Could a new rule help smaller credit unions better compete with behemoths such as Navy Federal Credit Union on technology?

If so, smaller institutions might be able to grab a larger share of loans and stanch the recent flow of membership to larger players.

The National Credit Union Administration in September passed a rule permitting credit unions to more freely partner with fintechs on some lending opportunities. 

The NCUA said the new rule could help by providing credit unions with additional flexibility to participate in loans acquired through indirect lending arrangements, allowing them to use advanced technologies and opportunities offered by the fintech sector.

Total membership at U.S. credit unions grew by 4.4% year over year, to 134.3 million, as of Sept. 30, according to NCUA data. 

But while credit unions with at least $1 billion in assets grew their memberships 8.1% year over year in that time span, institutions in each of the NCUA's asset categories below the $1 billion mark saw a drop in membership. 

For example, credit unions with assets of at least $10 million but less than $50 million — the category with more credit unions than any other — saw membership decline by 3.4% in that time. 

The asset spectrum

Membership and lending often go hand in hand as consumers who take out loans often sign up to join the credit union as part of the process. 

While total loans outstanding increased 9% over the year to $1.59 trillion in the third quarter, much of that growth was concentrated at the upper end of the asset spectrum. 

Credit unions with assets of at least $1 billion in assets saw 10.6% loan growth, but every NCUA asset category below that saw more tepid growth.

Part of the problem is that the bigger institutions are lapping smaller credit unions on technology, and the new rule might not change that.

Larger credit unions have broader reach and greater capabilities to create better experiences for members who may be looking for a new loan or deposit product, said Vincent Hui, managing director at Cornerstone Advisors.

The fintech rule will help smaller credit unions as they now have other channels to attract members, “but the challenge is this will benefit all credit unions, and the fintechs will look to work with institutions that can handle their potential volumes — meaning larger credit unions,” Hui said.

But not everyone agrees.

Todd Marksberry, CEO of the $4.4 billion-asset Canvas Credit Union in Lone Tree, Colorado, said he believes giving credit unions the ability to further partner with fintechs is a game-changer. 

“We have a significant disadvantage when it comes to fintech and their ability to serve consumers without the same regulatory burdens traditional financial institutions have,” he said. “The old adage stands true: If you can't beat them, join them.”

Marksberry said small to midsize credit unions will now have the ability to partner with fintechs to use technology they wouldn't otherwise be able to access or afford. But, like Hui, he also worries the larger fintech companies will likely want to partner with institutions that will bring larger revenue streams. 

That could mean larger credit unions. 

Tech’s role

Jim Adkins, managing partner for Artisan Advisors, said technology is continuing to transform the finance industry, and credit unions are no exception. 

The NCUA’s financial innovation rule may give smaller credit unions more flexibility to pursue fintech partnerships, allowing them to compete for more digitally minded consumers, Adkins said. “However, smaller credit unions will need to realize that they are also competing with both their larger credit union brethren as well as commercial banks for these lucrative fintech partnerships,” he said. “And to compete for these relationships, the smaller credit unions must have the core technology and talent to support new fintech initiatives.”

SeaComm Federal Credit Union CEO Scott Wilson said there is an advantage of scale and, more specifically, allocations in budgets for technology at larger credit unions. 

The challenge with smaller credit unions is the amount of due diligence that is required in selecting the right fintech in which to invest, he said.  

“When you are an institution with multi-billions of dollars in assets, you certainly can put together the right mix of risk professionals who oversee vendor management, which is an important component,” Wilson said. “It’s not just about putting a platform out there to attract a specific demographic, but one that will have a solid [return on assets], so it isn’t a drag on the income statement in order to just attract members.”

Large credit unions tend to want to know who their vendors are working with before jumping into the pool, said Geoff Bacino, a credit union consultant and former NCUA board member.

A vendor that can string together a list of credit unions — regardless of size — can build a good reputation and also a good book of business, he said.

Vendors that only seek to partner with the "big boys" will often find that the larger credit unions already have the tech in place or they can build it and not need an outside vendor, Bacino said.

Ready on risk

Smaller credit unions will also need to step up their game when it comes to risk management, especially in third-party due diligence and vendor management, Adkins said. 

Assessing risk management levels will be top priority for examiners as they assess a credit union’s foray into a fintech relationship, he said.

“Even with the new rule, technology is moving so fast that smaller credit unions will continue to lag behind large credit unions like Navy Federal, State Employees and PenFed, where economies of scale and access to talent provide a tremendous advantage over the smaller competition,” Adkins said. 

Still, some industry observers are skeptical that small credit unions have the expertise to effectively partner with emerging fintechs.

"I haven’t seen too many banks or credit unions have much success in creating tech or in managing the emerging fintechs,” said Tim Scholten, founder and president of the consultancy Visible Progress. “I think this requires expertise they may not have today. It may be an opportunity, but there is substantial financial and execution risk.”