The Future of Fintech Integration

Sensedia Talks Webinar Discussion Summary

The world is changing faster than ever. And it feels like we're all trying to keep up with never-ending headlines and changes. No matter how fast or how much the government and regulatory landscape shifts, some fundamental concepts remain constant, especially the need for credit unions to innovate and adapt to thrive.

Sensedia's US Managing Director, Lisa Arthur, hosted experts Raj Bandaru, CIO of Kinecta Credit Union, Bill Butler, CEO of Kachinga, Susan Mitchell, CEO at Mitchell Stankovic & Associates, and Filipe Torquetto, Sensedia's head of solutions, to talk about fintech integration and its role in expanding credit union reach through elevated member experiences.

If you have an hour, the full webinar replay is well worth the watch! If you're short on time, check out our summary below.

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Our panel discussed strategies to attract and keep digital natives and their families, technology challenges, and a game-changing credit union shared service, CUSS, a new model to unlock significant member growth potential. 

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The Health of the Credit Union Industry

National Credit Union Administration (NCUA) board chairman Todd Harper said the latest industry quarterly performance data showed declining growth and weakening performance across auto lending, mortgage loans, and commercial loan categories. These trends contribute to the large percentage of credit unions with low CAMELS ratings of three, four, or five. 

CAMELS measures a credit union's overall performance in capital adequacy, asset quality, management, earnings, liquidity risk and sensitivity to market risk. A rating of three or lower is a significant concern, and one in five federally insured credit unions have CAMELS ratings of three or lower.

Sue Mitchell explains that the rating system is based on the NCUA exam of credit unions. Often, the numbers can be misconstrued because of the different sizes of organizations. The credit union movement is strong and healthy. It has gone through some adjustments just like the world has economically.

The NCUA wants to ensure credit unions have sufficient capital to weather a storm. Credit unions should constantly look at their net worth and our capital and understand how it might shift because of asset quality. Strong and capable management is key for what-if scenarios and disaster recovery, and some things we know are needed in today's environment.

Earnings represent the bottom line. Every not-for-profit needs to be able to cover operating costs. Technology and growth are expensive. Giving back through serving and social impact - being able to give money back to members and the community requires sufficient earnings. That's the credit union model. It's all about the mission.

Liquidity  - cash on hand -  ensures that not all funds are tied up in investments or the lending portfolio. Liquidity allows for investments and doing what we need to do for our members,  making up the difference in earnings. 

Sensitivity measures how much a credit union might experience economic changes and environmental changes. And this has become more important with new accounting rules and things that have impacted the credit union space. The fires that just hit Southern California, the weather and the storms that hit North Carolina and the East Coast are examples of those changes. Credit unions need to ask how sensitive their business is when these events occur.

Raj Bandaru shares that many credit unions have lopsided balance sheets due to rising interest rates, the pandemic's impact, and post-pandemic influence. They have lent less to their members. Members don't have as much liquidity as during the pandemic with the government stimulus. Deposits are drying up, and people are not taking as many loans as they did in the past.

Mortgage refinance is gone, and several economic factors are driving member behaviors on the lending and deposit sides. Credit unions must start thinking about more creative ways to raise deposits, get new memberships and grow lending portfolios.

Bandaru continues to explain that banking products are commodities. Credit unions need to find creative products that differentiate them from the others and add value for members. That's how credit unions will generate new deposits and members.

Lending products need better feature functionality rates and more creativity. Credit unions might need to venture into small business lending and other areas that are not typically credit union territory. Kinecta developed a mortgage product called Meet Me in the Middle, a creative lending product to work with the high interest rate environment.

Kinecta also launched a new deposit product with a slew of member benefits, like roadside assistance, cell phone insurance, and Teladoc doctor visits without copays - about 20 benefits for members with a checking account. 

Bandaru says credit unions must also focus on automation and efficiencies across all workflows, departments and the back office. Tackling growth and becoming more efficient flips the balance sheet around.

Mitchell expands that we have to remember that we're credit unions. When we put the products and services together and understand the market, creativity can come from social impact, investing in the communities, and ways that further our mission and differentiate us within the market. When we talk about the size of the balance sheet, we're also juggling making a difference on the bottom line. People will talk, and that will add to grassroots growth.

Arthur shares that many credit unions looking at partnerships and the ecosystem only consider fintech. Kinecta found partners in local and more, not just fintech partnerships. Kinecta leverages fintech partnerships to deliver for members and to deliver for its local communities. 

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What about Consolidation and Collaboration?

Mitchell mentions that we do a lot of talking around consolidation. Credit unions need to think forward, figure it out, and get things done. The solution is complex, with just 500 credit unions considered big and 5,000 small in the banking and financial ecosystem.

