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Fintech is defining digital communities, and vice versa

The rise of digital communities has become a catalyst for change in financial regulations. One of the types of financial institutions that’s feeling the aftershocks of these communities most keenly is credit unions. In the past, credit unions were empowered to grow their member base from specific communities that shared a common bond, such as a common geographic location or employer. However, the proliferation of digital communities has not only led financial regulators to take question the boundaries of the common bond — it’s led them to take action.

On October 27, 2016, the National Credit Union Administration approved a plan that relaxes the membership restrictions imposed upon credit unions. Part of the plan includes softening the geographic limitations on credit union membership. A driving force behind the NCUA reform, it would seem, are digital communities.

“The internet has changed everything for lenders, this only modernizes some arcane requirements,” Ryan Donovan, lobbyist with the Credit Union National Association, told Reuters.

It hardly seems likely that the NCUA will ever consider all internet users as one big community, thus freeing credit unions entirely from their membership restrictions. Special interest groups like the American Bankers Association and the Independent Community Bankers of America have already taken umbrage with the NCUA’s relaxed membership rules. “If credit unions want to eliminate the common bond requirement and operate like banks, they should be taxed like them and required to meet the same set of regulatory standards. They can’t have it both ways,” ICBA President and CEO Camden R. Fine said in a press release on the topic.

In spite of these roadblocks, digital communities could still lead to bigger regulation breaks for credit unions. “If lobbyists and advocacy groups can work to localize critical issues and messages to the targeted stakeholders that digital communities represent and cultivate, the NCUA could be strongly influenced to move to drastically relax membership,” argued Michael Barrio, managing partner & vice president of public affairs at Leverage Point.

And while digital communities may be shaping finance, fintech is concurrently shaping these digital communities. Crowdfunding in particular is providing people with a way to form meaningful groups based on, well, common bonds.

“I think an argument can be made that crowdfunding is seen within the community not just as a business tool to support innovation and creativity,” said Giancarlo Frosio, senior researcher and lecturer at the Center for International Intellectual Property Studies. Rather, crowdfunding is also “a revolution in social interactions promoting a new order based on disenfranchisement from centralized control of means and ideas.”

Crowdfunding, then, provides a platform through which people can build and join online communities united around a common goal or passion. It will be interesting to see in the coming years whether finance will have a bigger impact on digital communities, or vice versa.

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Oh, Danny Boy: The top 5 things to know about Irish fintech

Americans might have Canada as a fallback plan if Donald Trump is elected as president. UK fintech companies are looking to Ireland with Brexit repercussions shaping up. A 2016 PwC briefing projects that Ireland will come out ahead on Brexit in terms of attracting talent, regulation, and data protection. However, until the Brexit fumes disperse, here are the top five things you need to know about fintech in Ireland.

Payments is Ireland’s biggest fintech sector

Ok, so maybe mobile payments haven’t lived up to all their hype. But payments continues to be one of the forefront fields of fintech innovations, drawing $500 million in investments in the second quarter of 2016. The promise of payments as a lucrative field hasn’t been lost on Ireland’s fintechs. According to Ginger Techie’s September 2016 map of Irish fintech companies, payments is winning the Ireland fintech company count with 30 startups, followed not so closely by funds and investing (13), accounting tech (11) and regtech (10).

Banking platforms are Ireland’s least popular fintech field

Ginger Techie only lists two Irish startups developing platforms specifically for banks – leveris and Sentenial. So, banking platforms are at the bottom of the Irish fintech food chain. To be fair to the field, though, Ireland only has 3 bitcoin startups to its name.

Personal P2P lending hasn’t even launched yet

Even though P2P lending was already a $3.5 billion market back in 2013, Ireland is just now in the process of launching its first personal P2P lending platform.

