How neobanks and fintechs can help drive credit union innovation

The digital transformation movement within the banking industry has opened the door for new market entrants and has raised table stakes for market incumbents. The explosion of the fintech marketplace has brought with it some challenges, but also some opportunities for credit unions. Topping the list of challenges is competition. Neobanks and fintechs present a new competitor in a space that hasn’t seen much change over the last several decades. How credit unions respond to that threat can be the make-or-break opportunity they have been waiting for.

These new threats on the horizon are organizations that are purely digital. They don’t exist with overhead or legacy architectures. They don’t require the structure, nor do they incur the regulatory burden of traditional banks and credit unions. They exist without brick and mortar and provide quick and easy, personalized services that are typically delivered entirely via mobile device.

Their rapid success is built on both simplicity and a lower cost model. Neobanks and fintechs do not need to be, or strive to be, everything to everyone. They keep it simple offering a niche service that solves a problem and drives loyalty – think gamified savings apps. They don’t need or want to sell you a loan. They just want you to keep coming back to play. This minimalistic approach keeps overheads low and minimizes regulatory requirements, translating into lower fees or more investment for R&D. Their lack of legacy technology is perhaps the greatest feather in their cap. This new breed of competition is digital-first – whereas traditional financial institutions are often forced to bolt digital offerings on top of outdated banking applications.

The disruption being driven has not gone unnoticed by traditional credit unions. Not only is it pressuring them to accelerate digital transformation initiatives including modernization of legacy technology infrastructure, but also to discover new ways of delivering a compelling member experience.

Credit unions have a few feathers in their caps as well though, including:

Well Established and Sound Reputations
Despite being a generation of instant gratification seekers, today’s digital economy is not so trusting of the big banks or new market entrants. They want to know that their funds are going to be there for the long term, which for the younger generation, can be quite a long time. Credit unions are perhaps best known for their safety and soundness. Finding the right way to get that message front and center to a new audience is critical.

Long Lasting Member Relationships
Credit unions are in it for the long haul. They are not looking for the next quick deposit or loan, while they wouldn’t turn it away either. They are focused on cultivating lifelong relationships built on trust and service. Neobanks and fintechs simply do not have the history to compete on this level.

Member-First Approach
Many emerging apps and digital services are built around an experience. Oftentimes, the care and feeding side of the experience comes later, if at all. Credit unions are devoutly focused on serving their members’ needs, ensuring satisfaction and holding hands along the way. In a digital-first marketplace that personal touch is easy to lose sight of but can mean the difference between a short- and long-term relationship.

Deep Member Information Profiles
Because credit unions are designed to serve multiple aspects of a financial relationship, they have access to massive amounts of member information – ranging from account balances and transaction history to communication preferences, and even family milestones. These rich data sets are priceless when it comes to crafting digital journeys that inform and delight. This is perhaps one of the greatest assets credit unions have over their emerging competition. With an open architecture that helps facilitate the easy aggregation and consumption of that data, technologies such as artificial intelligence can help streamline the back-office burden. The credit union is more efficient, but also adds value to the member through meaningful recommendations that can be quickly and easily implemented.

Startup neobanks and niche-focused fintechs just don’t have this vantage point to draw from. Their experiences and recommendations are based more on generalized market research and less on personal experience and history.

Although all these differentiating attributes help give credit unions a position of competitive advantage, how they leverage these assets and respond to emerging trends will determine if they can retain and extend that advantage in the digital age. To be successful in this new market, credit unions need to think in terms of creating experiences and no longer about just delivering transactions. They need to harness their assets in new and innovative ways, and they need to find technology partners that can seamlessly extend their product offerings to the digital marketplace.

A few key strategies that credit unions can consider include:

Make Digital Services User-First
Too often, financial institutions design a digital experience around the back-office process required to support it. Compliance needs X for a new account, the card services team needs Y, etc. Consumers don’t work that way. They want quick and easy. Each user interaction should be built around the simplest, quickest start-to-end journey. Most consumers who switch to neobanks do so because of the ease of using their digital services. They can deposit checks, pay bills, and apply for loans through an app on their phone within 10 clicks or less.

Think Beyond the Cross Sale
Members don’t wake up wondering what product they need next from their credit union. They wake up wondering how they’ll pay for college, save for retirement or whether they are leaving money on the table. Leveraging the collective insight of a broad array of fintech providers, coupled with the credit union’s rich data set, members can be served relationship building recommendations that help them feel good about progressing their financial journey while helping to grow the credit union’s bottom line.

Be Aware of Psychological Barriers
Security is one of the biggest concerns consumers cite related to digital banking. They want quick and easy, but they want to know their money is safe too. Educating members about the safety and soundness not only of the credit union itself, but of the technical architecture digital services are delivered on, goes a long way towards allaying those fears.

Reach Out to Underserved Consumers
Credit unions are known for serving underserved communities. Many of these consumers gravitate towards the less traditional offerings of neobanks because they afford added flexibility when it comes to things like loan underwriting. By looking at a broader set of data points on the consumer enabled through open data, credit unions can more accurately assess risk rather than just looking at credit scores, income, and other traditional metrics. Credit unions that can take advantage of the fintech market to better serve these communities will reap benefits in the form of both goodwill and a growing member base.

Consumers have never had more options to choose from when it comes to selecting a financial services provider. By 2024, digital-only bank account holders will make up a huge 17.9% of the US population, according to Insider Intelligence. For credit unions, delivering seamless and secure digital consumer experiences is crucial to staying competitive. Credit unions need to understand what makes these alternatives appealing to consumers and adjust their positioning and product mix to remain relevant and viable.

Technical Advancements Via Open Platforms and APIs

Digital disruption has not only been driven by the demand side of the sector, however. On the supply side, technological advancements are making it easier than ever to deliver on consumer expectations and even anticipate future needs.

The open banking platforms and the proliferation of APIs (application programming interfaces) have largely enabled many of the service improvements that fintechs and neobanks have capitalized on. These innovations help facilitate faster payments and loans, create greater visibility into a consumer’s financial picture and facilitate bundling of services – leading to more comprehensive user journeys. For credit unions open to embracing the multitude of offerings the fintech space affords, the challenge will be adapting resources to manage a broader number of third-party service providers and ensuring symmetry between them to create a cohesive experience.

In this new service delivery model, credit unions will have to seek out technology architectures (platforms) that allow them to readily offer these enhanced member experiences. Digital banking providers that can easily integrate with and expose the services of fintechs will allow credit unions to focus on digital strategy rather than integration obstacles.

Oftentimes, we only rise to the occasion when we are pressured by some external threat or adversary. For credit unions, this is one such time. The opportunity is ripe to learn from and evolve as a result of the neobank/fintech movement. Successful credit unions will develop digital strategies that consider the entire member experience end-to-end to craft a personal, if not conversational, delivery model that brings all touchpoints to bear collectively. Credit unions and fintechs that work together as partners rather than client/vendor will reap the greatest reward. Those that have the foresight to bring their fintech partners side by side collaboratively will no doubt come out on top.

Dawn Sirras

Dawn Sirras

Dawn Sirras, SVP-Fintech Partnerships at Constellation Digital Partners, holds over 17 years of experience in strategic and technology positions with credit unions – including 9 years as Chief Technology Officer for ... Web: Details