Harnessing Fintech for Credit Union Advancement

 

[00:00:00] Dan Berger: You can’t go it alone. Very few credit unions have the financial power 200 programmers on site like Bank of America or JPMorgan Chase. So you have to partner with Fintechs and with technology companies like Linkey and others.

[00:00:28] Voiceover: You’re listening to 22 Minutes in Lending, your go to podcast for insights on all things lending. From lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode, host Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive into the latest in lending.

[00:00:44] Vince Passione: Welcome, everyone, to 22 Minutes in Lending.

[00:00:46] Vince Passione: I’m your host, Vince Passione. I’m excited to introduce today’s guest, Dan Berger, President and CEO of the National Association of Federal Credit Unions. And Dan really doesn’t need any introduction, but I’m going to give some top little highlights. Dan has more than 30 years. In the industry and has been with NAFCU since 2006 is well known a figure within both the political and financial press.

[00:01:07] Vince Passione: And he’s been listed as 1 of the most influential lobbyists in Washington by the Hill newspaper every year since 2002. I’m always excited to hear what Dan has to say. And without further delay, let’s start these 22 minutes in lending and thanks for coming on the podcast.

[00:01:19] Dan Berger:  Hey Vince, it’s always great to spend time with you.

[00:01:24] Vince: Perfect.

[00:01:25] Vince Passione: So listen, here we are 11th rate height in 17 months, highest fed funds rate in 22 years, three bank failures so far this year. And back in June, you open up your annual conference and your keynote is about operating in chaos to all of your members. Can you talk a little bit about what you meant and other opportunities in that chaos?

[00:01:47] Dan Berger: Let’s talk a little bit. We’ll start with the chaos. And then, as you said, there are opportunities in a chaotic atmosphere, but to your point that you opened up, we’ve had interest rates rise. What five points since last spring and this past spring, we had the second and third largest bank failures in us history.

[00:02:07] Dan Berger: Which caused a run on bank deposits like we haven’t seen since the Great Depression. That’s a huge problem. And then from a regulatory side, from our standpoint and our members standpoint, and your partner’s standpoint, the CFPB, on the other hand, has been full steam ahead, attacking the so called junk fees, regulating by enforcement with the numerous actions, whether it’s overdraft.

[00:02:31] Dan Berger: They’re expanding their scope of their legal authority and their examination powers. It goes on and on and on. So these are some pretty hefty headwinds we have. And then the competitive landscape that across the lending environment as well, the competition. And there’s not just competition with banks and regional banks and community banks, it’s credit union versus credit union.

[00:02:53] Dan Berger: It’s the FinTechs, you got these kids in the garage and Palo Alto creating the next online platforms and stuff like that. All these headlines create a chaotic atmosphere, but there’s opportunities in that chaos. Those opportunities come from being able to manage that chaos. And that comes quite frankly, to having partners.

[00:03:11] Dan Berger: Like Linkey and then the others at NAFU services have, those partnerships matter because you can’t have a way and a strategy to deal with those headwinds. And so those opportunities are there. You just have to find the right partners to redo it all.

[00:03:25] Vince Passione:  Yeah. So it’s interesting, right? Cause when we saw the SBB collapse, everybody was looking at the issue around insured deposits, right?

[00:03:34] Vince Passione: Even our own firm, we were impacted by it. But credit unions, remind me, aren’t they like 93% insured on their deposits? If there was a lack of confidence or this was sort of a run on the bank, most credit unions, right? Aren’t those deposits already insured?

[00:03:49] Dan Berger: Oh, the vast majority. Approaching 94% are all insured deposits.

[00:03:55] Dan Berger: The concentration risk at SVB was extraordinary. 97% of their asset base was uninsured. The risk management they were lack thereof was extraordinary. And of course, it’s going to be a run on the bank. The venture capital guys pulled out all the payroll people, all the companies and the startups are working through SVP pulled out.

[00:04:16] Dan Berger: And then of course, social media makes it a little bit quicker. Now everything’s in real time almost. And so it was just, it was a perfect storm. But it started with the mismanagement, and it also started with the regulators and quite frankly, the Federal Reserve in San Francisco. They sent the red flags.

[00:04:32] Dan Berger: Everybody had the warning signs that were there and they cited them for multiple years. They just didn’t follow through and mitigate those risks.

[00:04:40] Vince Passione: So let’s move on to liquidity then, because it’s related. We see deposits moving as consumers are turning around and trying to figure out how to get the highest CD rate they possibly can.

[00:04:49] Vince Passione: Credit unions are competing with regional banks for deposits. We see a whole bunch of marketplaces out there. You can move money a lot faster. It’s no surprise now, right? As we talk to our clients, the NCOA, this exam cycle is focused on sort of these three things, right? It’s interest rate risk, it’s credit risk, and it’s liquidity management.