Bank of Ireland is trying to keep up with social media

Ireland has its own specific social media trends, with Facebook clearly leading the way in the percentage of social account owners in Ireland in Q2 2016. Bank of Ireland at least is trying to be a social media innovator. With the help of a Snapchat influencer and a model (no joke), the bank launched its FeelFree student reward program via Snapchat in August 2016. Bank of Ireland is pretty good about updating its YouTube channel — we’re big fans of the singing sandwich ad for the bank’s MortgageSaver product.

Irish credit unions still dominate the retail banking market

Credit unions continue to be the major retail banking players in Ireland, claiming over 3 million people of the country’s population of 4.6 million as members. This, in spite of a 2016 survey conducted by the Central Bank of Ireland, which found that only 12 percent of credit unions have more than 20 percent of members doing some business online. Still, that same survey found that most credit unions believe that by 2018, the ways in which these financial institutions use information and communication technology will have changed significantly. Meanwhile, credit unions in Ireland are preparing for the technology transitions up ahead by staying innovative. For instance, in October 2016, 16 Irish credit unions began offering fast-track loans through Facebook. 

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What fintechs and credit unions have learned from each other

Like all financial institutions, credit unions have had to adapt to changing technologies. From back-end to front-end, credit unions have made changes to meet growing customer expectations for better banking experiences.

For credit unions, this demand to become a sparkly digital thing of wonder does not come easily. Credit unions often don’t have the budgets needed to make considerable changes, and big bad core IT providers often make it difficult or impossible for smaller banks and credit unions under contract to access newer technologies.

Still, you’d be hard-pressed to find a credit union in the U.S. without an online or mobile app. Interestingly, as fintech continues to drive change in credit unions, some credit union practices are also finding their way into fintech companies.

Member-owned, not-for-profit credit unions function as the wellness gurus of the industry in a number of ways. For one, they have lower checking fees. A 2015 Bankrate survey found that 72 percent of credit unions offer free checking accounts, as opposed to just 38 percent of banks. What’s more, as Andrew Downin, CPA and managing director of the Filene Research Institute told Tradestreaming, credit unions’ philosophy has them constantly searching out new and better ways to help their members improve their financial behavior.

ChimpChange, a digital banking service provider, seems in many ways to be a digital credit union copycat. Launched in August 2015, the company set out to provide lower account fees with a free, or nearly free, basic bank account.

So far, the company is hitting its credit union-like fee goals. The account is free to open, there are no monthly fees, deposits into the account are free, and there is free real-time check deposit and P2P payments to other ChimpChange users. According to ChimpChange founder and CEO Ash Shilkin, the company is also scheduled to abolish its 60-day inactivity fee. 

There are, of course, some fees, like when a ChimpChange user uses the company’s debit card to make a withdrawal from an ATM outside of the 24,000 on the company’s network. Nevertheless, “you can by and large get by with a free account,” said Shilkin.

What enables all of the frees in the above paragraph is that the company’s revenue model has shifted from the customer to the merchant. According to Shilkin, ChimpChange takes a cut of the interchange fees a merchant pays every time a ChimpChange debit card is swiped. If, as Shilken claims, the company has 100,000 customers, this system just might work.

Aside from the lower fees, ChimpChange, like credit unions, is developing a suite of products intended to improve customers’ financial health. A feature that will auto-categorize spending and present it in an easy-to-digest fashion, a budgeting feature, and a round-up savings account are all in the works.

Shilkin is quick to distance ChimpChange from credit unions. “What they are not always strong in, to put it kindly, is technology and providing tools over and above that basic bank account,” he said. But he’s just as quick to acknowledge that ChimpChange isn’t exactly a unique product. From the payment side, you’ve got Venmo, Apple Pay, Snapcash, and Stripe, just to name a few. And in terms of low-cost bank accounts, Simple is also out to help people budget and save.

The added value of ChimpChange is supposed to be in the mashup of all of the app’s different components: payments, checking, and financial behavior. Whether or not this mashup actually sets ChimpChange apart from the competition, the company serves as a good example of how credit union practices and principles are influencing emerging fintechs.

