It’s been almost 50 years since automated banking machines revolutionized the financial services sector with 24/7 access to cash and financial transactions. Today, they’re barely relevant; cash machines are only used by 16 percent of Canadians, while three quarters of Canadians rely primarily on online and mobile banking for their day-to-day transactions.
Financial technology, or fintech, an umbrella term for innovative technologies and products and financial service startups, has drastically altered banking behaviour and consumer expectations, from online banking to more recent developments like online account openings, marketplace lending and mobile pay.
Competing with fintech offerings developed by the big banks, as well as those from a variety of startups and tech giants like Apple, means credit unions need to provide a more complete suite of on-demand, digital transactions. Many of Canada’s large credit unions have been able to innovate and launch fintech services and products to keep pace with consumer expectations. But for smaller credit unions like Mountain View Credit Union (17,000 members, $740 million in assets), based in Olds, Alta, finding ways to innovate effectively has required some creativity. “We have concerns about remaining relevant and needing to be at the forefront,” says CEO Bob Marshall. “We can’t be lagging behind our colleagues.”
It’s a concern that was validated in a recent report by the Filene Institute, Weighing the Risks of a Fintech Partnership, which asserts that “credit unions, regardless of size, can’t afford to ignore fintech. It’s a must-have in today’s financial services world, and especially important in attracting younger generations who have a greater trust in products provided by players outside the traditional financial services world.”
For Mountain View, the “daunting list” of fintech services expected by consumers has led to some attempts to bridge the gap, Marshall says. The credit union worked with fintech provider Grow as part of an aggregate group of credit unions that signed up for its online account opening and lending platform. “We’re leveraging what they have with some customization,” Marshall says. “It’s been agreed to by the entire group participating — they’re not doing one-offs for each participant.”
“We have concerns about remaining relevant and needing to be at the forefront.” – Bob Marshall
But for more substantial and customized innovations, Mountain View has taken its creative problem solving a step further, landing on the idea of a merger as the most viable way to provide its members with the benefits that come from being part of a larger credit union. Earlier this year, Mountain View approached Connect First Credit Union (100,000 members, $5 billion in assets) about merging; the vote took place this past June. “We would become a division of Connect First, so we would keep our name and local decision making,” Marshall says. “Being with a larger credit union has advantages,” he adds, pointing to the Large Credit Union Coalition (LCUC), which has developed technologies Mountain View wants, such as Apple Pay. “We’re looking at 18 months to two years to get it” without the merger.
The merger gives Mountain View access to the resources and technology it needs to be closer to the forefront of fintech. Connect First has “a significant IT department and they belong to LCUC. So they can lead the way with some of their own developments,” Marshall says. “With them, we’ll get Apple Pay. Another real benefit out of the gate is a call centre, which we do not have. When it came down to making a decision about approaching a larger credit union, their regional model really appealed to us.”
Credit unions driving fintech adoption
According to a recent report by the C.D. Howe Institute, Canada lags behind other developed nations in the development and growth of fintech. “The back office of the banks is pretty old,” says Jeremy Kronick, a senior policy analyst and author of the report Productivity and the Financial Sector — What’s Missing. “It’s actually quite expensive for the banks to modernize their operations and banks don’t see a huge incentive to modernize. When you’re smaller though, you can be more nimble. Credit unions don’t have nearly the same back-office issues,” Kronick says.
Canada’s credit unions, however, have been very active in the pursuit and implementation of fintech. “All the large credit unions are at least dabbling in the fintech area,” says Kevin Morris, manager, data analytics at the Canadian Credit Union Association (CCUA). “A lot of what I’ve seen has been focused on lending,” Morris says. “And personal financial management is a huge thing.”
For Northern Credit Union (70,444 members, $1.3 billion in assets), which has undergone a massive digital transformation, member needs have driven fintech initiatives. “We spent a lot of time understanding our membership and what they’re looking for,” says Tony Dunham, vice-president of strategy, innovation and operations at Northern. “We were looking for an understanding of the millennial space and we wanted to address operational efficiency, membership growth and engagement, economies of scale and share of wallet,” Dunham says.
The result has been the launch of a small business and consumer suite of fintech offerings in partnership with ASAPP Online Solutions, which enables members to self-serve online. “They can do everything from their couch: open an account, apply for a loan, open a line of credit and open an RRSP,” Dunham says. “We’re not restricted by bricks and mortar; we can engage with members through video chat.”
The results of Northern’s innovations have been signicant. “We have opened up in excess of 2,000 accounts on the consumer side; either loan or deposit products,” Dunham says. “We’re starting to see big volumes month over month because retail branches are now using the platform, which is helping with adoption when people come into the branches. We’re anticipating that 100 percent of our banking will go through this tool.”
First West Credit Union (240,000 members, $11.9 billion in assets) has also been at the forefront of fintech innovation, with a string of first-time Canadian offerings. These include the first wearable payment accessory in North America to use Visa payWave in 2015, the first financial institution in British Columbia to offer Mobile Pay for Android and the first credit union in BC to provide personal online financial management tools.
“They can do everything from their couch: open an account, apply for a loan, open a line of credit and open an RRSP.” – Tony Dunham
“The protocol we follow is either partner if the solution makes sense, or we take a look at the viability of being a venture capitalist,” Dunham says. “The partnership one works out well; it’s a lower cost point. You can understand what your overall investment is going to be and you get a quicker return. But you do have some limitations: can you make the necessary changes internally? Our biggest piece is having a roadmap in place so the solution is fully integrated end to end.”
Its next offering will be a tool called Quick Switch Assist, developed in partnership with Central 1 Credit Union and ClikSwitch, which enables members to automate the switching of their pre-authorized payments to their First West account. “One of the main barriers for new members is that it’s a hassle to switch over payroll deposits, utilities payments, etc.,” says Paul Leppky, First West’s senior manager of innovative solutions. “This solves that problem by allowing a member, through a single sign-on, to identify which accounts they want to switch. The service then does that work on their behalf,” Leppky says.
Central 1 worked with ClikSwitch on two development phases: an as-is implementation and a custom integration. “We were interested but not in the stand-alone scenario. We wanted it integrated with our online banking for a single sign-on experience,” Leppky says. “Central 1 integrated that technology within the Member Direct Platform as part of Phase 2 this year and we used their platform.”
Fintech partnership versus DIY
Partnering with an aggregate group or working directly with a fintech company that has already developed the technology are the two most likely approaches for most credit unions. According to the Filene report, “many credit unions lack the financial resources and technical skill to build their own solutions.”
The CCUA’s Morris concurs. “To do fintech properly you need developers, business analysts and quality assurance,” he says. “It’s not something you can do by hiring one or two developers.”
Challenges with their existing vendors and legacy systems led Northern to explore potential fintech partners.
There are also risks inherent in fintech partnerships, the biggest of which is exposing a membership base to a less regulated system. “Fintech providers don’t come in with a lot of their own customer base, or with a deep knowledge of the financial regulatory system,” says Sean Gobey, assistant professor in the School of Environment, Enterprise and Development at the University of Waterloo. “So if a credit union hands over keys to the system, they can put a lot of their current membership base and assets at risk,” Gobey says.
But beyond regulatory risks, can a sector that values community, personal interactions and customized services effectively adopt technologies that automate financial transactions? “What we have found is that your values never change but how you interact with your membership around values can change,” Dunham says. “Consumers appreciate the fact that we’re giving them a tool. It’s actually enhanced our brand values in the eyes of our members.” ◊