When we think about what draws members to your credit unions, we generally point out the low rates, accessibility, convenience, and trust as compared to your bank counterparts. However, when we consider that financial technology (fintech) companies such as PayPal and Square are coming onto the scene more rapidly and picking up more of the market share with consumers, we have to ask ourselves what our members really value in their financial services—and how it will change how we deliver those services in the future. Fintech companies use technology to provide financial services in innovative, non-traditional, and convenient ways.
On this episode of “C.U. on the Show,” Doug welcomes guest Kirk Drake, author of CU 2.0: A Guide for Credit Unions Competing in the Digital Age and founder of Ongoing Operations. With over 25 years of fintech experience, Kirk has spoken at over 100 conferences, raised an impressive $15+ million in capital for his credit union partners, and founded multiple 7+ figure companies such as OGO, CU Wallet, and CU2. While fintech is undoubtedly changing how financial institutions compete, Kirk believes leveraging fintech and becoming part of the growing ecosystem is a more positive direction for credit unions.
Consumer preferences and expanding technology capabilities are driving how fintech is filling the gap in traditional financial services. Still, many fintech companies are looking for trusted partnerships with financial institutions to gain far-reaching adoption to be successful. Kirk emphasizes how these types of partnerships can help credit unions build long-term, broader strategies that provide more value to their existing members, a future generation of members, and the credit union movement overall.
They go on to discuss that there’s no better time for credit unions to explore these new avenues of servicing their members, with new fintech companies cropping up every day. By efficiently vetting companies and aligning them with the right financial institutions, Kirk helps credit unions enter into fintech partnerships and leverage outside innovation to grow their membership and remain relevant and competitive for decades to come.
Kirk explains that curiosity is a quality credit unions should embrace and encourage as they navigate the digital space. While entering into a fintech partnership comes with risk, learning about the process is a positive exercise in positioning your credit union for successful partnerships in the future. Exploring new technologies and prioritizing how to bring more value to members, even in areas that may not immediately relate to credit unions, could be the determining factor in changing your credit union’s trajectory.
Stream the episode to learn more about:
- The type of scale needed to participate in the fintech space, such as systems integration and capital. You may be surprised to learn that fintech companies are not necessarily considering partnering with banks or the largest credit unions.
- Examples of how credit unions can incorporate fintech for services such as lending and checking accounts.
- What a fintech arrangement and lifecycle may look like, from how to get started to how to protect your members to what happens if a fintech’s business status changes.
Listen now.
Kirk Drake and Ongoing Operations are not affiliated with or endorsed by ACT Advisors, LLC.
AUDIO TRANSCRIPTION:
Doug (00:03):
Hello credit union executives. Welcome to “C.U. on the Show,” where we give you up-to-date information on how you can reduce risk, keep key talent, and take a strategic approach to your personal financial wellness hosted by me, Doug English, CERTIFIED FINANCIAL PLANNER™ and former credit union insider with Act Advisors. My guest on today’s podcast is Kirk Drake. Kirk has more than 25 years of fintech experience and is the author of Credit Union 2.0: A Guide for Credit Unions Competing in the Digital Age. As CEO, Kirk has raised over 15 million in capital for his credit union partners and founded multiple seven-figure companies, including OGO, CU Wallet, and CU2. In this episode, Kirk discusses fintech in the credit union movement, including the type of scale needed to participate in the space, fintech lending ideas, and the lifecycle of a fintech arrangement. Welcome to the show, Kirk.
Kirk (01:06):
Thanks for having me. Great to be here.
Doug (01:08):
So when I first learned a little bit about Credit Union 2.0, I watched a video where you were talking about credit unions coming out of the great recession in 2008. So can you talk to our listeners a little bit about that video?
Kirk (01:23):
Yeah. So really the genesis of that began probably when I moved to Washington, DC and started working at a credit union. The first credit union I work at, you start hearing all the industry kind of buzz, and they’re talking about how we need to really be more convenient, more trustworthy, more accessible, better rates, all those kinds of things. And I start following kind of the RA financial model and going to their events and all that kind of stuff. And really, this was right around the time when Credit Unions were doing a huge lobbying campaign of Congress to make sure that we weren’t taxed and really began expanding membership options. So it really felt like it was my first kind of career experience. And so I really bought into that, fell in love with credit unions. I spent the next 10 years working at credit unions and around year 10 spun off and created Ongoing Operations.
