Credit unions are underdogs in a financial services space still dominated by major traditional banks, particularly when it comes to small business (SMB) lending and payments. However, credit unions have unique opportunities to elevate their positions with SMBs and the overall financial services (FinServ) ecosystem.
According to Biz2Credit, credit unions in the U.S. approved nearly 40 percent of small business loan applications in October (compared to a 28 percent approval rate among big banks). In addition, a recent advisory notice from the National Credit Union Administration highlighted credit unions' opportunity in servicing hemp and legal marijuana businesses around the country, as large banks continue to shun the market amid regulatory uncertainty.
Yet, the credit union community is hardly the first FinServ player to come to mind when considering payments innovation. Indeed, said CULedger Chief Experience Officer Julie Esser, there are multiple opportunities for credit unions to improve their offerings for their members, small businesses included. That means opportunity for FinTech collaboration, she told PYMNTS in a recent interview, and a chance for credit unions to ramp up their reputations in the payments innovation arena.
"I know the first big challenge that credit unions face is friction in the member experience," she said. "There's a lot of process time — a lot of costs associated with payments, in particular."
The Improvement Opportunity
Esser highlighted three key areas with major opportunities for improvement in the credit union market, with CULedger finding blockchain a promising technology to address them.
Among the opportunities is the concept of decentralized credentials, which involves the use of distributed ledger technology (DLT) to establish digital identities for credit union members, without relying on a central authority to manage that database. This is paramount for some of the largest challenges in the payments and financial services market today, for credit unions and beyond, including fraud and Know Your Customer (KYC) compliance.
"The biggest weakness a payment has is anonymity," Esser said.
Second is the concept of digital exchange of data between credit unions, critical for an array of processes from loan underwriting to payments. Third is the exchange of value — which includes payments, Esser noted, but also incorporates other concepts of value like settlement, or even member loyalty.
These three concepts drive CULedger's roadmap, with the latest initiative being its CUPay solution, designed to work with existing infrastructure and streamline payments between credit unions. The solution is an electronic funds transfer (EFT) payment tool built on top of R3's Corda blockchain platform, and which integrates CULedger's MyCUID decentralized identity technology to incorporate security, data exchange and value exchange in a single solution.
Payment Rail Agnostic
CULedger's EFT solution also reflects the reality of the payments landscape today: With demand for faster payments, transaction transparency and greater efficiencies, more new payment rails are stepping into the market, while existing ones continue to evolve.
The CUPay solution will initially support EFTs — which include ACH transfers and wires — between credit unions. However, Esser explained that it was critical for any solution facilitating fund transfers for credit unions to be "rail agnostic" to remain agile in a shifting market — rather than build an entirely new rail to facilitate credit-union-to-credit-union transactions.
"Existing rails have been working for a very long time," she said, adding that CULedger did not want to "reinvent the wheel."
Credit unions must have access to both legacy and emerging payment rails to meet changing needs among end users. Technology, noted Esser, has an opportunity to facilitate integrations onto those rails, and wield existing infrastructure to improve the way credit unions exchange funds and information — in ways that traditional rails cannot do on their own.
Evolving For The Future
Speed is frequently the main focus for service providers building new payment rails and updating old ones, but it's not the only trend in payments that Esser said credit unions must watch. She noted the importance of cross-border transactions being incorporated into credit unions' modernization efforts — in facilitating both cross-border payments for members and cross-border fund transfers for the credit unions themselves.
"Within itself, there is $1 trillion of money in the credit union system being utilized or transacted through the credit union industry today," she said. "That's a huge market opportunity for credit unions."
It's also an area that can elevate complexity, particularly when it comes to fraud, KYC and interoperability of one nation's payment rails with another.
Esser highlighted the friction that traditionally emerges when central banks hold control in a cross-border transaction.
"Central banks have a lot of control in that [cross-border] process in terms of how it can be facilitated. We're trying to break free from that control mechanism," she said. "We want to be able to facilitate a payment between a U.S. credit union and an international credit union."
Like any financial service provider, issues like fraud, compliance, security, infrastructure interoperability and data exchange are just some of the many hurdles faced when operating in today's modern payments landscape. While credit unions are not always top of mind in cutting-edge payments innovation, these players remain an essential piece of the FinServ puzzle — and, through technology adoption, stand to bring significant value to their members and to themselves.