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Fast Money

Credit unions are joining the online lending revolution

With names reminiscent of hipster indie-rock bands, upstart financial technology companies, better known as FinTechs, are coming into their own. These once-boring cousins of Silicon Valley startups are increasingly working in symbiosis with credit unions to simplify business processes and consumers’ lives.

For years, recognizing a growing demand for a different — if not better — banking experience, financial institutions have been trying to shake things up. They’re investing in social enterprises, offering alternative business hours, and repackaging traditional products to attract a younger clientele interested in new ways of banking.

Concentrated on her job

That shift has accelerated recently, as credit unions have crafted collaborations with emerging financial technology companies in an effort to find competitive advantages. (Read “The new FinTech disruptors”.) These collaborations are helping shape not merely where and when Canadians get their financial services, but also how quickly they can access those services.

Taking a cue from the rapid growth of online lenders like LendingClub and Prosper south of the border, these Canadian partnerships are hoping to take a piece of the $574 billion Canadian consumer credit market by providing the technology and business processes to enable the provision of loans at the click of a mouse.

Digital platform ‘hyper-efficient’

From the 16th floor offices of Grow Financial (formerly Grouplend) in the heart of downtown Vancouver, employees enjoy majestic views of the city: on a clear day, you can see as far as Vancouver Island and Mount Baker in Washington State.

“Collaborative FinTech ventures … are gaining ground over so-called ‘disruptive’ players that enter the market to compete against those institutions” – Report by Accenture

Sean O’Connor, Grow’s 30-something VP of partnerships, describes his current digs as a big step up for the company whose small staff is made up of software engineers, data scientists, and financial types. “Our old office was a real startup office with brown water coming out of the faucets,” he jokes, pointing out the roof of Grow’s old Gastown office space below.

Despite the moneyed views, the company’s new offices still feature the trappings of a typical startup: open concept floor plan, a lounge with big screen TV equipped and several video game consoles, and a kitchen featuring Mason jars and a long communal table — the kind you might find in a cool coffee shop. You won’t find a suit in the place; instead O’Connor wears jeans and a T-shirt with Grow’s logo.

Learning more about the online lending company, it’s not surprising to discover that the majority of its customers are not unlike Grow’s staff: young professionals living in urban centres with good credit scores. More than half of Grow’s customers need loans to consolidate debt: they are carrying $10,000 on their credit card at 20 per cent interest rate, and go to Grow to refinance at 5.5 per cent. Other clients look to Grow for extra cash to help with lifestyle expenses, like a home reno, wedding, or vacation.

Rather than going to a physical branch, filling out long paper forms, and then sitting on their hands for weeks to see if their loan request has been approved, Grow’s digital platform makes it hyper-efficient for clients to fill out applications get loans for as much $30,000 within 24 hours.

Wi-Fi meeting

O’Connor sounds like an evangelist as he describes the company’s desire to help customers cut through the bureaucracy to get a loan.

“Instead of spending 20 out of 25 minutes of a meeting with a financial adviser looking at the side of their head as they are type your form in, you get through the process in a few minutes and then they spend 25 minutes actually focusing on you,” he says.

He emphasizes how the company’s in-house-built technology solution relies on an algorithm that helps to parse a client’s credit profile, calculating his potential risk, and helping the client take clearer stock of his financial future. Data about even the smallest of details of clients’ budgets, like monthly service fees, can help Grow’s clients save big. Still, there are no fees involved in taking out a loan with Grow, and its credit facilities have flexible repayment terms customized to the client.

Reaching out to credit unions and financial institutions was always part of Grow’s plan. “The investors in our company are two technology entrepreneurs: we probably spent a lot of months eating ramen noodles and Kraft dinner while we were trying to get financing. We avoided taking cheques from financial institutions in Canada because when we partnered with credit unions, we wanted them to know that [Grow won’t] give your data back to a financial institution that’s invested in us when we sell our company off,” he explains. “We wanted to operate truly as partners in the credit union space.”

Though an initial partnership with First West Credit Union failed to gain traction, O’Connor and his team have partnerships with Conexus Credit Union (119,000 members, $7.1 billion funds managed) and Westoba Credit Union (38,000 members, $1.29 billion in assets) in place and are processing loans through the credit unions’ websites.

Banking ‘a thing you do’

“Our credit union has a phrase that banking is no longer a place you go but a thing you do. And if it is truly a thing you do, I do think there’s an expectation of availability beyond the nine to five that credit unions traditionally served,” says Eric Dillon, CEO at Conexus.

For the Saskatchewan-based credit union that’s proud to have built the first ATM in Canada, bringing innovative solutions to its members is not new. Having been early adopters of digital banking tools like text and mobile banking, adding to consumer convenience by offering loans online seemed like a natural next step for Dillon’s team.

As of this spring, Conexus members have been able to apply for loans from the credit union’s website, with Grow’s technology running in the background. Dillon says the benefit of providing this functionality to its members was clear from the very first application.