Kirk (02:17):
And frankly I just stopped paying a little bit of much attention cause OGO was very infrastructure oriented. So I didn’t do as much on the member side of things. And then in 2013 I created CU Wallet with Paul Fiore, founder of Digital Insight, and really kind of fell back in love with the consumer side of things. And so when I started really working on the first book Creating 2.0, and I started researching, I really went back to all the things I had heard over the years about rates, convenience, trust, all those pieces, and said, you know, I’m gonna kind of call BS, right? Like we’ve done all these things as an industry. We are more convenient. We are more trustworthy. We have better rates. We are all these things, but 2008 comes along and this is our time to shine. You got Susie Orman out on every talk show going, how great credit unions are and how consumer banks are looking terrible. And then when I look up 10 years later and I’m writing this book, credit unions have barely moved the needle. We didn’t capture market share as a collective industry in all that time.
Kirk (03:16):
And just kinda look at that and go, if it’s all about convenience, rates, and trust, those pieces, how come the whole world didn’t just move over to us, right? This was our heyday. You got banks, they’re down and out. They’re getting pounded on by the regulators, by every news outlet, all this kinda stuff. And it made me really question about what we think consumers want and what we think members want and what we need to be providing and how to build organizations like that. Because I think a lot of times we think we know, and we think it’s based on what our own personal experiences are. We think we want them to be more professional and more bank-like, more stable, more consistent. Yet most people I think who join credit unions, aren’t joining because yes, you need to have better rates, more convenience of those things, but we need to be better at really demonstrating the cooperative difference. And I think things where they’ve got these kinds of feedback loops, patronage, dividends, things that really help the consumer tangibly feel that difference, feel the values, feel the cultural difference in this. That’s really how you get the explosive growth. Because if we’re competing on rates, price, scale, those things, we’re really playing the game of our opponents. We’re not playing the game of what is really our core competency.
Doug (04:42):
That’s before fintech. And so now you’re really involved with fintech and you have your fintech library in quarterly meetings with credit unions. So talk to me about that. I wanna know about what that is and how that functions, and then let’s get some great ideas for credit union leaders to be able build their institutions and serve more members.
Kirk (05:03):
Absolutely. So I think it really goes back to the days when I was a CTO, CIO of a credit union. What I found was lots of interesting startups would come through my door and wanna partner with the credit union. And if I found it was a great idea, we’d go down that journey. We’d try it. But inevitably we’d get stuck at two points, more system integration. And even if we were successful getting past that, if we were the only credit union to adopt it, then generally speaking within 18 to 24 months, that company would give up on credit unions and go someplace else. Right? And so you have this need to have a group of credit unions believe and demonstrate that we can be an ecosystem and a financial B2B partner in that regard. And so as I was writing Credit Union 2.0 and researching that, what I just kept finding was lots and lots of, I like to say, I’m 51% in person, 49% entrepreneur.
Kirk (05:54):
But half of my network is in the entrepreneurial world who see things very differently and are off creating new ideas. And they’re really good at solving one problem, way better than we ever can as a cause we kinda serve a very diverse set of products and services. And so as I looked at that and kind of started looking at the onslaught of fintech, what I just really noticed is the number of transactions that were being pulled away from the credit union world, without even knowing whether it’s PayPal or Venmo or any of these things just kept growing. And as an industry we weren’t noticing. And then secondly, the number of innovations that were coming in were exploding. I probably talked to about 25 new fintechs every single week that just walk through my door, me not even looking, right, just call up.
Kirk (06:40):
Hey, we wanna talk to you. We’re in a really frothy time period. And all of these guys share the same problem, which is they don’t have the bank charter structure that credit unions do. They don’t have the lending licenses that credit unions do. And the regulatory environment, they have great ideas. And they’re able to really execute on many things. What I call the atomization of financial services, where they’re breaking into all those small parts. The good thing is most of these early stage entrepreneurs really believe in the social cause of what they’re doing and wanna find great partners that frankly aren’t banks. Yes. Some of ’em want to go bigger than that. We like to say, there’s three groups: the ones that want to eat your lunch, the ones that wanna have lunch with you, and the ones that wanna serve you.
Kirk (07:23):
So when you look at them in that perspective, I would say 70, 80% of the market is in the not eat your lunch category, that they truly wanna partner and create good financial services companies that are partnering with credit unions in some way, shape, or form. So we really spent a lot of time thinking about how can we connect these dots? How do we help credit unions digest these fintechs much faster? How do we help them leverage this outside capital and outside innovation that’s coming in? Because if we, as an industry, can connect the dots here and be accessible, frankly, the net, all the market share, is gonna be grown by credit by these fintechs over the next 20 years. And if we can be part of that ecosystem, it’s huge for our members. It’s huge for diversification, it’s huge for staying relevant and shifting the burden of innovation and cost of innovation to the new entrance in the marketplace.
