Fintechs combine three elements: Adaptation of technology, an outsider’s lack of preconceived notions, and an incredible ability to ignore the obvious.
That said, fintechs’ criticism of technology in the credit union world is both blunt and correct: We have fewer, larger providers that focus on their own solutions, leading to little product differentiation between organizations.
The result: We’re as unique as melted snowflakes.
The promise of fintechs is that aligning with them will give us a unique product offering in a commoditized market.
When researching how fintechs work, I came across “Fintech for Dummies,” which lists five steps for partnering with credit unions:
1. Make a pitch to senior management using the terms “fintech,” “disruption,” and “AI” at least 12 times per hour. If asked how their system works, allude to magic, unicorn hair, and teams of monks writing code. They’ll disclose the secret, however, after several nondisclosure agreements and a lucrative contract.
2. Assign a project manager named Trey to convince management this is the future before involving the credit union’s pesky information technology (IT) people. Trey can’t have been on the job for more than two weeks, must come from another fintech, and must refer to this organization as “the best company I’ve worked with over the past two weeks.”
If problems arise, make sure Trey describes the credit union’s IT staff as “slower than a herd of slugs stampeding through peanut butter” and refer the issues to the lonely land of “our developers.”
3. Shift the blame by deriding the fintech’s sales force for promising features on the “road map” that are not yet available, namely “the product.”
4. Promise that the credit union is their most important customer and you will take all steps available to finish the project sometime in the near geological future.
5. Put the financial institution on your “satisfied customer” list and repeat.
All kidding aside, bad fintech relationships cluster into three areas:
1. Believing technology can overcome everything, even reality. An example is Wonga, a U.K. firm that used artificial intelligence (AI) and mobile apps to transform the personal loan market. But what started as an attempt at disruption quickly turned into a debacle after its AI engine found the perfect formula for giving loans to people who could not repay them. After writing off 330,000 loans, the company folded.
2. Assuming that being new is all the differentiation you need. German firm N26 entered the U.S. market with a splash when it determined its advanced mobile product, which had no overdraft fees and early automated clearinghouse deposit, was far better than the offerings here. But dreams of rapid growth soon fizzled as its product wasn’t good enough to stand out from the crowd, and it budgeted virtually no marketing funds.
3. Realizing even excellent ideas may not work. Case in point is the infamous Lending Club, which did peer-to-peer lending by matching loans with investors, cutting out financial institutions. But it underestimated the return investors wanted and became critically short of liquidity. The higher-than-expected losses and flaws in the business model spelled doomed. Lending Club eventually bought a bank, abandoned its online lending program, and went from $9 billion in capitalization to $350 million.
That said, not all fintechs are relegated to fail. For example, Block (formerly Square) has grown to more than $36 billion in valuation since 2009 and has significantly impacted merchant services, Buy Now Pay Later loans, and other products. They’ve done this through investment, mergers and acquisitions, and understanding that some ideas just don’t work out—such as the Caviar food delivery brand it sold to DoorDash.
So, when a fintech approaches you, ask these questions: Does this actually work? Does anyone other than the founder use it? How is it different from anyone else? If it’s going to change the world, why didn’t you sell it to a national bank?
Credit Union Magazine’s Summer 2023 issue highlights the lending outlook for the rest of the year, how credit unions leverage fintech companies to boost digital lending, the power of lending partnerships, common Bank Secrecy Act violations, and the shift board members must make when becoming chair.
