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As the financial services industry grows increasingly crowded and end users demand more control over their data, credit unions struggle with the best path forward. Options like banking as a service and open banking have been presented, both with inherent flaws that are detrimental to all parties involved – financial institutions, fintechs and members. However, there is another route that can be mutually beneficial to all: Collaborative banking.
Unlike banking as a service, which requires fintechs to jump through regulatory hoops, and open banking 1.0, which pits credit unions and fintechs against each other, collaborative banking is a model that allows credit unions and fintechs to finally join forces, sharing business opportunities and empowering the member with greater control and choice. It incorporates the spirit of open banking but mitigates the risks and downsides, accelerating growth and innovation for the industry as a whole. However, it requires a major shift in thinking.
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The Next Wave of Open Banking
Open banking has shone a light on the need to empower members with control of their data. While the idea and root cause are noble, the movement has had many issues in execution. Perhaps most notably, open banking has pitted fintechs and financial institutions against each other in competition for members' finances. With the current open banking model, there can only be one winner, the credit union or fintech. But, what if there was another option?
Collaborative banking allows credit unions and fintechs to team up by removing the regulatory risk traditionally associated with partnership. In a collaborative banking model, credit unions are connected with vetted, member-facing fintechs in a secure, compliant marketplace. The digital rails connecting the credit union to the marketplace scrub all sensitive data, anonymizing and tokenizing it. Vendor due diligence is no longer a concern; the approach separates bank end compliance from banking. And, because the data is anonymized, the fintech has no way to know anything about the member, not even an email address, making it impossible for them to cut out the institution.
Paving the Way for Personalization
Too often today, credit unions are spending a significant portion of their budget on building an app that's nearly identical to the app offered by the institution down the street. There's no competitive differentiation or meaningful personalization, which is a cornerstone of the credit union mission.
There is simply no good way today to effectively personalize the experience for each individual, given an institution's app has to have relevance for and serve approximately 70% of members to make economic sense. As a result, many affinity groups within the member base are left out. However, by allowing members to easily access an ecosystem of vetted fintechs and select and leverage the niche apps and solutions that fit their specific lifestyle and needs, one-to-one personalization at scale is possible, driving engagement and loyalty. Such choice also eliminates the need for members to have to choose between their local credit union they know and trust and the modern technology they crave.
From Disruptors to Benefactors
The collaborative banking approach allows credit unions to shift from paying for fintech to looking at fintech as a source of revenue. Fintechs are very good at engaging with and serving affinity groups; they don't want to be a financial institution, worrying about things such as KYC and loan to deposit ratios. Collaborative banking allows fintechs to access real-time, reliable data to power their apps and focus on their core competencies without having to become a financial institution. Credit unions can alert the fintechs to what types of new business they're looking for, providing the opportunity for fintechs to bring that business opportunity to them to fulfill.
The collaborative banking model presents significant value for credit unions and fintechs while meeting member needs through greater optionality, but it does challenge the traditional notion that credit unions must own and control every aspect of the member relationship to succeed. The truth is, members are already leveraging outside apps; a recent survey from Plaid found that nearly nine in 10 consumers are leveraging fintech in some aspect of their financial lives. Collaborative banking presents a model that enables credit unions and fintechs to partner directly, instead of with an aggregator that will disintermediate the financial institution entirely.
The future of financial services is collaborative banking. It embodies the spirit of open banking while erasing the risks and drawbacks, paving the way for stronger growth, true partnership and a better, more personalized member experience.
Landon Glenn Landon Glenn is the CEO and Founder of Asa Technologies, a Provo, Utah-based tech company that connects banks and credit unions with fintechs.
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