Doug (08:18):
That’s the idea of fintech, but what manner scale is needed to participate?
Kirk (08:23):
In this space? So I think it’s a misnomer that it can only be the top hundred, right? I mean, there’s definitely a group of fintechs that wanna start there because they can bring a certain scale or expertise in it. But in general, we see a couple different patterns. Either the fintech needs one credit union in each state in some way, shape, or forms a partnership. And they don’t really care about the size. They just need a credit union in that state that they can partner and bring business to. Or they’re looking for depth where they don’t want to have regional competitors. They don’t want a franchise model. They really want every credit union to be offering this in some way, shape, or form. In which case, I would say credit unions under 50 million, it starts getting pretty difficult to participate, but over 50 million, almost all of these guys work pretty well.
Kirk (09:08):
We try to focus our pilots around doing the first couple purely manual and demonstrating that atomization or whatever the fintech is doing works for that credit unit financially. And then once we do that, prove that the core business thesis works, then go back and pave it with what we call the fintech service bus, which is core agnostic and allows for multiple fintechs to absorb the same API and connecting multiple credit units, because the core is always, like I said earlier, it seems like that’s always a big hurdle point in that. And so we have a couple different service buses, one that focuses on the lending side, one that focuses on the payment side. And so there’s different options in there that basically allow you to not be totally reliant on the core for that digestion piece of it. And then the third piece is really the financial model of what I would kind of call whose member is it?
Kirk (09:57):
So, how do you protect your existing clientele and membership, right? It’s the first focus, then B, how do you get some slice of the apple of new members that are being generated and then C, is there some bulk aggregate way to simply put things on your balance sheet in bulk that allow you to solve for shorter term financial concerns and liquidity and ALM portfolio decisions and those kind of things in that regard. And all three of those, we have found very consistently with the diversity of fintechs that you can really piece that together into a broader strategy.
Doug (10:33):
So I wanna circle back to the thing that you do quarterly with credit unions. Talk to me a little bit about that. And I wanna wanna get into some examples of some of the best adoption, best ideas, best execution, examples as our listeners can kinda make this actionable.
Kirk (10:48):
So today we work with about 250 credit units on a quarterly basis, half an hour to 45-minute phone call, and we present three to five fintechs on that call. We start with some questions for the credit union, trying to understand what the strategic planning focuses are or balancing focuses, those kinds of things. And then we go to our library, pick the three to five most relevant and pitch them in five-minute increments. There’s usually two formats. If we have no competition for that particular piece, we just talk about that one fintech. If there’s multiple fintechs in a particular field, we help understand how is fintech A different from fintech B and what is their core competency? Cause we tend to believe that they’re both gonna be successful or three of ’em are gonna be successful. You have a good marketplace in that, but some might be right for AEG-based credit union.
Kirk (11:35):
Some might be right for a community charter, some might be right for some other piece of it. And so just understanding that dynamic helps the cutting to focus in and know, all right, it’s worth spending time on two of these five things that we got presented today, and instead of spending five or 10 hours reviewing all of ’em, we know C2’s already vetted these. We know that they already have at least one credit union client. All of our, almost all of our fintechs have to meet that criteria outta the gate. So we know they have some social proof and economic proof that their thing works before we go take them into other credit unions. And then through that process, we’re able to help credit unions really kind of speed up that process and not have to take every fintech that kind of comes in the front door and know that we already know about core system integrations.
Kirk (12:18):
We already know about balance sheet issues. We already know about membership qualification, core things that exist in every credit unit in that decision-making criteria. So, you know, the fintechs have already had some level of vet in that capacity. So I think your second question was a good example. One of the areas we’ve spent a lot of time really thinking about is the neobank checking account kinda structure and really, checking accounts haven’t changed since the late nineties, early 2000 when you got one free, right? But we have a lot of new people trying to compete with those in different ways, shape, or form. At the same time, you’ve got overdraft protection and courtesy; those things being highly fraught with lawsuits as well as really, I think it’s kind of embarrassing right now as an industry that the banks are actually reversing overdraft protection charges faster than credit unions are.
Kirk (13:04):
And we’re sitting here looking like this is challenging for our income statement. We don’t wanna admit it, but it’s really not a good thing. We need to figure this piece out. And so there’s one called double check that is a QSO and has some great IP already integrated to a number of different cores that gives the credit unit a whole bunch of options around creating transparency for the consumer about which items to get paid and which ones don’t. And the consumer has the choice at the end of the day. So you avoid all the regulatory piece of it. And the choice to kind of suspend the transaction for 24, 48 hours and bring an alternative funding mechanism. So they don’t experience the overdraft situation on the rent or mortgage side on the other half of the transaction in some way, shape, or form.