The continuum goes both ways.

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How credit unions are using fintech to build their brands

Big banks are leading the customer satisfaction race for the first time in forever, in part because they’re winning at digital user experience. For anyone even slightly familiar with the cost of innovation, this shouldn’t come as a shock. After all, megabanks have the capital they need to invest in new technologies.

Smaller financial service providers like community banks and credit unions don’t have that kind of capital lying around, and as such are largely unable to compete with big bank’s digital UX. Moreover, unfair Core IT contracts make it challenging for some of these institutions to integrate cutting-edge technology into their banking services in the first place.

How, then, can smaller institutions gain traction in the online and mobile customer experience track? For credit unions, at least, the answer is in their charter. “They’re unique in that their legal structure and their philosophical objectives are different than a for-profit bank,” said Andrew Downin, CPA  and managing director of innovation at Filene Research Institute. “Credit unions are not-for-profit financial institutions, which means that they’re primarily aimed at serving their members’ needs.”

With members, not profit, as the epicenter of the credit union galaxy, credit unions are getting into creative apps tailored to members’ unmet needs, and building strong brand identities in the process. 25-year-old nonprofit Filene vets apps and technology for their partner credit unions, helping them focus on the most promising of the bunch for their members.

One such app that Filene recommends for credit unions is Larky. Using GPS, the Ann Arbor, MI-based app connects credit union members with relevant offers that the credit union has negotiated with local merchants. So if a member walks past a Dairy Queen, for instance, a Larky notification will pop up on the screen to offer a 15 percent discount on a meal there if the member pays with her credit union debit or credit card.

“The challenge is getting trying to get credit unions’ brand identity out to their customers at the exact moment when customers can benefit from that account and that relationship,” explained Downin. According to Downin, Larky has generated positive responses from CUs, their members, and the merchants involved. And while it bolsters loyalty, Larky financially rewards the CUs themselves by shifting transaction behavior from competitor credit cards to the credit unions’ cards.

Credit unions are also using big data to build their brands as member-serving institutions that care about their members’ well-being. For example, credit unions can use big data to look for a group of members that have high-rate loans with a payday provider, and then use algorithms to send them a message suggesting that they move their debt to a credit union for a lower-priced loan.

“Credit unions can leverage the big data trend in a way that for-profit institutions might not necessarily look at,” said Downin.

Filene hasn’t forsaken small-data, either. It’s developing an app called Centsus, which will use surveys to assess individual members’ happiness with their purchases and suggest shopping practices to make them happier in the future. Similarly, Filene promotes app SavvyMoney, a personalized financial education resource for CU members, to help members manage their finances.

The innovation required by credit unions to access these and other new technologies is admittedly a risky endeavor, Downin said. By bringing credit unions to work together to innovate, Filene “distributes some of the risk across multiple credit unions. We can begin to close that technology gap.”

For credit unions, then, closing the technology gap isn’t just about recruiting more members. Rather, fintech is helping credit unions build their brands as the wellness gurus of the industry.

Megabanks can’t claim that title for themselves. Yet.

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WTF are credit unions?

Fintech has provided customers with a plethora of alternative banking products to choose from. However, you don’t have to be tech-savvy to bank outside the traditional banking system. One banking alternative that’s been gaining traction in recent years is credit unions, which have been around since the late 19th century.

WTF are credit unions?

Credit unions are financial cooperatives that are owned by their members. Like banks, credit unions provide basic financial services, such as banking and ATM services, loans and payments, and investing. However, in order to join a credit union, you have to have share a certain commonality with the other credit union members, such as location, community, church, or place of employment.

Because credit unions are not-for-profit organizations, whose goal is to serve their members and not their shareholders, these organizations are exempted from taxes. Banks are obviously not down with this exemption, and in 1998, the banking industry won a Supreme Court ruling against credit unions that limited who could join these co-ops and threw into question the status of as many as 20 million existing customers of credit unions.

