Kaua'i Government Employees Federal Credit Union drew on impact investor dollars to help local businesses navigate the pandemic. This small Hawai'i credit union has delivered over $11 million dollars in pandemic aid since March, including investments in business incubator and accelerator programs that aim to scale social enterprises and build economic resiliency in response to COVID-19.

"We are building a new market of borrowers and recirculating money locally," Monica Belz, CEO of the newly-certified Community Development Financial Institution, said. "This investment not only puts food on the table, it also supports diversification and scalable innovation. Every dollar matters."

Working with impact investors can also help credit unions build capacity to scale to new regions. Impact investors are an excellent source of diversification because their deposits tend to be more flexible than other capital sources. They are assessing social as well as financial returns from their relationship with credit unions, so they want to make sure you can deliver on your community benefit goals. That means they can offer more flexibility on the return or liquidity you provide.

Reducing Capital Acquisition Costs

Since their launch, Self-Help Credit Union and Self-Help Federal Credit Union have used larger deposits from mission-supportive families and institutions to fund lending activities – consumer, mortgage and commercial loans, mostly to low-income families and in underserved communities.

"With the growth of impact investing and tech-enabled platforms that facilitate investments into credit unions, impact investors have become a great source of deposits to support our impact lending," Viola Mai, investor relations associate at Self-Help Federal, said. "Partnering with impact investment platforms that utilize technology to match investors with appropriate credit unions is a very cost-efficient way for us to raise mission-supportive deposits that support our lending activity."

Expanding Capabilities

Credit unions need to advance their technology deployment – McKinsey research showed that consumer and business digital adoption in the U.S. vaulted five years forward in just the first eight weeks of the pandemic, and the rising digital-native generations expect the latest technology. As credit unions struggle with the expense of upgrades, partnerships with fintech-enabled impact platforms can provide shortcuts to tech enablement.

"Impact investor partners gave us the impetus to add additional services for organizational accounts," Alison Beck Yonas, SVP of finance and strategic investments at Latino Community Credit Union in Durham, N.C., said. "For example, beginning a partnership with CNote provided external pressure to advance some of LCCU's internal initiatives on digital organizational banking upgrades. These improvements will have trickle-down effects to allow us to better streamline organizational member service across all our constituents and partners."

In addition, having thought partners from a different area of the finance field can spur new initiatives. Fintech firms in particular tend to be fast moving and open to experimentation. They may be willing to partner with your credit union to pilot beneficial projects focused on increasing your institution's net worth, for example, or boosting engagement with members.

Bringing on Impact Investors Is Easier Than You Might Think

Credit unions often have concerns about nonmember accounts, custodial accounts and brokered deposits. For most credit unions, these concerns do not pose barriers to engaging with impact investors.

Credit unions are allowed to take nonmember deposits, with the percentage depending on their specific regulatory requirements. Most credit unions are nowhere near maxing out their allowable percentage, so they have room to grow here. For regional, state-chartered credit unions that are not allowed to take out-of-state deposits from individuals, impact investing platforms that fit their field of membership criteria and can aggregate deposits across multiple clients are a viable option.

Custodial deposits, which impact platforms use to manage deposits, will most likely be categorized as nonmember deposits. As long as a credit union is under its limit, they don't present a problem.

Another concern credit unions often raise about nontraditional deposit sources concerns the definition of brokered deposits. Deposit brokers typically focus on seeking the highest interest rates for their clients, which may create liquidity concerns for a recipient credit union. Impact investment platforms focus on deploying capital for mission alignment rather than maximizing rate of return, which largely reduces the likelihood of volatility in deposit volume.

Before you move forward with engaging an impact investment platform, consult with your internal compliance team and share what you are thinking about with the NCUA. We know some credit unions perceive NCUA regulations as limiting their ability to grow and innovate, but we encourage you to reach out to your auditors to initiate a conversation about deposit growth opportunities. The time is right to engage with new capital partners: The pandemic has forced a lot of change to happen quickly, and everyone – including regulators – is more open to change. You owe it to your members to investigate all the paths toward long-term resilience.

Yulia Tarasava

Yuliya Tarasava is co-founder and COO of fintech company CNote, an Oakland, Calif.-based provider of an impact investment platform supporting female- and minority-led small businesses, affordable housing and economic development in financially underserved communities.