Bill Butler discussed how credit unions face the challenge of balancing current technology costs with the need to invest in new solutions to remain competitive. Attracting new members with limited budgets is another significant hurdle. While these challenges constantly strain resources, there are viable solutions. Credit union service organizations (CUSOs) and technology can help credit unions compete, and exploring shared models can alleviate some of the financial burden.

Butler also mentions that maintaining a strong sense of community is crucial for credit unions, and this can be achieved through various means, including giving back to the community, encouraging member involvement, and supporting each other. Even with the pressures of consolidation and cost reduction, credit unions can find creative ways to preserve their grassroots ethos and look toward future growth.

Mitchell says we need to change the model and break away from some of the legacy practices, not just technology. Consumers are vulnerable right now because of legacy technology.

She acknowledges that the kind of investments Kinecta has made in their organization is required. Small credit unions have to be able to do that, too. We can't exist in a world of lack - people and technology resources based on price.

Arthur brings up smaller credit unions struggling and the prospect of more mergers, mainly credit unions merging with each other and maintaining that credit union ethos with members at the center of every conversation on products, services, rates, and fees. And some credit unions are acquiring smaller community banks.

Bandaru agrees there are some positives to consolidation, but with consolidations comes the complexity of merging legacy systems and making technology decisions across the tech stack on merging these two institutions. Sometimes, merging does not make sense. If it's a tiny credit union, the amount of time and money spent merging is probably not even worth it for the larger credit union that can generate the same revenue in a month organically. 

Many decision points go into choosing mergers. But again, the consolidation is happening, and there is technology complexity. The good news is that the only way forward is to partner with fintechs and solution providers so credit unions can provide the best technology and member experience while retaining community focus, localization and personalization. All of that has to go hand in hand.

Arthur tells the group that credit unions must zoom out and assess everything going on and not assume that everything will merge when consolidating. It's a chance for a fresh start or tech stack.

Mitchell dives deeper into the complexity issues, mentioning that merging with a commercial bank could make tax exemption vulnerable. She likens it to a little dance of being able to compete, stay in the market and understand the future. How do credit unions afford the talent it takes to have that complexity at the chief executive level? She reinforces that consolidation is not easy. People throw out solutions or criticisms. We must work together and find the best ideas to make it happen.

Arthur brings up research from Cornerstone Advisors, stating that credit unions' top challenge in improving technology efficiency is the lack of integration between legacy systems and new technologies and applications. The Cornerstone report also states that, on average, credit union executives believed they could realize nearly 1.3 million by improving technology efficiency by consolidating some of their internal processes and getting better integrations by automating technology workflows.

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How are new technologies helping reduce costs and remove the friction for credit unions? 

According to Filipe Torqueto, the key to next-gen banking lies in modern integration. While end users demand seamless digital experiences, C-level executives face the challenge of bridging legacy systems with new technology. They know it's important.

IT leaders must assess whether their in-house integrations are truly meeting evolving demands. More often than not, the answer is no—because integration and automation haven’t been prioritized to deliver the seamless experience users expect. Recognizing this challenge is the first step toward transformation.

Legacy systems are significant. Torqueto mentions that legacy brought the credit union and the community where they are today. We need to ensure the next-gen technology focuses on the legacy and enhances it for the end user and the member. The strategy needs to be legacy-friendly while enabling the credit unions and ecosystems. Keyword: ecosystems. How fast can a credit union deliver a solid integration strategy within its budget? Those layers add up to modern integration that balances spending and enables the credit unions to create the ecosystem.

Bandaru agrees, stating that everybody relies on the core systems, which are the central focus area. A credit union's core system is most likely a legacy platform and the brains of the operation. And the core systems will not innovate or progress as fast as the members want.

The core systems are going to be slow and steady. Getting out of that legacy mode will take credit unions a decade or more. Institutions are innovating with fintechs to offer the latest and greatest software products around the core system. Kinecta's connector online banking platform has about 40 integrations, all providing some experience to the member or some functionality to the member, and they are all integrated into our legacy core platform through some middleware integration or integration of some sort.

The integrations are all over the place, and that adds complexity. Some are SSO integrations; some are API integrations. The look and feel of all of these integrations are different. There's no consistency in how they interact. This inconsistency confuses members.

End users want a uniform, consistent look, feel and experience, but a myriad of integrations with different third-party fintechs makes it hard to create consistency and a common look and feel for a better customer experience. Those are some high-level, big-ticket items and challenges credit unions need to address to tackle this legacy consolidation and all the fintech integrations.

Mitchell adds that credit unions have to be careful not to add legacy to legacy and extend the mess we have with antiquated legacy systems into additional hard stacks. We're in a position where the unbundling of it becomes even more important. We must have a roadmap so we don't get into this same thing for 50 more years.