Kirk (13:48):
We love that one. They’re live at a couple credits and we’re seeing some good traction with one called a sell wage, they’re doing an earned wage access. So a lot of credit unions will, if they’ve got ACH records, they’ll allow members to have their money a day or two before the ACH record is actually live. These guys actually I think get to the core way of generating members at a credit union, which is you have a SEG offering that allows you to go to your SEG partner with them. They take care of the integrations with their payroll system and now the consumer can choose to get paid 5 to 10 days early for a $2 fee. But the data for how much they’ve worked is coming from the payroll provider. And the only way they can get this is that they’re a member of the credit union, not if they’re at Bank of America or something else like that.
Kirk (14:31):
And so it gives credit unions a huge differentiator and ends up being a huge marketplace right now on growth, especially in the neobank China kinda world where they’re already offering this kinda natively in that. And so those two, double check and accelerate, I think are doing a great job of beginning to reimagine the checking account as we know it. And you can start to see the pieces of where this is going to go over the next 5 or 10 years and how the credit can really adjust this for the next group of members that are gonna want not my mother or father’s checking account. That’s based on bill pay and PFM, but really starts getting into the next generation of thinking about financials.
Doug (15:10):
Everyone’s got plenty of deposits now. Not that they don’t want that. Talk to me about some fintech lending ideas.
Kirk (15:18):
Sure. On the fintech lending side, there’s one called Synaptic, which is an AI-based underwriting tool that allows a credit union to decide much, much faster, and really creates transactions much, much faster. That’s gonna actually perform using AI machine learning to really digest that. And so there’s probably 30 or 40 credit unions that are actively using that and seeing much better throughput. On loan volume, on that side, there’s one called Ren. That’s doing a future market lending set of solutions starting with home equities. Now moving into first mortgages where they basically look at the house and they say, okay, you want to do a kitchen remodel. We know that’s gonna add 20% of value to the house. So we’ll loan you the full amount upfront to do the renovation. We’ll manage the contractor, kinda like construction along the way. And it becomes one transaction for consumers where once the practice is complete the rate drops and instead of the consumer having to go borrow against a credit card or home equity or some other thing their parents do, it all becomes one transaction. They’re also doing that on a traditional first mortgage; you wanna buy a new home that, you know, you wanna do a lot of work on it, they’ll kind of prepay that whole transaction as well.
Kirk (16:31):
And so they generate just a ton of new members for credit units around the country that want an innovative product in that capacity to bring that to market.
Doug (16:42):
Let’s pick that one. Let’s pick reify. Yeah. So let’s pretend that I’m a participant in your quarterly meetings. And I decide that I want to explore bringing that into my credit union. Walk me through the steps of the lifecycle of that arrangement, including from what I understand most fintech’s objectives are to get bought out. So eventually they get bought out by somebody. And how does that change my experience? So take me all the way through.
Kirk (17:11):
After the quarterly fintech call of your interest. If we set up another call with reify, you have a kind of exploratory piece of that. And if that’s something you’re interested in, then they set up a small scale test with you to say, we’re gonna bring you 10 loans, see how this does, if you like it. And you need to tell us what your underwriting criteria would be, and then we’ll put those on the manual. And then once we get good at that, then we’re gonna go in with your lending system and bring that pipeline directly into your environment at that stage. And allow you to say, I want a commitment of 25 million, 50 million, a hundred million, whatever it is. And then they’re gonna go off and generate that new business, those new members, that new pipeline for you in that regard. Back to your question about exit strategy.
Kirk (17:56):
This is definitely something I saw at Ongoing Operations when we started doing infrastructure security work 15 years ago was if we partnered with the best technology, there’s one of two paths in; either they were VC funded and they were gonna be bankrupt, which was a problem for us, or they were gonna hit it huge. And the credit unions wouldn’t matter. And that would be a problem for us. And so we got really clear around picking entrepreneurs and technology and partners that were much more aligned with that longer term exit strategy. And so the way we advise fintech structures and partnership with credit unions today is we’ll usually set up a QSO structure where there’s a license and some IP or some access to a product or service within that credit unions might invest some money we’ll then facilitate having that money go as investment capital in the fintech, usually in the form of warrants.
