By Ray Birch
SCOTTSDALE, Ariz.—The need to partner with fintechs is being recognized by more financial institutions, but one expert insists that organizations should not rush to a decision, and instead step back and make some important strategic decisions first.
Sam Kilmer, senior director at Cornerstone Advisors, said that many banks and credit unions are moving forward with decisions to work with fintechs in some fashion—either buying technology they need from the startups or partnering with them. There is even the option to create apps in-house, noted Kilmer.
“The mashup between CU, vendor, fintech, and investor—it’s an exciting, intermixed new sandbox out there where the differences between build, buy and partner aren’t always clear,” said Kilmer.
He cautioned credit unions against simply partnering with fintechs because they believe they must do so.
“You have to approach this decision strategically,” he said.
But it’s clear, Kilmer added, that CUs must come to a decision about how they will work with fintechs, simply because technology is becoming a major component of almost all businesses.
“To be viable going forward, every company now—whether that is a credit union, a bank, or a shoe manufacturer—one way or another has to be a technology company,” said Kilmer. “I am not saying they have to be IBM. But they must incorporate technology into the fabric of their business. Take Nike–they now have chips in their shoes that work with apps. John Deere has high tech in their tractors, with GPS…Everyone is trying to figure out how much technology do I need to get where we want to go.”
Build, Buy or Partner?
That leads to the decision of whether the organization builds, buys or partners to get the technology it needs to meet the advancing expectations of their consumer market, said Kilmer.
Kilmer contends that more credit unions need to step back and do some thinking before they choose one of these three paths, and he is concerned that not all are doing that.
“It comes down to thinking strategically about what do we want to be,” said Kilmer. “What capabilities does the credit union need to serve its members. We hear a lot from our credit union clients that they want to partner with fintechs, and when we ask why we often don’t get a clear answer.”
Kilmer advised credit unions to take a step back and make fintech decisions more strategic, and to be careful and thorough in how these decisions are made.
“So it’s also looking at how these decisions are made internally. Is there some kind of consistent approach the credit union uses,” he said.
Three Separate Areas
Kilmer insisted that at least three separate areas of the organization get involved, one being the CFO, and possibly the board.
“There needs to be a line of business that looks carefully at what they are getting. Another area that looks at the cost, and lastly one that looks at risk assessment. At least three different parts of the organization—you need checks and balances,” Kilmer said.
Kilmer emphasized, as well, that the credit union should understand the relationship it will have with the fintech and what will be expected from the partnership.
“It comes down to capability and control—what control will the credit union have over its destiny and what resources will be brought to bear by the fintech and the credit union. You want to marshal the third-party’s resources and align them with the credit union’s resources. And, you want to make sure that the credit union is driving the future capability of the solution set,” he said.
Not Always About Size
Kilmer noted that some people may think the credit union has to be large, possibly near $1 billion in assets, to strike a great deal with a fintech and get the startup to deliver what’s needed.
“You would think that it’s the big credit unions that have all the influence—they can push vendors and have the leverage to say I want these capabilities, I want you to dedicate these resources,” said Kilmer. “But what I often find is the relationship is determined by the leadership of the credit union—the relationships they have with the provider. So it’s not always about size.”