Month: May 2019

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The New Capital: Member Data

Member data is an asset. It is so potentially valuable that FDIC Chair Jelena McWilliams calls it the “new capital.” But that asset is nowhere on the balance sheet. However, it might be inferred from traditional institutional numbers such as average loan and share balances.

Because member data is not recorded financially, the necessity to convert this “capital” into a member service opportunity is often opaque. That is, until an outside party comes and wants access to some information to promote a new service or solution such as a software to manage an aspect of member’s life such as teen spending.

The member-owner design can help position credit unions as trusted fiduciaries with this information. Fintech innovators often view credit unions as valuable partners for targeted solutions because of their trove of member information and assumed trust.

What is the opportunity within the cooperative movement for the stewardship of this “capital?” How can credit unions both teach the value of and facilitate member benefit from their information?

Several countries including the United Kingdom have implemented the concept of “open banking.” https://www.americanbanker.com/opinion/us-way-behind-the-curve-on-open-banking

One way to explore this concept would be for credit unions to provide members the ability to grant permission of their financial data to other third parties. Under this concept, members would gain the ability to seamlessly and securely allow trusted third parties access to their member information.

Today this process is partially accomplished by aggregators such as Yodlee, but this is an uncertain process subject to operational disruptions. It is frequently limited to traditional product information available by screen scrapping.

By teaching members to value their data, credit unions can initiate member experiences that can help test new financial tools or solutions—thus enhancing the cooperative’s role as an intermediary.

As a member, I would certainly be interested in participating in these kinds of consumer innovations. Increasing my financial awareness, can only enhance my relationship to the cooperative.

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Why Financial Disruption is an Attractive Fintech Opportunity

Many factors are powering the multiple fintech startups in the financial sector.

The advantages of internet-based platforms are clear: low startup costs, rapid and continuing market responsiveness, easy scalability, preferred channel for younger demographics just entering markets, etc.

An example of the fintech ecosystem’s many segments can be read here.

But another reason financial services are subject to such extensive external disruptive efforts is that the barriers to entry for traditional charters are enormous. New charters for both banks and credit unions are costly, time consuming and closely monitored.

As a result, de novo charters are few and far between. Five new CU charters have been approved by NCUA in the last decade. The average organizational effort is more than four years, and often longer.

For cooperatives, incumbent credit unions are protected from new entrants by a massive regulatory chartering obstacle that effectively prevents new competitors, no matter how much needed by organizers.

However, if one looks at the number of new and innovative CUSO startups by credit unions, the appetite for innovation and new solutions is clearly understood. But without an openness to new charters, these ventures will be outside the traditional charter structure. While that may be a necessary short-term path for innovation, is that approach hindering a credit union’s ability to change themselves?

Outsourcing technology innovation and solutions to new organizations is expedient. But will it stymie more dynamic and necessary approaches in traditional credit union operations and services?

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Understanding Disruption Within a Full Economic Cycle

At the FDIC’s April 23 Fintech conference, frequent reference was made to the growing role of “marketplace lenders”; firms using internet technology to reach customers directly versus traditional branch based, depository strategies.

Two frequent credit disruptors were cited: Quicken and peer lenders such as Lending Tree, Sofi, etc.

One estimate is that 40% of unsecured consumer credit was provided by fintech firms last year. Quicken was the number one mortgage originator in 2018.

While the advantages of internet based providers were easily listed–convenience, speed, ease of use, targeted market capabilities–the potential challenges were also noted. Most internet providers rely on external funding, which could disappear in a sectoral or broader economic downturn. Moreover the majority of marketplace lending innovation has been done in the very low and benign post-2008-crisis interest rate environment. Would their funding strategies be as viable in a higher or more volatile rate climate?

More importantly, the credit quality of most unsecured consumer lenders has not been subject to the stress of a economic downturn with rising unemployment. This part of the cycle is when capital adequacy is most tested.

There are real consumer benefits from financial innovation. However the lesson is to be careful about concluding that disruption in the short term will necessarily reshape markets over a full cycle. Market shakeouts may seem immediate, but the ultimate restructuring may not be known until incumbent firms and innovators experience a full cycle of financial competition.

Might such a perspective have informed credit unions’ and NCUA’s responses to the disruption of the taxi medallion industry? A subject for ongoing examination.