Kirk (18:51):
So there’s no downside risk to the credit. And the credit unions are getting kinda a coupon back from the fintechs outta their own revenue stream. So get a hundred credit units paying a thousand dollars a month, each pays a 5 or 7% operating income coupon back until the credit unions get their money back. And then it reduces at that point, the credit union just has the warrants. So if the thing ever exits, and there’s a huge windfall, the credit union will execute the warrants. If there isn’t, they just sit there and keep getting this nice kind of passive dividend out of that structure. And that’s a role CU2 plays where we end up running and administering on behalf of the credit union and playing board member or entrepreneur for the fintech in that regard. And then secondly, in the lending space, we wanna make sure that that’s a good long-term structural relationship so that even if they do sell, credit unions are still getting that pipeline of loans long term, and making sure that we’re structuring the partnership agreements between the credit union and advising both on the fintech and the credit union side of how do we structure this in a way, not just you use the credit union, you built a great business.
Kirk (19:55):
You exit the business, you walk away with a bunch of money and the credit unions are going great. Now I gotta go do this all over again.
Doug (20:00):
And that’s exactly where I was going. So what I heard you say is this is part of what your company is doing. The credit union creates a QSO and then funds it, and the QSO gets those warrants, but that would demand a certain level of scale, right? You need to have a certain amount of scale to be able to have the time to participate in that, have the capital participate in that? What if you just wanna plug into the fintech and yeah, they may go and be gobbled up by someone else and be gone. Is that an option? Or you gotta have to go the other way.
Kirk (20:30):
You can go the traditional route. We do have a couple other options that we’re working on. So one of which, the circle fund, has raised a couple hundred million from about 60 credit unions that are investing in this fintech, much better as an entrepreneur, hands-on client two through a hundred is what I like to say. My sweet spot, about a hundred. I get distracted and don’t like operating the things. And I love the very messy part of core system integrations, pricing models, first-time client issues, you know, that piece of it. So CU2 has a fintech fund where the credit union puts some money in, and then we place those bets across 20 or 30 and manage that whole lifecycle with the idea being that you’re able to just go along; we bring you these pilots and these different things on a perpetual basis. And then if we win or when we win collectively, we’re sharing in that with the credits across that whole spectrum.
Doug (21:21):
Are you running a cooperative hedge fund?
Kirk (21:25):
You could call it that, but I’m a huge believer in taking what works in other spaces and bringing it into the credit union space. And generally speaking, whether it’s Wall Street, fintechs, healthcare, property management, that’s one of the reasons why I have such a diverse network of entrepreneurs is there’s nothing I love better than going to some meetings sitting down for two days, learning about some crazy piece of business that has on the surface, no relevance to credit unions, and then figuring out how to bring and partner that back into credit union loans. Because I think every time we can do that, that makes us more competitive and makes us more likely to be here 20 years from now, really doing great things for consumers.
Doug (22:03):
Interesting. Interesting. This is forward leaning stuff. I love these kinds of ideas to help our credit union leaders be successful, but we’re about out of time for today’s episode. So I’ll kick it over to you for any closing comments or thoughts for our listeners.
Kirk (22:19):
The number one thing that I think I see in credit unions that I find frustrating is the lack of curiosity, right? And so I would just encourage everybody to lean in, do it, explore something, see if you can get it to a term sheet, even if you don’t sign the term sheet, right? Like just take that next step and say, well, how could we make this work? And my guess is you’ll find something interesting that brings even if that one thing doesn’t bring you value the process of learning, how to do that, and then getting better and better at that third or fourth time, you’re gonna find some gem that comes along and changes the trajectory of your credit unit, but it all starts with curiosity about maybe I don’t fully know exactly. I think there’s a book called Think where the guy talks about how we tend to think we’re smarter because we see patterns earlier, but usually we haven’t fully done the research, and it’s this confirmation bias from our friends and family that tells us we’re smarter. But the key is to recognize you’re at the top of the hill of stupid at that point. And you’re about to go to the valley of despair. And it’s not true that learning doesn’t occur until you start coming up out of that, recognizing just because you see a pattern early doesn’t mean that it’s right.
Doug (23:31):
The top of the hill of stupid.
Kirk (23:35):
I spent a lot of time. I spent a lot of time there.
Doug (23:38):
One of the takeaways we’ve never had on this show, the top of the hill of stupid. Thank you, Kirk. Really interesting insights and we’ll have your information posted on the podcast.
Kirk
My pleasure. Thank you.
Doug
That’s all the insider credit union knowledge we have for this episode. Are you enjoying the conversation? Be sure to subscribe and share your thoughts with other credit union leaders by leaving us a review. See you next time on “CU on the Show.”
Speaker 3 (24:11):
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