CU 2.0 has partnered with LendIt Fintech to put on the first in-person networking event for fintechs in 2021! For two days, executives will meet for one-on-one, double opt-in meetings in Miami.
Sontiq Adds Nationally Known Fraud, Banking and AI Experts to Lead Company’s Data Breach and Financial Fraud Protection Initiatives
Boston, Mass. — March 9, 2021 — Sontiq, the leader in intelligent identity security (IIS), today announced it has acquired award-winning data breach intelligence fintech Breach Clarity. As a result of the acquisition, Sontiq’s products – IdentityForce, Cyberscout, and EZShield – all built on its tech-enabled IIS Platform, will have the proprietary capability, BreachIQ.
Probably the single most despised charge at financial institutions is the overdraft fee – and a NerdWallet survey of the exact charges imposed by a selection of mid-sized (Navy Federal) through mammoth (Chase) institutions found fees at $20 (Navy Federal) and as high as $39 (KeyBank).
$35 is a particularly common charge in the survey.
Ask yourself this. You present a Visa card at WalMart and the card is declined (and you know it’s because the balance is overextended and a payment is late). Does the cashier say, “Sorry, bud, card declined and now you owe us another $35 for being a nuisance.”
That does not happen.
You walk out without your purchase, but you aren’t dinged for a nuisance charge.
Overdrafts are different. Charges are the norm, even though at the financial institution, all that happens is that bits and bytes shuffle around on a computer screen.
With the shared goal to redefine what a multifaceted financial services model looks like to members, more credit unions are looking to partner with forward-leaning fintechs. But does this approach make sense for all credit unions?
“The biggest challenge I have seen between fintechs and credit unions is the culture shock,” said John Best, CEO of Best Innovation Group. “Fintechs are used to being lean and moving fast. They expect to have technology in place that will allow them to do this. Credit unions are a bit more slow-moving and sometimes don’t have the technology that a fintech would expect.”
During a recent web seminar exploring this topic, Capstone Managing Director John Dearing noted that over the last five years, 20 fintech companies — incuding TradeKing and Openpay — have been acquired by banks, and 40 percent of these acquisitions occurred in the last eight months. In April 2018, for example, Goldman Sachs acquired Claritymoney, a PRM app.
“We would love to have a slide next year that has credit unions on the left hand side and show all the investments that have been done through CUSOs or other partnerships,” said Dearing.
Joining Dearing was CU 2.0 founder Kirk Drake, who noted that one of the leading reasons fintechs want to partner with credit unions is because CUs have a loyal member base.
“It’s hard for a fintech to get 30,000 or 40,000 users, so there is a lot of interest partnering with credit unions,” he said.
Among barriers credit union executives face is that many fintech companies come to the table with “half-baked” concepts that “lack proof-of-concept” or a proven business model, said Drake. But he views this as an opportunity — getting in on the ground floor.
“Credit unions are risk-averse and they don’t know how to structure [fintech] deals to minimize the risk,” said Drake. And with so many new fintechs popping up, he said, it becomes difficult to pick the “winning” partner.
Whereas vendors traditionally came to credit unions with solutions designed to last five years or more, he said, fintech models are constantly evolving and may only have a shelf life of 12 to 24 months.
“Oftentimes it’s not the best tech or user interface that wins, but the business model and the market,” said Drake. “This challenges the traditional credit union vendor-management program.”
Fintech and CU success stories
Big banks are not the only FIs in the fintech game. Credit unions have thrown the proverbial hat in the ring as well, including the Boston-based Digital Federal Credit Union (DCU) and its Fintech Innovation Center.
“First and foremost, we are looking for opportunities to partner and learn from fintechs,” said David Arauno, DCU’s SVP of technology and innovation. “We are currently hosting 20 different fintech companies in our space. Some of them have alignment with our initiatives and some don’t, but regardless of alignment, it is a tremendous opportunity to learn from these entrepreneurs.”
Araujo further explained that there is “no set path for success” at the center or how best to work with fintech startups.
“We simply learn about their product, what their needs are to gain traction in financial services, educate them on our industry, and where it goes from there can vary,” he said. “We have run pilots, done proof of concepts and signed contracts with these companies.” One successful partnership born from the Center is Digital Onboarding (digitalonboarding.com), he added.
When working with a fintech company, Araujo said credit unions must keep in mind the age of company — especially when interfacing with a management team tasked with reviewing proposals.
“The companies we work with are early stage and are looking for guidance as they figure out their path to market. The CU management team has to look at the possibilities of what they are working on and be patient to help them down that path,” he said. “It doesn’t always mean a longer delivery expectation, but simply a different conversation from buying something off the shelf.”
While a guestimate, Best Innovation Group’s Best said perhaps 5 to 10 percent of all credit unions may be presently working with fintech companies. And while it would seem logical that larger credit unions are leading the charge, it’s not always the case.
“I have started seeing $200 and $300 million dollar credit unions engaging. The trend is that the current CEO is retiring and the new CEO inherits the capital that the CU was sitting on and needs a place to invest,” said Best. “Because they are smaller, they can move a bit faster as there aren’t as many services to overhaul in order to move toward a digital investment.”
Finding the best partner
During Drake and Dearing’s webinar, the pair suggested credit unions develop a strategy, be proactive, define ideal outcomes and select a market/sector to focus on, all the while remaining objective.