Not to worry, though. Credit unions have come up with some creative – and community driven – ways to get around that ruling.

Want to join Alliance Credit Union but don’t live in Chicago? Just donate $10 to the non-profit Foster Care for Success and you’re good to go. Feel like joining the NASA Federal Credit Union but you (sadly) aren’t an astronaut? Simply join the National Space Society (free) and deposit at least $5 in savings account.

Talk to me in numbers.

A 2014 report published by the World Council of Credit Unions lists 57,000 credit unions in 105 countries in every continent on planet earth (save Antarctica). These organizations serve 217 million people worldwide, and combined hold $1.5 trillion in savings, $1.2 trillion in loans, $151 billion in reserves, and $1.8 trillion in assets.

Why choose credit unions over banks?

Credit unions’ tax exemption gives them an edge over traditional banks in terms of fees: 76% of US credit unions offer free checking accounts, and most have substantially milder penalty fees (such as overdraft or ATM withdrawal fees).

Furthermore, a 2014 survey conducted by the American Customer Satisfaction Index (ASCI) found that credit unions were easily winning the customer satisfaction game: credit unions average an 85 customer satisfaction score, while banks lag behind at 76.

The same report showed that member loyalty is nearly 20% higher at credit unions than at any other financial services the ACSI surveyed, and the complaint rate among credit union members is less than half the rate at banks.

Still, credit unions aren’t a deus ex machina with the power to resolve any and all banking problems. As BankRate’s David McMillin points out, credit unions don’t always win against the banks, especially when it comes to being able to offer attractive rewards programs and innovative digital banking solutions.

Plus, in spite of their get-out-of-tax-free card, credit unions may have to up their fees to meet regulatory expectations, just like banks.

So are credit unions up to digital scratch or not?

That’s like asking whether all banks have figured out how to seamlessly digitize all of their services. The answer is yes, and no. Some credit unions — like the aforementioned Alliance Credit Union and NASA Federal Credit Union, which feature on multiple “best credit union” lists – -are outfitted with up-to-date online and mobile technology, including P2P payments.

Other credit unions, like Tinker Federal Credit Union and Visions Federal Credit Union still have a ways to go when it comes to providing a positive digital experience for customers.

Photo credit: Hoffnungsschimmer via Visualhunt.com / CC BY

Photo credit: Consumerist Dot Com via Visualhunt / CC BY

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5 trends we’re watching this week

5 trends in finance this week

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletters .[/alert]

  1. LendingClub models misfire as loan write-offs top forecasts (Bloomberg): A chart on one of the slides shows that write-off rates for a portion of five-year LendingClub loans were roughly 7 percent to 8 percent, compared with a forecast range of around 4 percent to 6 percent
  2. Zenefits CEO ousted, compliance saga takes a turn: what’s next for the company? (Insurance Thought Leadership): The CEO is out at Zenefits (one of the hottest fintech/insurtech/any tech startups) after it was found that 83% of the insurance policies the company sold were done by unlicensed employees. Oops.
  3. BBVA shuts in-house venture arm, pours $250m into new fintech VC Propel Venture Partners (TechCrunch): The bank is shutting down its in-house venture arm, BBVA Ventures; and it is taking BBVA Ventures’ portfolio, the $100 million fund it had allocated to the group, and another $150 million, and putting all of it into a new VC called Propel Venture Partners.
  4. How financial media firms are monetizing as readership changes (Tradestreaming)
    Being an old-school financial media company is tough in this market but a handful of firms have transitioned into a winning model. Here’s how…
  5. How credit unions can win the millennial market (The Financial Brand): No, this isn’t just another study about millennials. This is about a report – produced jointly by the Center for Financial Services Innovation (CFSI) and Cornerstone Advisors – entitled Competing on Financial Health: How Credit Unions Can Win the Gen Y Market.