By Ray Birch
WASHINGTON—Partnering with fintechs is in the business plans of many credit unions, but an overreliance on the upstarts is placing too many cooperatives at risk for eventual bottom-line problems, one expert is cautioning.
Sam Brownell, CEO and founder of CUCollaborate, told CUToday.info that as credit unions chart their course for 2023 and beyond there is significant potential risk to the organization that lean too heavily on fintechs to grow their business. There is more than just the risk of having the rug pulled out from under the credit union, he said.
A fintech could switch itself off or apply for a bank charter, Brownell said of the potential risks. And that’s especially painful for a CU that is using that partnership to drive new memberships, he added.
“When this happens…credit unions will…find themselves without that source of growth they had depended on, but they will have just invested in building that fintech’s brand and their next competitor,” he stated.
As CUToday.info has extensively reported, credit unions, their vendor partners, and even regulators already know all about the “new normal” that has changed everything about how credit unions plan to meet member needs moving forward. For longer-term leaders of credit unions and their supplier partners, the new normal can be further complicated by old mindsets and approaches that can be very difficult to overcome and are uncomfortable. This CUToday.info series looks at how credit unions are approaching their planning for the test of this year and beyond.
All About Choice
Brownell emphasized he is not telling CU leaders that partnering with fintechs is bad for the movement; instead, choosing the wrong collaboration is.
“For example, indirect lending makes a lot of sense, and auto dealers are not really a threat to credit unions,” said Brownell.
Again, Brownell repeated his concern for credit unions that partner with fintechs is when the tech firm is relied on too heavily for growth.
“I see a couple potential issues,” said Brownell. “The first is when the credit union relies too much on the fintech partnerships to attract new members. I think it will always be advantageous for the fintech to partner with credit unions, as credit unions have lower rates. And many of the fintechs need partnerships as they are themselves growing.”
Assessing Intentions
It is not good when a credit union chooses a fintech partner whose intentions are to use the early partnerships just to grow and then leave, explained Brownell, adding it can be difficult to assess a fintech’s intentions.
Sam Brownell
“If the fintech gets a bank charter, for example, the credit union has just subsidized their competition. Sure, it’s great when they are working with the fintech in their maturing phase. But fintechs often have every incentive to eventually cut credit unions out,” said Brownell. “And then the business model the credit union built to get new relationships gets turned off.”
Brownell also said a credit union should always be wary if the fintech is the member-facing brand.
“Anything where they don't have their credit union brand that is direct to the consumer, where the credit union is not inserting themselves into the consumer's mind as the brand that solves their problems, I don’t think that is good,” Brownell said. “If the fintech is going out to the member with their own personal brand, they're going to be a competitor eventually…A business has to be good at marketing to be successful, and if you’re relying too much on a fintech for that…”
The Allure
The allure of fintechs, however, is obvious. As NCUA Board Member Rodney Hood recently stated, for example, credit unions are losing market share to fintech companies. Hod cited TransUnion data showing fintech loans comprise 41% of all unsecured personal loan balances, up from 5% of outstanding balances in 2013. Meanwhile, Hood added during the agency’s December board meeting credit union market share for unsecured personal loan balances declined from 31% in 2013 to 21% in 2021.
Hood suggested added that preliminary research suggests fintechs are beginning to make significant inroads in mortgage and small business lending.
For all those reasons, in looking ahead to 2023 and beyond Brownell urged credit unions to be careful when choosing their fintech partners.
Can’t Get Complacent
“It’s pretty much about not getting complacent here,” said Brownell. “There is a very real chance that these partnerships are not in everyone's best interests.
He added he does like the concept of the credit union or credit unions becoming a fintech itself/themselves, as in the case with four CUs that partnered to form Bank Dora.
“There are clear examples of fintechs that have built their companies off the backs of others, and Amazon was like that,” said Brownell. “The first thing I would tell a credit union to do is pay attention to that fintech and its brand. If the fintech is the consumer-facing brand in the arrangement, the credit union should be very aware of this as it plans for the future.”