“The first loan that we advanced, I believe the application was done at 11:30 p.m. on the Grow platform. So clearly this is a member [who] couldn’t get access to our contact centre or one of our financial advisers at that time, but was still able to access a very small unsecured loan from a trusted institution like Conexus.”

And though his group’s partnership with Grow is still relatively new, Westoba Credit Union CEO Jim Rediger is excited about the technology’s potential. “Grow brings the technology to the table of not just being able to apply for a loan online, but getting the credit adjudication done online [and] the disbursement online. I think a lot of our members are viewing that simple consumer loan in the same way as paying the bills—Why do I need to come into the branch to do that?”

Collaboration, not disruption

A recent report by Accenture, entitled Fintech and the evolving landscape, noted that now, more than ever, FinTechs are partnering with industry mainstays, with promising results. “Collaborative FinTech ventures — those primarily targeting financial institutions as customers — are gaining ground over so-called ‘disruptive’ players that enter the market to compete against those institutions.”

Grow’s digital platform makes it hyper-efficient for clients to fill out applications to get loans for as much as $30,000 within 24 hours

Still, deciding who to partner with can involve a delicate dance of priorities and there isn’t a one-size-fits-all approach.

After speaking with a number of online lending FinTechs, Rob Paterson, president and CEO of Alterna Savings (100,000 members, $4 billion in assets) and Alterna Bank, ultimately decided to back Vancouver-based Lendful Financial in a $15-million investment deal.

While Lendful’s technology — providing a seamless digital experience for customers applying online — was definitely an important consideration for Paterson, investing in a company with the right people and connections was equally essential.

Lendful’s founder and CEO, Alex Benjamin, concurs. “I can understand from the credit union’s perspective that they want to feel like they’re working with an experienced team. Especially when you’re stepping into a FinTech and a disruptive environment you want to feel like you’re working with people who know what they’re doing.”

Capitalizing on the momentum from its partnership deals with Alterna and others, Benjamin was able to attract Mitch Salis as his COO and Pat Forgione as his CTO. Both came from Thinking Capital, a 10-year veteran in the online lending space previously hailed as one of Canada’s fastest-growing technology companies.

A new underwriting model

According to Paterson, the two former Thinking Capital executives “revolutionized” online lending for small businesses, and are set to do the same for the consumer-lending sector with Lendful. In particular, the recruits are helping to develop an underwriting model — a huge consideration to be able to mitigate the risk involved with serving a diverse customer base.

“A lot of credit unions will partner with FinTechs that have a great-looking app, but the problem is if they don’t have the underwriting experience, or they don’t have the capital behind them, they’ll have no staying power,” says Paterson.

The details of how Alterna’s customers will be able to access loans through Lendful are still being finalized, but both businesses have enjoyed a lot of buzz around their partnership.

“Certainly, there is a huge amount of interest in the model and what we’re doing with Alterna,” says Benjamin.

“I think one of the questions that a lot of the credit unions have is there are a number of players in the space and the challenge is trying to work out who is going to be successful ultimately, and what does a partnership really mean.”

A bright future with FinTechs

Back at Conexus, Dillon is describing a successful partnership between a credit union and a FinTech as a “symbiotic relationship.” Working and learning from each often involves an exchange that goes beyond just numbers.

“We were very sensitive, as we learned about the company, about who our credit union decides to partner with: it is a very meaningful question in our world because of our unique values orientation,” he says.

Next destination: Europe

Similarly, Alterna’s Paterson describes the partnership with Lendful as “a great combination of millennial leadership and grey-hair experience.”

Being able to find guidance in the partnership with Alterna was a bonus for Benjamin.

“Rob has been a great mentor and also a pilot — someone who has helped us navigate the landscape in Canada and the challenges credit unions face, and how we can potentially help not only Alterna but other credit unions as well,” he says.

Depending on their size, the kind of innovation needed and the people involved, there are several approaches that can be taken with partnerships. Ultimately, Dillon advises, credit unions sharing their experiences partnering with different FinTechs are sure to come out ahead.

“I think there’s a tremendous opportunity to be more nimble, more creative — and that aligns well with the kind of chaos that’s going on in financial services today in my mind.” ◊

Inside Look [Virtual Cash]

With injections of funding supporting these startups it’s clear that online lending is on the rise. Here are four Canadian FinTechs to watch for in 2017.

HQ: Toronto
Loans: $1,000– $35,000
APR: 5.8%–16.09%
Recent funding: $6.4 million (February 2016)

HQ: Vancouver Loans: $5,000– $35,000
APR: From 6%
Recent funding: $15 million (January 2016)

HQ: Vancouver Loans: $3,500– $35,000
APR: 5.9%–45.9%
Recent funding: $200 million (September 2015)

HQ: Vancouver Loans: $1,000– $15,000
APR: 19%– 46.95%
Recent funding: $11.4 million (December 2015)