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Credit unions team up on payment tech strategy

Banks are under competitive and regulatory pressure to either compete or partner with fintechs that support services such as mobile payments, and credit unions are in the same boat — though with a very different challenge at the start.

"It's going to take partnerships with the next generation of payments and financial tech to stay relevant. And credit unions are challenged to compete on technology," said John Carew, chief strategy officer of Georgia’s Own Credit Union. "And it's pretty simple. The existing technology to do this in the credit union space is not adequate."

Georgia's Own Credit Union, which operates mostly in the Atlanta region, has teamed with a handful of other credit unions to use credit unions' traditional shared scale culture to build payments technology. The credit unions are trying to counter the rise of payment fintechs or to gain favorable terms for payment technology collaborations to innovate quickly.

The credit unions have just launched CUPayz, a partnership with Payrailz to form a credit union service organization, or a consortium of credit unions that share and add scale to adopt new technology or services. In this case, it's an old model — credit unions have pooled resources for decades to add scale to extend services such as branch networks — applied to a new purpose.

Chart: Groundwork for collaboration

The other members at CUPayz's launch include Coastal Credit Union in Raleigh, N.C.; Farmers Insurance Credit Union in Los Angeles; Meritrust Credit Union in Wichita, Kan.; Teachers Credit Union in South Bend, Ind.; and TwinStar Credit Union in Lacey, Wash. Two CUSOs, MDC and Constellation Digital Partners, will also be founding members. The credit unions are recruiting other credit unions as owners of the venture, giving them input on technology development and strategy.

"The tech needs are across the spectrum, but it's the most impactful when you look at electronic product delivery for banking and payments," Carew said. "That's where the most member-facing activity happens. Most of the bank investment is going to consumer-facing technology and we need to compete there."

Payrailz has worked with banks and credit unions, using machine learning to connect banking systems to P2P, bill payment and account transfer platforms, and will build on these and other payment technology through the CUSO.

"With credit unions, it's hard to do a one-off collaboration but they are very much willing to collaborate with each other," said Fran Duggan, CEO of Payrailz.

The credit unions are trying to respond to a growing trend of banks teaming with technology companies to improve connections between financial accounts and payment apps that support e-commerce, omnichannel shopping or international payments — or non-payment services like personal financial management.

In some markets, such as Europe, there are regulations such as PSD2 and GDPR that are leading to these collaborations or sharing partnerships, which are often called open banking. That trend is expected to be global, and Carew is concerned the bank technology market is not able to serve credit unions' needs to address these developments.

Other credit unions have teamed this way to approach emerging payments technology. CULedger, for example, is a group of credit unions that have pooled resources to build blockchain-supported payments and financial services.

"Many of the existing CUSOs are attempting to help credit unions innovate. Some are focused on AI or authentication, so I guess it's not surprising that a new one is focused on open banking," said Tim Sloane, vice president of innovation at Mercator.

Open banking's definition can vary, particularly outside of Europe, where the PSD2 regulation is governing data sharing between financial institutions. But in most cases it refers to the use of an API or some form of open technology that connects financial institutions to third-party companies in an effort to give consumers more access to digital services and control over their data.

There are many attempts to support open banking, including large payment companies such as PayPal and Mastercard, which are pursuing separate strategies.

Mastercard recently launched several products in a short span — a single connection to financial institutions' open banking function, real-time verification of third-party registration, centralized query and dispute resolution and advisory services.

The PayPal Commerce platform is designed to help businesses scale and connect to PayPal's user base in multiple currencies. PayPal manages compliance in more than 200 markets, and provides access to the point of sale, business financing, consumer credit and risk management.

Individual banks have also made moves, partly in anticipation of a PSD2-style evolution in the U.S., even if there is no specific regulation or law. BBVA in 2018 launched an open banking platform in the U.S. to connect third parties to account transfers, identity verification and card issuance.

"So competition is hot and I would expect those that are already working with credit unions on core banking, digital banking or payment platforms will have an advantage because it will represent the lowest effort solution," Sloane said.

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