GLASGOW, Scotland–A credit union regulator and a government official here shared their insights with credit unions on what they see ahead for regulations, fintech competition and partnerships, how CUs should proceed and more.
Speaking to the World Council of Credit Unions’ World Credit Union Conference here were Brian Corr, head of credit union policy with the Department of Finance in Ireland (Ireland’s credit unions are regulated by the Central Bank), and Rodney Hood, board member with NCUA. The conversation was moderated by Greg Neumann, director of communications with WOCCU.
Here are the questions posed and the responses provided.
Neumann: Emerging fintech firms are making inroads in traditional financial services. How do you make sure they are going to play by the same rules?
Hood: I want to make sure these new players do play by the same rules. We do provide them with guidance around cybersecurity, consumer protection and more. There are risks. But as I tell our institutions and examiners, let’s make sure we mitigate the risks. We can’t eliminate the risk, but through innovation we are going to get the tools needed.
Corr: What is fintech? I think this is the challenge for all of us. In traditional terms it’s financial technologies, which support credit unions in many ways. But it’s gotten merged and confused a little bit with companies that are providing banking and payment services digitally, and unrelated firms in areas like BNPL and crypto, which have yet to come into the regulated world. So, I suppose the first question is what products and services should be regulated. In Ireland, BNPL has been brought inside the regulatory perimeter. And the second question is what level of regulation and supervision do you apply? While we have legislated to bring BNPL into the regulatory sphere, the EU is regulating to bring crypto into the regulatory sphere.
Neumann: How is a credit union supposed to evaluate which companies to work with?
Corr: I think the great advantage credit unions have all over the world is they don’t have the legacy systems the retail banks have. So, they can take onboard tried and trusted technologies. They don’t have to be on the leading edge, they can take these on after they have been tested in the real world and still be ahead of banks on legacy systems. One thing I say to credit unions is ‘Be ambitious.’ You don’t have to take as big a risk as the retail banks.
Hood: I concur. I often tell credit unions they need to be focused on innovation and prudent risk-taking. We encourage our folks to look at risk management, not risk avoidance. Do your due diligence. When we work with regulated entities, are they doing the risk assessments? Are they looking at scale and things of that nature? At the end of day I want to make sure the credit union makes the appropriate choice. We don’t want to be in the way. What I am seeing in the U.S. is credit unions are embracing fintech to provide greater member service.
Neumann: There are a lot of complexities here for regulators. What are the challenges?
Hood. There have always been emerging technologies. We look at what our resources are and can we do the mitigation. It’s understanding how the tools are going to work. We walk through the litany of activities. At the end of day, as a regulator I am trying to provide the regulatory framework for folks who take on these tools.
Corr: There are 209 credit union in Ireland. In U.S. dollars, the average size is about $100 million. The only way credit unions of that size can manage the complexity is to collaborate, bring scale and get the expertise. I would like to see (Ireland’s credit unions work more) through CUSOs. There are some really positive signs in Ireland. Seventy-five of the 209 credit unions have collaborated to provide Current Accounts from a standing start of zero two or three years go. One of other issues we have is there are complex regulations coming out of Brussels, but there are exemptions we are looking for. We have gotten an exemption from (the EU’s) Digital Operations Resilience Act. It’s not that we don’t agree with the principles, but we thought it would be easier to manage proportionality at the national level.
Neumann: What about fintechs themselves having perhaps a competitive advantage over traditional FIs. How do you balance that and ensure a level playing field?
Corr: From a legislative point of view, we are trying to give the regulator the right tools and the right powers. When BNPL came up we legislated to include BNPL in the regulatory perimeter. The reason it wasn’t was due to the age-old definition of credit, which was different. We needed to make sure any gaps or anomalies that allow companies to play outside the legislation are closed. But, also, if a digital bank takes in digital deposits, it’s regulated as a regulated institution.
Hood: If we don’t have the fintechs on the same regulatory playing field it creates an uneven footing. One thing we are doing--and we have about 500 CUSOs in the U.S.--our NCUA board has passed a rule where CUSOs can do a lot of the same (lending) activities as credit unions. Nowhere was this more apparent than in the marriage of CUSOs and fintechs during the pandemic with Paycheck Protection Program loans. Credit unions in the U.S. made almost 300,000 PPP loans. I dare say it would not have been as seamless were it not for technology.
Neumann You seem to be encouraging technology, but you also urge being cautious. That can get in the way of adopting new technologies. Credit unions may be asking, ‘Which is it, adopt or be careful?’
Hood: It’s both. It’s manage risk, not avoid risk. I am enthusiastic about technology as a regulator because if our institutions don’t adopt these platforms there may not be an industry for me to regulate. We have 5,000 credit unions, and they are diverse, from $500,000 in assets to more than $100 billion. One thing they all have in common is technology to serve their members. Seven-million members joined during the pandemic because of the digital tools.
Corr: I would agree with Rodney, you can do both. You should be able to adopt technology in a careful manner. When I think back to start of the pandemic, we sat down with credit union representatives and we were worried about operational resilience and serving the 3.5 million members across the island. Credit unions in Ireland adapted really well. They brought forth digitization plans in a careful manner. One thing you have to factor into this, as one report recently said, there are “signs of a gathering storm.” Some of these fintechs may not be there. Klarna, Affirm, their (market caps) are off by 70-80%. But that is also an opportunity. Some of the firms at the edges will have less money to expand their services and credit unios are well capitalized and can take advantage of that gathering storm.