Butler adds that we're actually at a pretty exciting juncture. We've got access to many great new products on the market. It's a fun time to be here, and I really want to try to serve the members better. On top of that, exciting partnerships and tools are available that make integration a lot easier. It's definitely not easy, but we're on the right path to improve that and make it easier all around.

Bandaru shares that a core system with 30 or 40 fintech integrations becomes even more complex because some use APIs, some SSO, and others don't. The Member experience is inconsistent. If a credit union wants to monetize all of that data from all of these different systems, none of these integrations talk to each other because they're all discrete integrations. The credit union needs to figure out how to aggregate all that information and create a data exchange between fintechs. If one fintech needs to share data with another, how do they do that? A higher level of complexity is introduced into this whole mix.

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Next-Gen Member Strategies

Arthur discusses McKinsey's report data, which shows that credit unions face challenges in attracting younger members. The current membership is aging, and the next generation of digital natives expects a different way of banking than Baby Boomers or Gen X. She asks the panel how credit unions can meet younger members where they are and draw their families in.

Butler explains that Kachinga serves the future generation through youth and financial education. But in its entirety, the challenge of serving this next generation is bigger than just the youth accounts.

Credit unions must connect younger members with a variety of products they require to satisfy their technology expectations and solve their financial needs. Today, roughly 94% of the population is considered banked. The small percentage of unbanked could be older generations, younger generations, or folks that fall outside of that system. In addition, 65% of American adults don't desire to change who they bank with. Layering that on top of credit unions' willingness to grow and attract the next generation of members means targeting and acquiring those new members will be challenging. It's going to be expensive to compete with banks, other technology companies and other credit unions to get first in a wallet or bank of choice, credit union of choice. There's much competition there. New products are one way to differentiate.

Surprisingly, at Kachina, we've found that only 3 - 8% of credit union accounts are youth accounts. About 39% of youth across the US have savings accounts. Even with an aging member base, there's a big opportunity to attract families to a credit union with innovative youth offerings. Those accounts are not just increased deposits but possibly lifetime members. There's a significant opportunity to look within.

On top of that, youth accounts can create more stickiness with existing members. A parent using some type of program for their child could start using the credit union as their financial institution of choice. It's a twofold opportunity.

Bandaru adds that all the products credit unions offer are commodities. There are gaps in products and services. Every institution is different, but for the most part, there is a gap in youth banking. People are beginning to address the impending wealth transfer that will end up in Millennial or youth accounts.

The older generation is preparing to retire. They'll want trusts and retirement assistance, long-term medical care, and many products and services that most credit unions and banks don't offer. These are gaps. Youth banking is a gap.

Gaps mean there are opportunities for credit unions to venture into new areas and create new revenue streams. About 65 to 75% of the American population is financially illiterate. The idea of youth banking is so critical. Kids who have graduated high school and college and are working now have very little understanding of financial literacy. Parents still have to help them with all of their banking needs. Bandaru shares that kids are not getting adequately trained in high school and college, even his own daughter, but what he heard from his daughter firsthand is that financial literacy is critical. And young people want to learn about it when they need it.

Mitchell adds that it's a misnomer to think that 3% to 8% of the current members are youth accounts because if 39% of them have savings, somebody is establishing those relationships. She shares a case study from Boulder Dam Credit Union in Boulder City, Nevada, a town with a 15,000 controlled growth limit right outside of Las Vegas, which has unlimited growth. The controlled environment means the credit union must sustain youth membership.

In a 15,000-growth limited city, Boulder Dam Credit Union has 30,000 members. About 20 years ago, it implemented a financial education program, paying high school juniors $50 and seniors $100 to attend a financial certification course. They attend twice and get their parents' sign-off. And then, they go back to the credit union and deposit the money there. The credit union has close to a 95% plus retention of members. Young people use credit unions for their first car loan, checking account, etc., and the strategy works.

Many institutions want to offer a youth program but find it costly. They won't put much into it because they think it won't generate enough income. However, it can be successful if the program is about making youth work for money, understanding the practicality and the application, and making it hands-on.

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What's Stopping Credit Unions from Embracing These Innovations?

Bandaru cited that nothing is stopping us. Deep pockets, talent, strategy, vision, and leadership allow for innovation, but it's a balancing act, especially with constrained budgets and multiple generations. Shutting down the call center because everybody is using their mobile app doesn't work for the population calling the call centers regularly. Credit unions keep adding channels, but nothing has gone away.

He explains that we have created a technology complexity by servicing multiple generations of members and trying to provide numerous products and services consistently across all generations. That's a big job. Their needs are different. Their behaviors are different across each channel. Trying to balance all this and find the right fintech partner at a price point that's amenable and works with legacy is challenging. And over time, the credit union has a sprawl of integrations.

