How Are Credit Unions Navigating The Fintech Frontier?

Credit unions are increasingly relying on fintech partnerships to expand member-facing technologies without building in-house digital expertise. These partnerships allow credit unions to deploy products, services, and processes to make it easier to remain relevant and grow.

That’s not to say the process is easy. In fact, navigating those partnerships is almost as tricky as building and deploying the software. But as the industry deepens its connections with fintech providers, best practices are emerging.

Texas Trust Credit Union ($2.0B, Arlington, TX) partnered with Access Softek a decade ago for mobile deposits but soon found there were other areas where the fintech could help provide a better member experience. For example, it helped the credit union use algorithms to individualize, to a degree, deposit limits for members while tamping down fraudulent deposits.

“It was beneficial for both of us because we were getting our problem solved and we were the first client to go to market with that solution,” says Robert Underwood, senior vice president of IT operations at Texas Trust. “It became a competitive advantage for us, at least for the short term.”

In return, credit unions provide valuable feedback and insights fintechs can use to develop their own roadmaps for tool improvement and relevancy, Underwood says.

How To Choose The Right Partnership

Selecting the right fintech partners is crucial for credit unions to achieve their strategic goals and improve member services. This process begins with a clear understanding of the credit union’s needs and objectives.

At Texas Trust, that process starts long before talking to any potential fintech partners.

“We document really well, touch base with multiple stakeholders within the organization, and make sure we’re considering the organization’s needs and not just the needs of the individuals who are driving the project,” Underwood says.

That approach also helps ensure partnerships are based on strategy and member needs rather than an impressive presentation.

At Greater Texas Federal Credit Union ($949.8M, Austin, TX), three key factors come into play when evaluating potential fintech partners.

“The security and protection of any information that we might share with the fintech is No. 1,” says Kayvee Kondapalli, chief information officer at Greater Texas. “Integration with our current systems, depending on where this fintech is going to be playing, is also an integral piece. Finally, is the product ready to go to market or is it at the concept stage?”

Communication: The Power In Clarity

Effective communication is crucial for successful partnerships, but it also can be one of the biggest challenges. Credit unions and fintechs often have different cultures and ways of working, which can lead to misunderstandings if not addressed proactively.

“What I discovered very quickly with our fintech relationships is they speak a different language than we do and their business model is different,” says Josh Rodriguez, assistant vice president of fintech and mission integration at West Community Credit Union ($469.4M, O’Fallon, MO). Rodriguez joined the suburban St. Louis cooperative in January 2023 after it merged with a smaller credit union for which he served as CEO for 11 years.

Fintechs operate with a start-up mindset, he explains. They focus on rapid building and then selling. Credit unions, on the other hand, are long-term institutions — that word says it all — with a different style.

“A mutually beneficial relationship depends on us figuring out a way to communicate effectively with each other,” Rodriguez says.

Contracts: Don’t Bedeviled By The Details

Not surprisingly, contracts can make or break the relationship. By carefully negotiating contract terms and including provisions for performance evaluation and relationship termination, credit unions can better manage their fintech partnerships and meet institutional needs over time.

At Greater Texas, Kondapalli, a 21-year veteran of the industry who joined the Austin-based credit union in 2020, recommends keeping a close eye on how contract terms are written, including if the contract is at the product or relationship level, which can make a big difference if a company is sold.

And then there is the question of contract duration.

“I would not go more than three years on a contract,” Kondapalli says. “If it’s annual, that’s even better. I know one might say annual contracts are too much to manage, but it’s a dynamic state we’re in now. That’s the reality.”

Benchmarks are a serious matter, too, and West Community ensures its contracts include exit clauses.

“If we don’t hit benchmarks within a year, maybe 18 months, maybe two years, then we’re going to sever the relationship,” he says. “As fast as a fintech moves, we still need to be pushing them for results.”

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Security: Keep Data Corralled

Data security is another paramount concern in fintech partnerships, and credit unions must ensure their fintech partners have robust security measures in place to protect member data.

A proactive approach includes specifying incident response plans and notification procedures in the event of a data breach.

“We started mandating certain language within the contract itself around issues such as a data breach — at the partner’s site or one of their downstream partners — so we get notified within ‘X’ hours and are kept in the loop on an ongoing basis until the issue is resolved,” Kondapalli says.

Texas Trust’s Underwood highlights the importance of thorough due diligence and sharing only what’s necessary.

“We try to follow a least privilege philosophy so we’re only providing those vendors with the exact amount of data they need to be functionally capable for us,” Underwood says. “We’re not providing them any more than that.”

By implementing these security measures and maintaining vigilance throughout the partnership, credit unions can better protect their members’ data and maintain trust in their fintech-enabled services.

Finally, a final piece of advice might be more important than all the others: Don’t expect miracles.

“There’s this misconception that fintechs can implement all these solutions and all your problems will be solved,” says Rodriguez at West Community. “They’re not going to solve all your problems. There are going to be challenges. But if you find the right partners, it’s definitely going to be worth it.”