With all these Fintechs that are constantly starting out, do you ever wonder what impact they’re having on your credit union?
Today we’re going to cover how the top 5 Fintechs of 2016 are affecting your credit union.
Every single year, hundreds of millions of dollars are poured into Fintech. OCC is even considering creating this special Fintech chart. Each and every single one of these are constantly chipping away at the credit union’s business model. They’re impacting your fee income, your interest margin, and they’re doing it all across the board. It’s silent death by 1000 cuts, and your credit union has no idea.
I recently went into a billion dollar credit union, analyzed all their transactions, and who do you think their #1 competitor was? It wasn’t Bank of America, it wasn’t Wells Fargo, it wasn’t Chase. It was PayPal. And in that credit union, PayPal had more transactions than the next 4 huge banks combined.
So the reality is, your members are using this stuff, you’re not even aware of it, and it’s slowly eroding your value proposition and impacting your members. Which Fintechs are having the biggest impact? I want to cover a broad range so I’ll tell you up front: we’re actually going to cover more than 5; however, these top Fintechs fall into 5 key buckets.
Some credit unions may not offer investments, some partner with K– mutual… everybody has lots of different things out there that they’re doing. Regardless of that, a couple huge innovations are here. There’s one called Nutmeg, and one called EToro. Both of those are apps.
What’s interesting about them is they embedded auto-robots, or robo-advisors, in that process to give your members real-time advice about what’s going on in the market and what they should do with their portfolio. That’s really hard to compete against. They’re perfecting investment management in a way that a personalized relationship just can’t do.
Of course, I’m not proposing that the credit union go out and partner with these tomorrow – though there may be some good partner opportunities there – but for now, you should be aware these are going on and be looking to see if your members are using them and interested in that.
This has been going on for 5-10 years at this point, and clearly working because all these business are still here, so at least their business models are having some success. There are more and more entering, too. Those are really the peer-to-peer lending world, things like Prosper, Zopa, Lending Club, and Funding Circle (these are the latest ones). What they do is remove the middleman, do a little bit of underwriting, and allow 5 or 10 of your members to lend money to an 11th member. By doing that, they offer the 5 or 10 members a better return than the credit union offers, and they offer the member borrowing the money a better rate. So, they effectively eliminate the middleman and negate the need for the credit union in the first place.
Again, these don’t have huge traction, but they’re something to be looking out for. It would be a geat data analytics question to see if your members are using those and what you should be doing to tailor your lending platforms and products to compete with that.
3. Student Lending
Student Choice has done a great job of helping credit unions get into this market, but certainly as the market has eroded or changed over time with federal changes, it’s ripe for disruption. And the latest big one in there is something called Common Bond. What Common Bond does is enable anybody who’s taking these student loans out to refi them and get much better rates based on performance.
Again, it’s one of those kind of cannibalizing things where maybe they only steal 5 of your student loans, but if you do that over and over and over again, with investments, regular lending, and student loans, collectively they’re having a big impact on your bottom line.
This one is kind of a reverse one. This is one that banks are using that credit unions aren’t. It’s called Meniga. What that does is create a real-time Facebook-style feed of all of your transaction data and of your members’ activity and then it gives that to your portfolio ALM group so they can make real-time decisions about how to change their asset performance investment strategy.
That seems kind of crazy, and I don’t know if credit unions’ ALM portfolios are big enough, but I think there’s some relevancy. It probably gives you some early indicators about what your members are thinking about what’s happening in the marketplace, and how to react and make sure you’re on the front end of impact to bonds and treasury yields and all those kinds of things. Again, it’s a tool that big banks are using, so I don’t know if it’s right for credit unions, but it’s certainly something to watch.
I love this concept. Metromile allows your members to pay by the mile for insurance. So instead of paying for an unlimited insurance plan and going through traditional insurance, this is an app that tracks the members’ consumption of insurance and then charges them by the mile for what they need. There are also similar Fintech startups I don’t know the names of that are doing this for auto lending, so you’re literally paying by the mile for your auto lease.
This is all going to be a huge disruptive market as more and more things like Uber and Lyft come online, as well as driverless cars. All of this is going to change in the next 10-15 years. But it’s something to be watching for and it’s something that you probably have some members trying. It could be a really solid service for the credit union to offer to some members and differentiate in that marketplace.
This last one is a silent killer in my mind. Cadre is doing real estate crowdsourcing. A lot of credit unions participate in real estate lending in a shared participation model. So, imagine if instead the borrower is able to go to a crowdsource site, present the real estate property, and get 20, 30, 50 different people to participate in that. It’s probably a lot simpler than going through the normal underwriting process, and the credit union may never even get a bite of that apple at the end of the day.
So that’s one that’s not going to directly impact your members, but it’s going to be impacting your ROA and your ability to put your members’ dollars to work in active loan yield participation type things.
Again, those were things like Nutmeg, EToro, Prosper, Funding Circle, Lending Club, Common Bond, Meniga, Metromile, and Cadre. And those are just a few of the hundreds of these out there. There’s a great link on www.cu-2.com/fintech that’s got probably about 500 different Fintech startups classified for you. You can go look through there, figure out do they impact fee income, balance sheet, interest rate margin, all of those kinds of things, go up there, take a look, you can find some interesting ones out. Maybe they’re helpful, maybe they’re not, but it’s good to know what the competition is doing.