Michael Abraham, the chief strategy officer at Great Lakes Credit Union (GLCU), has identified shortcomings in how the $2.4 trillion credit union sector has operated for years.
Many credit unions simply don’t have the funds, expertise, or personnel to develop crucial tools like digital wallets or AI chatbots. They struggle to modernize outdated systems for underwriting and fraud detection. So, over the years, when they needed better software for things like mortgage data, they often hired outside consultants or paid fees to financial tech companies, frequently startups from Silicon Valley. These providers would take their fees and leave behind a jumble of incompatible software that didn’t mesh well.
This led Abraham to ponder: What if GLCU established an independent branch—a sort of private equity sandbox—that could invest in fintech and acquire or license the necessary financial tools?
Credit unions often collaborate through entities known as credit union service organizations (CUSOs). By pooling funds, they can invest in fintech solutions and partner closely with developers to obtain digital tools, generally at lower prices. More commonly, a singular CUSO is created, similar to GLCU’s setup.
GLCU, which has $1.4 billion in assets and serves northern Illinois and western Indiana, established a new holding company in 2023. This entity is designed to manage prior CUSO investments, including one in Interface.ai, which launched a service called AI Agents for Consumers. Last December, this new arm also invested in LetMeDoIt, a financial planning app aimed at the disabled community, which encompasses around 45 million people that Abraham indicates have been overlooked.
According to Abraham, having a standalone CUSO will simplify the management and deployment of investment funds. There’s a dedicated board and staff focused on evaluating and directing these investments, as opposed to having those duties just tacked onto someone’s existing job responsibilities.
A Relationship Between Credit Unions and Fintech
Research shows that more than 80% of credit unions hold less than $500 million in assets. For comparison, JPMorgan Chase, the largest bank in Japan, has $3.9 trillion in global assets, investing around $2 billion annually just for AI. Hence, forming partnerships with fintech firms—whether through hiring, investing in, or acquiring them—is vital for the credit union sector to not only grow but also survive.
“We want to automate as much as we can,” said Christine Blake, CEO of Cardinal Credit Union. “It also enhances the member experience.”
Cardinal has collaborated with Velera, a payments-focused CUSO, alongside Lumin Digital, a Velera-supported startup planning to launch an online banking platform in 2024. This platform will offer personalized financial guidance, a tracking dashboard, real-time payment options, and live chat with customer service. Blake highlighted that they have asked ten employees to explore AI applications and decide within the next year if they should partner with a fintech or build a solution themselves.
Recent data from PYMNTS Intelligence indicates that over half of credit unions believe that partnerships with fintech enable them to innovate quicker than they could internally. Two-thirds believe their fintech collaborations will enhance mobile and digital payments within three years. Just 0.6% claimed they could innovate without fintech’s assistance.
Collectively owned by more than 4,300 credit unions across the U.S., this sector encompasses about $2.4 trillion in assets. These credit unions serve around 145 million individuals and businesses—referred to as members due to their ownership stake. To thrive, they must offer advanced chatbots, agents, and superior fraud detection, especially to attract younger customers like Gen Z.
But the dynamics of the credit union-fintech relationship are complex.
“The Innovator’s Dilemma”
Nadim Homsany has worn many hats in this area. Currently managing $33 billion for Boeing Employees Credit Union, he was a co-founder and CEO of Earn, a platform that automates consumer debt payments. Last July, BECU acquired Earn’s generative AI technology to roll out mobile debt management solutions for its 1.5 million members.
Homsany aimed to keep BECU from facing the “innovation dilemma,” where large organizations can struggle with agility due to their size and bureaucratic processes. To counter this, he created a separate framework within BECU to house Earn’s AI technology.
They then began building Becca, an AI financial advisor focused on middle-income earners amid ongoing economic struggles.
Other credit unions are similarly making strides in partnering with modern fintechs. Coastal Credit Union in North Carolina recently joined a CUSO formed by PrizeOut, a fintech that offers cash back, digital gift cards, and rewards for financial institutions. Credit unions investing in this CUSO typically benefit from lower startup technology licensing costs.
“We’ve realized we can’t afford to develop everything in-house,” said TJ Wyman, Chief Digital Services Officer at Coastal Credit Union, a $6 billion institution. “If that’s not an option, you need a partner.”
Coastal manages around $20 million across numerous startups through a separate investment arm, leveraging their shares without needing to develop the technology themselves.
Who’s in Charge?
Most fintech partnerships are about enhancing existing offerings. According to PYMNTS, over 60% of credit unions are collaborating with fintechs to integrate new features into preexisting products. Nearly two-thirds are actively adding new service channels or delivery methods to boost current offerings.
The PrizeOut CUSO gives around 24 credit unions the ability to incorporate features like cash back and rewards into their systems. Because these credit unions have invested in PrizeOut, they can influence how the tech is developed. For instance, after a credit union raised concerns about an existing rewards program, PrizeOut tailored its rewards system accordingly.
“We hold discussions with our partners twice a year to address challenges and plan future developments,” noted Matt Denham, PrizeOut’s Co-Founder and Chief Strategy Officer. “Their input significantly shapes our direction.”
Blake Woods, Senior VP of Strategic Transformation at Orsa Credit Union in Michigan, mentioned that credit unions could promote fintech solutions, not the other way around.
Orsa is currently making a discreet investment in Rakhi, a startup that sends push notifications. For example, when an Orsa member attends a Detroit Lions game, they might receive alerts in the app that offer increased rates when the team scores a touchdown.
The Slow and Fast Pace
In an industry recognized for its personal service and cost-effective loans, the fundamental characteristics of credit unions include high-quality, attentive customer interaction. However, maintaining that essence is tricky in today’s AI-driven landscape.
Blending the fast-paced culture of fintech with the cautious approach typical of credit unions is nowhere near seamless.
Sometimes, initial proposals may seem overly ambitious. Abraham recalled a fintech that approached him with a solution for sharing mortgage data between banks and third-party systems. While technically impressive, the proposal collapsed when the internal vetting revealed it had not been built on a solid framework for protecting sensitive personal data.
“The underlying infrastructure lacked the capacity to ensure data integrity… It didn’t satisfy the regulatory requirements,” Abraham remarked. “That’s rather basic.”
Moreover, there’s often a mismatch in timelines.
Credit unions typically operate on annual budgeting cycles with a focus on gaining consensus, while fintech startups generally work on much shorter timeframes. Denham from PrizeOut stated that the typical software sales cycle is six to nine months, whereas credit unions often only approve new expenditures once a year, often in October or November. If they miss that deadline, startups often have to wait another year.
According to recent findings, only 22% of fintech companies believe their innovation projects with credit unions remain on schedule. Wyman indicated that it took almost two years for Coastal to reach a partnership agreement with PrizeOut. “Fintech firms often overlook the extensive regulatory and compliance challenges inherent in working with credit unions,” Cardinal Woods added.
