Credit unions urged to join fintechs to keep digital natives

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While many financial institutions are feeling competitive pressures from fintechs, a former Mastercard and Fiserv senior executive called on credit unions to collaborate with fintechs as a way to keep their tech-savviest members.

The opportunity to partner with nonbanks appears to be a way of making lemonade out of lemons being served to financial institutions. Just this week nonbank installment lender Affirm raised $300 million in fresh capital, restaurant POS payments platform Toast raised $250 million and business payment software provider Bill.com raised $88 million. Each of these startups is being valued at over $1 billion.

“Fintechs have changed how financial services are delivered to consumers but have not become dominant players, yet. The sole exception could be made for the payments industry," said Mark Sievewright a former SVP with Mastercard, the former president of Fiserv’s Credit Union Solutions Group and now founder and CEO of his consulting firm, Sievewright & Associates at the PSCU forum.

"Competition in payments is being reshaped by nonbank companies such as Square, PayPal, Venmo, Apple, etc. Even Square wants to be a bank,” Sievewright said.

Credit unions may have a very strong relationship with their members, but pressure from nonbanks is about to become extremely intense in the next few years for one reason beyond simply the investments being made in nonbanks. It’s all about how the demographics.

While millennials have been making a big impact on financial services in the last decade with their demands for 24/7 online access and better user experiences, they will pale in comparison to the impact that will be made by the next generation coming of age, Gen Z. By population numbers, Gen Z will outnumber the millennial generation by the end of 2019, according to a report in Bloomberg. Being the first truly digitally native generation with a mobile first orientation, Gen Z will put even more pressure on financial institutions to meet their user experience expectations.

“The ‘born digital’ consumers will demand new ways to interact with their financial providers, be it bank, credit union or nonbank," Sievewright said. "These are shifts in consumer behavior. It will ultimately shrink the time for delivering a better experience to bank customers as expectations are higher."

In the payments industry, it’s clear that nonbanks are fulfilling a gap in the user experience demands by consumers and businesses. The billions of dollars being invested by venture capitalists to fuel nonbank entries into payments is evidence that there is an opportunity to disintermediate traditional financial institutions.

There are, however, weaknesses that nonbanks are struggling to overcome — which is why Sievewright identified the challenges as an opportunity for credit unions.

Credit unions traditionally have very strong and longstanding relationships with their members, which is something startups need to overcome. Additionally, nonbanks don’t have banking charters, so they invariably need to partner with someone to provide many financial service and payment products.

Sievewright highlighted the fact that the credit union industry, and banking in general, has been experiencing consolidation as well as changes to its business model due to events such as the Durbin amendment and new entrants including Venmo, Square and others.

“If the banks and credit unions are unable to fulfill the right user experiences demands, then nonbanks will step into that void. Future fintech innovation and collaboration will bring about unprecedented changes to the payments business model. It’s an opportunity for credit unions to collaborate,” Sievewright said.

Since technology is continuing to drive change in the payments industry, it represents an opportunity for credit unions to step into the forefront through partnerships with nonbanks. It’s also a way for credit unions to prepare for Gen Z customers who will be asking them how good is their technology and how can they leverage it.

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