It's common to have added one vendor for something that made sense 10 years ago and another for something else. Down the road, these two vendors have probably enhanced their product offerings, creating duplication and overlap. Which vendor should the credit union keep? Who do they get rid of? Kinecta has 40 integrations and about 30 or 40 different vendors. Contracts start and end at different times because they were added at different times. The sheer magnitude of managing the contracts and their expiration, letting go or keeping vendors, and consolidating them is overwhelming.

Then, fintech vendors get acquired, and then they sunset. Some fintechs don't have integrations with the core systems, especially credit unions on XP2 and other archaic core systems like Spectrum. They will have a tough time with some of these fintech integrations. There are plenty of challenges that require a very methodical thought process and strategy to overcome.

Torqueto adds that technology is not easy. The more technology you add, the more complexity you have. Sometimes, legacy needs to go away. This balance is extremely hard, and there is no right or wrong. Decisions depend on size, members, and everything impacting the credit union.

Integrations can generate new, better channels. They can leverage data to create new revenue streams. But on the flip side, complexity can turn into a nightmare and keep you up at night.

So, build integrations, establish those partnerships and understand the impact on the end user's convenience and experience. Add the must-have experiences and remove legacy that no longer serves a purpose. Integrations and a solid build-over can indicate when to remove legacy in a data-driven way.

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Complexity Beyond Technology

Arthur shares that complexity also lies with vendor management, compliance, internal management within the credit union and having the right resources to support change. It's not just that tech piece. It's much bigger than that. Hence, technology sometimes takes a long time to change. It's not just that the technology couldn't change; it's that there are a lot of other pieces in the mix.

Mitchell agrees and interjects that integrations are also causing cyber security challenges. And Bandaru revisits that personnel issues fall into the mix as well.

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The CUSS Model

CUSS is a credit union shared service model initiative that Mitchell Stankovic & Associates is leading to give credit unions collaborative partnerships with vendors that understand the credit union world and can be more affordable and less complex.

Mitchell discusses The Underground event Mitchell Stankovic & Associates hosts. The event identifies issues and opportunities within the credit union movement. Collaboration was the focus of last year's Underground in Washington, DC. And out of that came a working group to return to our grassroots and cooperate. 

The credit union movement developed an ecosystem around credit unions. It was very effective early in the life cycle  - shared ATMs, service centers,  indirect lending, card services etc. Those are now legacy systems. And we don't see that same collaborative innovation happening.

So credit union shared services, CUSS for fun, makes us ask what you want to CUSS about. What are today's critical issues? We're asking the CEOs what they're seeing in the world.

Mitchell continues. Frankly, there's a lot to both positively and negatively CUSS about. Then there's the idea of fractional leaders. A $10 million credit union won't be able to find a new CEO. But they can share one. Michell also firmly believes credit unions should have a holding company of back office functionality.

And let's look at CEOs retiring. They've dedicated 40 years of their life to this industry; many are women and have no retirement. And shame on us, we have to look at that.

So credit union shared services is the idea of this four-legged stool, if you will, to work together through an infrastructure. Ryan Stankiewicz and our team are working with Torquetto and others to deliver scale and put Kachinga, the youth programs and our other partners into a model where we can drive down costs by driving up scale. And that will take a mindset shift.

March 2 kicks off The Underground Washington, DC. Immediately following the Underground, we will do a CUSS showcase of the studies that have been implemented. It's an opportunity for a few executives to get together.

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Final Advice 

Bandaru says credit unions rely too much on vendors to get things done for them. And when things fail, they fail because many credit unions do not have skin in the game through some of these projects. They rely on vendors all the time.

Credit unions need to develop that internal talent to be in the driver's seat, working with the fintechs and all the integrations so projects grow smoothly and successfully. Don't just rely on a vendor to do everything for you.

Butler shares, listen to your members and really understand what they need, but also listen to what they aren't saying. Listen to what the other generations need. It could be the younger or older generations, but those are your potential members. Continue to look and see what products are out there that support those members' needs.

Mitchell tells us that the train has already left the station. We have AI solutions out there. We have open finance solutions out there. People are integrating and implementing the next generation. Frankly, I don't want to call a call center. I want to use technology. So it's not necessarily just generational-specific. It's time for us to be forward-thinking.

If we're going to move things forward, it has to be at the board level through the executive level, and we have to have a complete understanding that we have to move forward. If there's a major takeaway of how it's happening in our US finance world right now, it is that things will change every day. And the train is moving forward, folks.

So now is the time. It's a critical time for us to step in and frankly take control of our vendor and people relationships to the greatest extent possible. And let's make sure credit unions are relevant. There's an essential purpose for them. Absolutely.

Torqueto wraps up the conversation with a recommendation for credit unions to own their data, understand the membership perspective and do everything in a conscious way.

Credit unions can overcome this legacy situation and thrive. Their sense of community is gold.