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The beginning of a beautiful friendship

Credit unions are learning that fintechs can be an excellent complement to support SME members.

The cry, “the fintechs are coming, the fintechs are coming,” has been heard for a decade at credit union conferences focused on the newest products and latest trends. The cry has been part-nervous warning, part-joyful prediction. But until recently, change has been slow and the rise of fintechs has been modest in Canada. Tight regulations, wary consumers and service improvements by traditional financial institutions have largely kept fintechs from dealing directly with customers, or taking large market shares. There are signs that is changing as fintechs and financial institutions realize they can work together to benefit each other and their customers.

Fintechs have come to play a role behind the scenes in IT and technology activities, providing services to credit unions as they upgrade their digital platforms. For example, this past November, Meridian Credit Union, (351,000 members, $18 billion in assets) the largest in Ontario, received the first-ever Best Credit Union of the Year at the 5th annual Canadian FinTech and AI Awards to acknowledge the technological advances it has made as it expands its motusbank online service.

Until recently, fintechs hadn’t moved into a public, member-facing position with many credit unions. But this past July, one of Canada’s largest credit unions turned to a rapidly growing fintech to help it better serve its small business members who needed loans to expand, or meet sudden demand, such as when a vital piece of equipment breaks. Surrey, BC-based Coast Capital Savings Federal Credit Union (572,000 members, $19.6 billion in assets) has partnered with OnDeck Canada to provide quick access to business loans, something that has always been a challenge for banks and credit unions that rely on traditional methods to determine who qualifies for a loan. In the past, the process has involved reams of papers, face-to-face meetings and the need to pledge collateral to guarantee the loan. But now the process is online, requires no travel and may simply be backed by the fintech’s assessment that the business has a strong cash flow and is in an industry that is thriving.

“It’s the first time Coast Capital Savings has partnered with a fintech for customer facing services.” – Derek Turner

OnDeck Canada uses an algorithm it has created and a wealth of industry data to rapidly evaluate whether a business qualifies and, if it does, starts the money flowing. “It’s the first time Coast Capital Savings has partnered with a fintech for customer facing services,” says Derek Turner, the credit union’s senior vice-president, Commercial Operations and Small Business. “It’s part of our commitment to innovation; we’re always looking for partners to expand the services that we provide our members,” Turner says.

In member focus groups and discussions, small business owners kept saying their greatest need was for urgent short-term cash flow or quick capital improvement, Turner says. Coast Capital Savings looked at a number of other providers and “found that OnDeck is a proven leader in transparent and responsible decisions. We saw the capability that they were very good at and we wanted to leverage that and partner with them.”

Turner expects that OnDeck loans will fill a small niche for its small business members; early indications are that interest is strong with many expressing interest in learning more. He adds that other credit unions have been in touch wanting to learn more about the arrangement. He’s happy to explain. Coast
Capital Savings small business members can apply for financing from OnDeck for up to $250,000 online, in branch or through the credit union’s contact centre. It offers term loans and merchant cash advances, called flex funds. Businesses must have been in operation for six months and have revenue of at least $15,000 a month.

Last October, Coast Capital Savings announced a more traditional fintech partnership with nCino, a cloud-based bank operating system that the credit union will use to enhance its digital lending platform, enabling it to reduce complexity in processing and managing retail and small business loans by streamlining loan origination workflow. This will be crucial as Coast Capital Savings moves ahead with plans to offer services across the country, now that it is federally regulated.

OnDeck Canada was formed in May 2019 when Evolocity Financial Group joined forces with OnDeck. Neil Wechsler, who had been CEO of Evolocity, became CEO of the new entity, which is owned by OnDeck Capital, based in New York. Evolocity, which was based in Montreal, started in 2010 and had lent more than $240 million using its own algorithm.

OnDeck, which started Canadian operations in 2014, and its predecessors have lent $440 million to Canadian businesses. It started operations in the United States in 2006 and has lent more than US $11 billion to small businesses. For three years it had a relationship with JPMorgan Chase but the bank cancelled it in July, a move that slashed the value of OnDeck’s shares. OnDeck says it is pursuing the option of becoming a bank in the US, a move that would let it provide a wider range of services. “We’re trying to get the best of both worlds: our technical ability coupled with the stable funding of a bank,” says Noah Breslow, OnDeck’s CEO.

