The days when fintechs and credit unions were viewed as mortal enemies are clearly behind us.
Throughout most of the 2010s, this supposed pitched battle for members’ hearts and minds was a popular storyline, portraying these brash young firms as disruptors intent on putting dinosaur financial institutions out of business.
While this portrayal may occasionally be true, both camps have come to recognize the natural synergies that exist between the two.
At the 2021 NACUSO Network conference, NCUA Board Member Rodney Hood lauded the “symbiotic relationship” between these entities, particularly in forging pathways to serve digital natives.
Recent industry events such as Finovate revealed an increase in young firms actively courting credit union partnerships from the podium.
As the saying goes, follow the money. Investment in fintechs during 2021 shattered previous records, and credit unions have played an active role.
The Curql Fund, a recently launched collective, raised $252 million in funding from credit union and league limited partners, far exceeding its initial $150 million goal.
CMFG Ventures, the investment arm of CUNA Mutual Group, has invested more than $240 million into a portfolio comprising more than 30 active fintechs.
Institutions such as $10.8 billion asset VyStar Credit Union in Jacksonville, Fla., and $6.2 billion asset Michigan State University Federal Credit Union (MSUFCU) in East Lansing are executing on direct investment strategies at scale, taking the movement’s longstanding credit union service organization (CUSO) model to a new level.
Underlying each of these strategies is a common goal: ensuring access to the newest digital solutions as quickly as possible in a form that addresses credit unions’ specific needs.
While a healthy direct return on invested capital is certainly a key objective, many of the leading players clearly state their most important success metric will be bringing valuable technologies to market—at which point the benefits will flow directly to members as well as through credit union P&L statements.
The various approaches need not be either/or propositions for credit unions, as our conversations with several executives leading the charge make clear.
“The concept of investing is not new to credit unions, even if we hadn’t used the word ‘fintech,’” explains Jenny Vipperman, Vystar’s chief lending officer. “We have Visa stock, for instance.”
Although the first formal CUSO regulation wasn’t passed until 1987, in practice CUSOs existed much earlier. The Federal Credit Union Act of 1934 authorized credit unions to invest in organizations associated with routine operations.
NACUSO’s database currently documents 1,100 recognized CUSOs.
VyStar President/CEO Brian Wolfburg introduced the notion of a more programmatic approach in 2018, says Joel Swanson, chief member experience officer.
“We didn’t know what appetite fintechs would have for credit union investment, so we announced our $10 million fund as a signal to the industry that VyStar wanted to partner,” he says. “Before that, I don’t think anyone was approaching this as a fund.”
The signaling had its desired effect.
“I’m seeing more opportunities because they know we have this strategy,” says Vipperman. “More fintechs reach out to me now to share what they’re doing.”
The existence of VyStar’s fund also serves to deputize senior leadership to scout for opportunities.
“It makes the conversations easier,” she says. “There’s an expectation we’re going to invest, so we don’t have to ask for approval with each investment. The funds are already set aside.”
Two of VyStar’s key investment criteria are internal use of or intent to use the product, and a clear path to a successful return.
“We first realize value through our own implementation, with further value coming through our investment down the road,” Vipperman says.
VyStar also seeks representation on CUSO boards. “When you’re a customer, fintechs care about you to a point,” says Swanson, referring to input through advisory groups and the like. Naturally, an equity stake and a seat in the boardroom amplify that voice.
Vipperman acknowledges it ups the ante on her own commitment as well. “I’m always sharing my thoughts with other credit unions on service providers, but I spend even more time doing this for companies in our portfolio.”
The fund’s first investment, a $2.5 million stake in Payveris, recently delivered a 220% return when the company was sold to Paymentus. VyStar has also multiplied its initial $10 million fund commitment several times over.
VyStar was the first live customer on Zest AI, in which Vipperman championed a $10 million investment soon after. They’ve also invested $20 million in Nymbus and $10 million in the Curql Fund, for which Swanson played an early role in the launch and views as “a version of our fund on steroids.”
“If you’re a fast follower you’re always going to be behind,” he says. “Don’t be afraid to be first.”
While he and Vipperman acknowledge not all credit unions are in a position to embrace this stance, they see their own involvement in the fintech space as an opportunity for VyStar to help carry the entire movement forward.
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