Online lenders looking for growth turn to credit unions for funding
Credit unions and fintech lenders may seem strange, but in recent years they have formed successful partnerships. Online lenders have grown like wildfire and along the way have sold their loans to many credit unions who see the value in diversifying their balance sheets and gaining access to loan products and programs. which could be expensive to set up from scratch. These relationships provide mutual benefits – the online lender has access to the capital it needs to fuel growth, while the credit union opens up the opportunity to acquire new members and grow existing member deposits.
It is important that fintechs approach partnership discussions with their business goals in mind. If growth is the priority, fintech can find great value in partnering with a larger institution with a bigger balance sheet. Still, not all credit unions are the same, so it helps to understand the additional regulatory compliance requirements related to the size of the credit union’s assets.
For example, institutions with at least $10 billion in assets are subject to the CFPB’s vigilant enforcement of consumer protection laws and regulations. As a result, fintech operators that partner with large credit unions will also be asked to adhere to more stringent compliance, reporting, underwriting, data security and privacy requirements, and must be staff prepared. and the processes needed to meet those expectations. A successful partnership requires major financial institutions and fintechs to work together to understand these requirements, creating a win-win situation for all parties, especially considering recent CFPB consent orders involving fintechs.
Fintechs can expect to answer several questions related to risk and compliance issues when entering into partnership discussions. Here are some questions they can anticipate:
- How does the fintech lender source applicants? A potential partner will want to know what channels the online lender uses to originate loans, whether the marketing of its products is broad enough to reach all consumers, what loan-specific information is communicated to the consumer, and whether the fintech is licensed. adequate to offer its products.
- How are the loans financed? There are many possible funding avenues to consider. For example, the fintech can fund the loan and then assign it to the credit union, or have a third party fund the loan and then buy the loan from that third party. Alternatively, the credit union could fund the loan and pay the fintech a premium for using its platform.
- What is the secret sauce? A credit union partner will want to fully understand the market niche and differentiators of an online lender. It may ask for historical data to demonstrate the success of the business model, and because credit unions are subject to fair lending laws, they may also want to analyze the credit model to ensure the use of acceptable credit attributes .
- How mature are the online lender’s settlement, reporting, compliance, data security, and accounting processes? A potential partner will seek established data and cash flows that facilitate settlements, reconciliations and accounting. It is important for fintechs to be receptive to a credit union’s review of their compliance management systems. An institution looking to protect itself against future regulatory missteps will likely conduct a thorough due diligence review for all risk areas, including but not limited to the compliance management system, complaints program, information security and privacy programs and anti-money laundering compliance. program. He may ask to review process maps, disclosures, consumer communications, training, monitoring, complaints, policies, procedures and other program documents. The ultimate goal is to get a detailed picture of the fintech compliance management system.
Although it may initially seem like a burden to answer so many questions about privacy, compliance systems and other areas, growing fintech companies should gain a lot of knowledge and experience by partnering with large institutions. Upping its game to meet the tougher regulatory expectations placed on major credit unions will help a fintech prepare to enter the big leagues of finance. Once this level is reached, it will create a repeatable process that will open up additional opportunities in other major credit unions and speed up the onboarding process.
Above all, it is essential to approach the arrangement as a true partnership. Credit unions and fintechs both have a lot to gain from working together – ultimately, both partners will be better equipped to meet the needs of today’s financial consumers.
Charles Krawitz Vice President, Head of Capital Markets and Head of Commercial Lending Alliant Credit Union Chicago