[00:05:08] Vince Passione: If you talk to members How’s that changing the way they historically have managed their balance sheets, how they deal with liquidity, what are they doing differently?

[00:05:15] Dan Berger: They’re doing a lot of the same stuff. They’re really looking for having partnerships with LendKey and having lending programs that are very robust because that’s the best way is to get that income going through onto their balance sheets.

[00:05:29] Dan Berger: The liquidity, they’re also, when you start and you advertise I mean, I’ve seen rates for five, six, even 7% at credit unions for certificates. That’s a good way to get money into your institution, but they’re managing it. And there’s always a concern. And we always saw all those headwinds peeking around the corner a little bit.

[00:05:48] Dan Berger: But I think it’s being pretty well managed by the credit unions. And the MCOA is appropriately keeping an eye on it during their job as a regulator. But you have to have an enterprise risk management program with all that kind of stuff, with lending, with liquidity. The risk management is extraordinary in this environment, but I think they’re handling it pretty well.

[00:06:07] Dan Berger: The relationships with the various places, whether it’s the federal home loan banks or the discount window with the Federal Reserve. There’s ways to really shore up some of the liquidity side of the balance sheet. And I think they’re doing that. I have heard from hundreds of CEOs and yeah, liquidity was a concern, but I think it’s settled down a little bit.

[00:06:25] Dan Berger: And I think they really are keeping an eye on it very closely. Yeah.

[00:06:29] Vince Passione: Yeah. So let’s go back to what you feel most comfortable with. I was watching and listening to a recent interview and you defined your job to someone. You said, Hey, It’s like three dimensional chess. I’m dealing in the world of policy, politics, and business, which I thought was excellent.

[00:06:41] Vince Passione: It really does explain the way, you know, you and your organization and where you fit in this ecosystem. So we think about the legislative side of things, and you’ve also said, hey, look, we have a stalemate, right? So now you have regulatory overreach in this environment. Can you talk a little bit about that and where you see the legislative opportunities that might actually help in this environment, or where you might see regulatory overreach that might be hurting?

[00:07:04] Dan Berger: We talked a little bit about the CFPB, the overreach there is pretty extraordinary. They are the MCA for the most part is fairly balanced and really focusing on safety and soundness. But for more legislative agenda, typically it’s defense. And we’ve been really fighting what we call the Derman amendment 2.0.

[00:07:23] Dan Berger: For him trying to cap interchange now on, on credit cards, kind of in a roundabout way. So it’s all hands on deck dealing with that issue. And it’s a big coalition of us that are working on this, the banks, credit unions and others, even those that have reward programs, airlines and stuff like that, because those reward programs, if you remember Durbin amendment, the 1st, 1.

[00:07:47] Dan Berger: All the rewards programs and point system for the debit card pretty much went away. And so that’s what’s going to happen. So if you like your miles and your hotel points and all that kind of stuff, you’re seeing a big battle on this. I think we’re okay now, but it’s still a defensive posture. But we’re also looking for ways to get some stuff done.

[00:08:06] Dan Berger: You know, field of membership, modernization, credit unions want to be able to serve more. The underserved more the unbanked, we have credit banks that have pulled out from suburban areas, inner urban areas, but especially in rural areas. And so we have these financial deserts across our country that have been created.

[00:08:24] Dan Berger: The banks don’t want to serve them. But then when we try to serve them, they end up suing the NCAA or suing credit unions, all that kind of stuff. They don’t want us to serve them, but we want to serve them. So trying to get some legislation passed to allow credit unions. To get the unbanked as part of the system.

[00:08:38] Dan Berger: And so they have banking services. I mean, there’s people in the flyover country, they may have to drive a hundred miles, 200 miles to a financial institution of that just as silly. Let’s look pretty and serve those people and those communities that really need financial services. And so those are the opportunities that are out there because they’ve recognized some of that.

[00:08:58] Dan Berger: But we’re also keeping an eye on some of the rolling back. We’re keeping an eye on some of the big banks and what they’ve been doing. You saw bank of America getting whacked again, hundreds of millions of dollars in fines. So they keep an eye on the big banks and some of the things that they’re doing.

[00:09:13] Dan Berger: But it’s to your point earlier, it’s still a defensive posture in a divided government. Which is actually better overall than what we’re trying to do. Yeah, there’s things that we want to do more powers and authorities. We want Freddie Young’s to have so they can serve their members and serve more members and better serve their communities.

[00:09:30] Dan Berger: But then when you can stop bad things. That’s oftentimes a really big win.

