CU Reality Check Blog: Fintech Friend or Foe?
in Blog

By: David Frankil, NJCUL President/CEO

Wikipedia defines FinTech broadly as -

Brian KaasSquareNew technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. FinTech is an emerging industry that uses technology to improve activities in finance. The use of smartphones for mobile banking, investing services and cryptocurrency are examples of technologies aiming to make financial services more accessible to the general public. Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies. Many existing financial institutions are implementing FinTech solutions and technologies in order to improve and develop their services, as well as gain an improved competitive stance.

I added the bolding for the first and last sentences because they show the crux of the issue – and when viewed together describe our challenge precisely. Will we as established financial institutions be able to co-opt new technologies to enhance our abilities to serve members and compete in our space? Or does FinTech represent our greatest competitive threat?

One company in the credit union space has distinguished itself as the pre-eminent thought leader and investor in FinTech, and that is CUNA Mutual Group, with their investment arm CMFG Ventures, LLC. We’re fortunate to have Brian Kaas, CMFG Venture’s President and Managing Director, as a speaker at this year’s CU Reality Check (February 18-20, 2019, at the Borgata in Atlantic City).

Brian oversees all aspects of CMFG’s venture capital program, and also serves as the vice president of Corporate Development at CUNA Mutual Group. He is responsible for sourcing, evaluating, and executing a broad range of strategic transactions for the organization. Prior to joining CUNA Mutual Group, Brian was a partner at Foley & Lardner and a member of its Insurance & Reinsurance and Health Care Industry teams.

We had a chance to catch up with Brian for a preview of the CU Reality Check presentation…

Frankil: Creating a corporate venture capital arm is not all that unusual for a major corporation – but focusing one on innovations that go well beyond the “traditional” core business of insurance is not that common. In a sense, you’re looking one step ahead in the value chain and helping your customers address their challenges. Can you take us through some of the logic behind the decision to devote such significant resources to investments?

Kaas: CUNA Mutual is deeply committed to bringing innovation into the credit union system to ensure the industry remains strong and relevant. CMFG Ventures was formed in early 2016 to help deliver on this commitment. Given the dramatic changes we saw emerging in the financial services industry, we knew we needed access to the latest technology, trends – and threats – impacting the credit union industry. Through CMFG Ventures, we have gained a front-row seat into the FinTech world and the future of financial services. I firmly believe FinTech companies will play a critical role in the long-term success of credit unions and want to ensure credit unions have access to the technology necessary to meet the rapidly changing needs and expectations of their members.

Frankil: How do growth rates compare between credit unions and FinTech companies?

Kaas: Over the last several years, credit unions have shown tremendous growth, even alongside the uprising of many FinTech companies. In the last number of years, credit union membership has experienced robust growth, with this year exhibiting the fastest member growth in more than 25 years, as measured from October of 2016 to that point in 2017; meanwhile, FinTech companies have seen a 778% increase in funding in the last five years. So it is not something we can just ignore and hope it goes away.

Frankil: Sometimes it seems as though FinTech companies are developing the latest in gee-whiz technology, and that investor money is chasing shiny objects. We’ve seen investment bubbles like this before – how is this different?

Kaas: Credit unions need to look at this from the member perspective. Members aren’t specifically looking to do business with a “FinTech," but rather, simply looking for businesses to meet their needs in a convenient and trustworthy manner. Credit unions continue to meet this need, but as the industry changes, credit unions will need to embrace technology and innovation to build for the future. The key is to think about FinTech in an integrated manner, and not just as those shiny objects.

Frankil: What are the strategic options for a credit union when it comes to FinTech?

Kaas: Financial Institutions are facing a choice: spend a significant amount of time and money developing their own capabilities to meet the changing market, or pursue partnerships with FinTech companies that are disrupting this space. Even the major financial institutions are facing this dilemma, and many are choosing to partner with FinTech companies to bring in new technology, products, and channels. Since 2012, the top 10 major financial institutions have invested approximately $3.6B in FinTech companies.

Frankil: Can you give us some examples of how FinTech can be integrated with credit unions?

Kaas: It may be easier to say where FinTech can’t be integrated with a credit unions’ processes – the potential is practically unlimited. Three examples show the opportunity:

  • End-to-end digital loans: Providing loans at the convenience and control of the member, so they can apply anywhere at any time from their mobile device or laptop.
  • Reaching underserved markets: Data continues to be one of the most critical elements to identifying and serving new market segments. For example, the “thin file” consumer who does not have an established credit score has in the past received limited financial options, whereas with new developments, credit unions can now offer comprehensive financial services despite their lack of traditional financial data.
  • New marketing channels: Technology such as mobile platforms or non-traditional distribution partnerships can help reach new customers and offer credit union products in more convenient ways for the member.

Frankil: The technology lifecycle poses a challenge for any credit union looking to adopt FinTech. What is cutting edge today can and often is disrupted itself within a year or so. How can a credit union make intelligent choices about when, where, and with whom to partner?

Kaas: I would certainly counsel credit unions to use caution when negotiating agreements with eager, young companies, and to seek validation from industry experts, startup customers, and other credit unions. It is all too easy to fall into the bright, shiny object trap. We meet with hundreds of FinTech companies each year and have significant experience evaluating these companies. Credit unions often take comfort in working with those firms where we’ve chosen to make investments. There are never any guarantees of success, but we conduct extensive due diligence on our portfolio companies prior to making an investment.

Frankil: Can you highlight a couple of the portfolio companies that you’re most excited about?

Kaas: We are fortunate to have many strong and growing companies in our investment portfolio. One of our fastest growing companies is Happy Money, which is a financial wellness company that offers “Payoff” loans to consumers to enable them to pay off higher interest credit card balances. Happy Money aligns with the credit union mission and funds its “Payoff” loans exclusively through partnerships with credit unions. In 2018, Happy Money originated over $440M of new loans for its credit union partners and expects to more than double this volume in 2019.

We are also excited by Rippleshot, which is a data-enabled early fraud detection technology that helps reduce debit and credit card losses and card re-issuance rates. Rippleshot’s team of data scientists utilize big data and machine learning to help financial institutions, merchants, and processors proactively monitor suspicious fraudulent activity and implement smarter fraud risk management strategies when card compromises do occur. With data breaches on the rise, fraud continues to be an ever-increasing challenge for the industry and the biggest factor driving Rippleshot’s rapid growth.

To learn more about opportunities in FinTech join us at CU Reality Check at the Borgata in Atlantic City (February 18-20, 2019).

And don’t forget to sign up for our first-ever Texas Hold 'Em Poker Tournament for a bit of friendly competition between the New Jersey Credit Union League, New York Credit Union Association, and Pennsylvania Credit Union Association. You'll represent New Jersey against players from NY and PA, including Bill Mellin, President/CEO of the New York Credit Union Association and Patrick Conway, President/CEO of the Pennsylvania Credit Union Association. I’m playing too – and if I do better than they do, you can safely assume that Bill and Patrick will never hear the end of it. J

This exciting pre-conference event taking place on Monday, February 18th, and is open to the first eight (8) registered players per state, so register and reserve your seat today!