of a dedicated fintech CUSO fund, targeting both early stage and existing company buyouts to create a beneficial ecosystem for credit unions. The fund is managed by Louis Hernandez Jr., an award-winning fintech entrepreneur and author of Too Small to Fail and Saving the American Dream. Hernandez has raised over $1.1 billion and delivered over $3 billion in value, as well as completing over $3.5 billion in transactions. His fund has invested over $320 million in technology companies since 2020, using his operator-led model and generating impressive returns.
Hernandez has partnered with industry veteran and Co-Chair Benson Porter, who has spent over 30 years as a Financial Services executive, including 10 years as CEO of BECU. When asked why he chose to focus on the credit union movement, Hernandez said, “I’ve been part of the credit union movement for decades. They have supported my technology ideas. My family and I have fought for them to highlight their unique position in building economic and social stability within the communities they serve. I couldn’t stand by and let my friend’s future be questioned when I know I can help. We have set up a dedicated team to do what we do best—build market-leading companies. But this time the value will go back to those who help me create the future ecosystem: the credit unions themselves. It’s exciting.”
For Porter, the decision to transition to an investment firm came naturally. “Louis and I have partnered on successful projects for decades. He is a clear innovator, successful investor, and committed member for the credit union movement, I am excited to create an ecosystem to help an industry I’ve been a part of most of my life, succeed and prospect”, said Benson Porter.
CURQL is a strategic investment fund that is part of a larger ecosystem designed to keep credit unions relevant. The fund provides fintech access to credit unions, and provides credit unions access to technology, all while de-risking the process. The process negates long decision-making cycles typical of credit unions investment and technology purchases. CURQL has four pillars of this ecosystem:
- Create a place where collaboration and innovation happen within an ecosystem of forward-thinking and fast-moving credit unions that adopt technology to compete with fintech and big banks looking to dominate the market.
- Ready money. A fund that could be nimble and fast-moving to make strategic investment in transformative credit union-focused fintech. CURQL invests in technologies that positively impact how credit unions engage with members and how members engage with their money, with the goal of speeding up the process of funding, market entry, and changing how people experience their credit unions.
- Regulatory modernization. Certain regulations need updating for credit unions to be more cutting edge when it comes to fintech collaboration.
- Create strategic alliances across the industry to reduce disintermediation occurring in financial technology and credit unions.
Nick Evans explained that the investment thesis of CURQL is to take minority stakes in early-stage transformative technology. “CURQL’s whole mission is around helping credit unions have relevance.” Nick also sees the collaboration between multiple funds as essential to helping fintechs find a home in the industry and believes that the collaboration between funds help everyone. It’s all about risk management, speed to market, and lowering the costs for both the credit unions and the fintech, according to Evans.
CMFG Ventures, the venture capital division of the long-trusted CUNA Mutual Group, has been devoted to providing financial security to hardworking Americans since 1935. With a 95% customer satisfaction rate among U.S. credit unions, CMFG Ventures has now extended its mission to discover and support the next generation of innovators in the financial services industry. To date, the venture has put forth more than 300 million dollars in 31 investments.
Advantages of Multiple Funds
- Increased access to capital: Credit union-funded venture capital firms provide access to capital for start-ups and small businesses that may not have access to traditional financing sources. This can help stimulate economic growth and job creation in local communities.
- Reduced and Diversified risk: Credit unions are more likely to take a longer-term view of a business and its market than traditional venture capital firms. This can help reduce the risk of failure for new businesses and entrepreneurs.
- Lower costs: Credit union-funded venture capital firms often charge lower fees than traditional venture capital firms, making them an attractive option for businesses seeking financing.
- More localized focus: Credit union-funded venture capital firms often focus on credit union businesses and entrepreneurs, which can help provide better solutions to credit unions.
- Market size: Multiple funds enable credit unions to spread their bets and make sure solutions are available for multiple segments of the market. It wouldn’t be healthy for the industry to have one core system, one loan system, or one provider of anything. Multiple solutions create competition and innovation that elevates all players in the space.
- Speed to market: More funds working on the same sets of problems helps credit unions and fintechs achieve adoption faster.
- Avoiding the repetition of mistakes: Leveraging multiple funds fosters the sharing of best practices and collective knowledge. This collaborative environment helps identify and rectify common issues in integration, marketing, and sales, thus helping credit unions, fintechs, and funds learn from each other’s mistakes and ensuring continuous improvement and evolution.
In summary, multiple funds create an ecosystem and a marketplace that uniquely benefits credit unions and fintechs. If you haven’t invested in these funds yet, we highly recommend you take a look!