But for fintech companies, getting used to regulatory compliance measures that credit unions face remains a hurdle.
“Finding the right partner can be tough and time consuming you may have to go through a lot and might need to try a few to see what is the best fit over time,” said Dearing. “Being proactive and defining your ideal outcome and staying objective [is important]. Look at the passion of the entrepreneur, their background and geographic scope and technology development cycles. There are ways to prioritize and vet potential partners.”
In most cases, there are three possible partnership models: joint venture, CUSO investment and working with a vendor. While Best said one option isn’t necessarily better than another, he prefers either the CUSO or vendor approach as opposed to the “scarier” joint-venture model that is often not as organized.
Since a CUSO is formed around the fintech, Best said this generally is a good approach because the fintech depends on scale to be successful. Examples would be a payments platform or a messaging platform.
“There is a built-in customer base, ability to control some of the roadmap or direction of the organization,” said Best. “There is reduced cost due to scale and better support and there could be a revenue opportunity.”
The downside to a CUSO model is if the fintech has banking customers or other pursuits, which may result in the CUSO getting lost in the shuffle, noted Best.
“The diversity of CUs can sometimes cause issues for the fintech, such as different cores or different regulatory issues, as they are used to a one size fits all approach,” said Best. “The CUSO will be regulated as though it is a credit union and this can also cause issues for the fintech.”
Credit unions that partner with vendors such as PSCU, CO-OP and CUDirect, added Best, have the opportunity to leverage existing frameworks to work with a fintech.
“They have resources to vet the business opportunity as well as the technology and staff to support a fintech, so the credit union’s risk is reduced,” said Best. “The cons are that the vendor may not see the value in the fintech that the credit union does or may be interested, but cannot move as fast as the credit union that desires the fintech services would like.”
By Robert McGarvey
For Credit Union 2.0
There was a time when traditional financial institutions owned the home mortgage business. No more. The changes are massive and stark and the bottomline is that non-banks are eating up this business. Their share is now 45% of home mortgages, according to the Federal Reserve.
Just about all experts expect it to climb above 50% pronto.
In 2011, just three big banks – Chase, B of A, and Wells Fargo – lent a staggering 50% of mortgage money. By 2016 their share had dropped to 21 percent, according to calculations by the Washington Post.
By 2016, six of the top mortgage lenders were non banks, with Quicken Loans leading that pack with 4.9% of the mortgage market, more than Bank of America with 4.07%.
Also among the nation’s top 2016 mortgage lenders were PHH Mortgage, loanDepot, and Freedom Mortgage.
Credit unions so far are holding their own. In 2015, they lent 8% of US mortgages, up from about half that in 2010.
Before applauding, though, recognize that credit unions face big challenges when it comes to just maintaining the current market share as mortgages become more digital and much, much faster. More on this below.
So, why have non banks grabbed so much market share, so quickly? Mainly because money center banks have largely pulled out of the mortgage market and it’s the non-banks that have nimbly moved to fill the void.
Many money center banks pulled out for two reasons. They were blindsided by the tidal wave of defaults on home mortgages in Great Recession. Maybe five million homes were foreclosed on. Big banks lost a lot of money – and a lot of positive reputation – in the meltdown. Many bankers accordingly resolved to get out of issuing home mortgages.
Enter the Consumer Financial Protection Bureau which sent more big banks running away. In their minds, the CFPB was anti bank, hostile, capricious and just bad news for mortgage lenders – so why make home loans?
That set the stage for the rise of non banks which plainly saw there are many, many consumers who have gained more confidence shopping online, they also became more comfortable applying for credit cards, car loans, and, eventually, yes, home mortgages online.
Non banks also have higher tolerance for consumers with less than perfect credit than do big banks and many credit unions. Most non banks also have found ways to live with, or avoid, the CFPB. And – crucially – they are pioneering and perfecting home mortgage processes that are essentially totally digital.
That means much lower loan origination costs.
It also means much, much faster processing, Quicken, for instance, has a “Rocket Mortgage” — where approval can be had in minutes. Not weeks. Not days. Minutes.
How many credit unions can match that – and know that this kind of speed is becoming crucial to holding onto a chunk of the mortgage market.
BMW and Mercedes can finance and roll a new car with $50,000 in paper in a matter of minutes and that car loses 20% of its value in the first year.
A house, in most markets, is very unlikely to depreciate.
Can credit unions match what the car companies and non banks can do in terms of speed?
A survey of banks and credit unions by Fairfax VA consulting firm CC Pace offered worrisome news. Some 80% of respondents said they were not even halfway there to being able to offer a fully digital mortgage experience. Said CC Pace: “Everyone recognized that this is where the future lies, but many owned up to the fact that they have barely begun the process.”
Keith Kemph, a CC Pace consultant, noted that credit unions have particular – and particularly troubling – challenges and may in fact now be falling behind even community banks in the battle to stay relevant against non banks. Kemph said credit unions “have not been as agile in the marketplace,” especially as the marketplace changes.
And he said “they are still plagued with technology challenges that limit their ability to grow without increasing their overall operating costs.”
Bottomline: there are big opportunities in the home mortgage market especially for credit unions. But credit unions may also lose this market unless they adapt to the changes that are transforming it – especially the push into digital mortgages.