“We have access to automated data for making credit decisions in industries that banks in general didn’t want to lend to.” – Neil Wechsler

Breslow told investors that OnDeck gets most of its customers, about 40 percent, through its direct mail and online channels. But, he says, “the strategic partner channel is an area where we are seeing value and winning more business. In fact, this channel has our lowest customer acquisition cost.”

Breslow says OnDeck is looking ahead to the inevitable economic slowdown. “I don’t dispute that when the next recession comes, there’ll be a shake-out in non-bank lenders. The stronger ones will survive and maybe consolidate into others.”

In Canada, Wechsler says OnDeck provides “a digital platform that within eight minutes an application
can be satisfied and we’ll let you know the same day, or within 24 hours. We provide an alternative
to credit union members that credit unions haven’t previously been able to provide.”

In addition to quick and easy access to loans, OnDeck provides capital to merchants that otherwise might not have qualified. “Traditional banks only lend on collateral and we lend based on cash flow. We have access to automated data for making credit decisions in industries that banks in general didn’t want to lend to,” Wechsler says.

OnDeck, adds Wechsler, will not be taking customers away from Coast Capital Savings. “They are Coast members who become an OnDeck financing merchant as well, on a co-branded basis. We are, as far
as I’m concerned, providing complementary services to Coast and we are in no way replacing it in the merchant relationship.”

Weschsler further adds that this “is just a great partnership and it’s what you’ll see industry-wide in terms of fintechs partnering with financial institutions, whether they be credit unions or banks.”

Does it cost businesses more for the convenience, speed and access to capital? “We are a fee-driven business, but we want to be a transparent lender,” says Wechsler. “We are slightly more expensive than
traditional banks, obviously, but there are no hidden extra fees.”

Wechsler says OnDeck’s loans range from $10,000 to $300,000, with the average being about $40,000 and the average term less than a year. A typical OnDeck customer is “a restaurant that wants to build a deck for the spring that adds seats so that they can grow their business, or a piece of equipment goes down and they need access to quick funds so that they can keep their business operating.”

“I don’t dispute that when the next recession comes, there’ll be a shake-out in non-bank lenders. The stronger ones will survive and maybe consolidate into others.” – Noah Breslow

Corrine Pohlmann, senior vice-president, national affairs, with the Canadian Federation of Independent Business (CFIB), says access to capital has always been and continues to be a problem for Canadian
businesses. “The issue is cash flow, which for a lot of small businesses can be a real struggle,” Pohlmann says. “A lot of them have been turning to credit cards and that’s not the greatest way to bankroll the business.”

Polhmann says that CFIB warns business owners to be wary of alternative lenders. “Sometimes the quick loan kinds of businesses also have high interest rates,” Pohlmann says. “We always tell them to be cautious. There are lots of scams in that world, so you have to be careful.”

Online lenders may be better for smaller loans but, Polhmann tells owners, “if you’re looking for a bigger
loan there is something to be said for looking someone in the eye and talking about your business, versus an algorithm that just does a bit of a credit score. So much of the success of a business has to do with the individual running it and if you don’t know who the individual is and how they do things that can have
a huge impact on whether they are going to be a success or not. No algorithm is going to tell you that,” Pohlmann adds.

Wechsler notes that OnDeck is seeing a change in the makeup of Canadian small businesses. “We used to be focused on storefronts, restaurants and retail establishments. Today we do e-commerce and all different types of industries. As part of our credit underwriting, we used to ask for proof of a valid commercial lease — how antiquated is that? So many businesses are e-commerce operating out of their
homes on digital platforms. We had to modify our existing algorithms and no longer require that piece of evidence.”

Wechsler is looking forward to the advent of open banking and the opportunities it will provide to non-traditional lenders such as OnDeck. Along the way, credit union SME members should increasingly enjoy the benefits that such alternative lenders have to offer. ◊