[00:09:37] Vince Passione: Yeah, no, I agree. It’s a big fight. It’s a big fight. And you’ve been pretty consistent. You and your team and what you’ve been doing to fight that fight. Let’s circle back to liquidity back in 2017. I remember the opinion letter that was issued by the NCUA and it really allowed credit unions to actually, for the first time, participate in securitization to access the capital markets, right, and unload some of their loans since 2017, we’ve seen maybe three credit unions actually pull up a securitization, I think the number was like.

[00:10:04] Vince Passione: 1. 2 billion dollars of auto loans, I think, were actually securitized across those three credit unions. What do you think is pulling them back and where does the legislative world and regulatory world come together to say, let’s make this more accessible to these credit unions? Because I look today and they’re borrowing from the home loan bank at over 5% and the capital markets are sitting there and fintechs now are selling again.

[00:10:27] Vince Passione: The capital markets, the capital markets are on fire

[00:10:29] Dan Berger: The cost of funds is always an issue. For financial institutions, especially crediting or the margins being relatively squeezed. We do see securitization continue to build. I think that it takes a level of comfort and expertise to have in house. And I think that they’re beginning to see more and more of that.

[00:10:50] Dan Berger: But I think they need to partner with Linkey and others. To have that expertise in order to participate in those type of programs. But no, the legal opinion letter was helpful in giving incidental powers to the federal credit unions. We’re seeing some of the larger credit unions really doing more in the Ginnie Mae securitization area and some of that activity.

[00:11:11] Dan Berger: But we’re seeing mostly in the, to your point, the auto lending space. And because the securitization requires a lot of capital to package and the issue and then the turnaround to sell those securities. For larger assets like residential commercial mortgages, it just takes a lot, a lot of capital, big banks, and obviously the GSEs already do that well.

[00:11:30] Dan Berger: And so I think there’s a little bit of fear of the unknown that’s out there and they need to be comfortable with it a little bit more. It’s our job. Vince, to put as many tools in the toolbox as possible for credit unions can grow and thrive. And the securitization is just one of those tools. We believe that they should have the ability and the opportunity to offer those types of securitization for all those loan products.

[00:11:56] Dan Berger: But I think they have to get to a comfort level. And I just don’t think it’s there yet.

[00:12:01] Vince Passione: Now, do you think that the NCUA, the role they play there? I remember once sitting there and talking to the capital markets folks, and there were some concerns around. The role of the NCOA and the oversight piece and the cost of it, and that perhaps it was going to increase now because of recourse issues around securitization, do you hear much of that?

[00:12:19] Vince Passione: Do you see that coming up again as some type of obstacle?

[00:12:21] Dan Berger: Yeah, the cost and fairness, we beat them up on their budget a lot and cause it’s our members money. And so if a catch 22 for us in some instances. But there’s savings in other areas they could look at in order to have the expertise on staff. Yeah, it would increase the workload, but the NCOA is pretty well known for outsourcing the expertise that they need.

[00:12:45] Dan Berger: So they have the ability to do that as well. So I don’t like excuses and we all have problems. Let’s find a solution to it. And I think there’s multitude of solutions that the NCOA can do to help with some of that workload. Lack of resources.

[00:12:58] Vince Passione: Well, it brings you to the QSO rule, right? And it was interesting because when I was looking at the rule and I was looking at the comment period, I always loved reading Melanie Connery Ashbrook’s or your secretary board, her commentary.

[00:13:12] Vince Passione: And she wrote a nice piece in support of the rule. And her interpretation of the rule was very interesting, right? Because most people look at it and say, what we’re going to do is allow QSOs to become lenders. But she stretched it a bit. And she said, no, this also would allow QSOs to step in and to facilitate securitizations, right?

[00:13:29] Vince Passione: To do what creditors do best, right? Small creditors cooperate together. They pool their assets. How do you feel about this? And how do you see this rule rolling out? I don’t hear much about it anymore.

[00:13:40] Dan Berger: We still hear about it relatively frequently, Vince, but to your point, CUSOs have a long history of facilitating innovation and new lending opportunities and partnerships with credit unions.

[00:13:52] Dan Berger: And so it’s been a really helpful tool for a multitude of product lines with that rule, which allows CUSOs to originate any type of loan. The fellow credit unions have, provides a strong foundation for these partnerships to continue. The example I will give you, the number of NAFU members partnering with CUSOs to sell mortgages has risen steadily since 2017, 2018.

[00:14:19] Dan Berger: And so similarly, we did a survey, we do a multitude of surveys, as you’re aware. But we did a recent survey, MAFQ members showed a 29% jump in the total value of the investments in QSOs between 2020 and 2021. So there’s an appetite there for those kind of services to be there. So by expanding those QSO lending abilities, even smaller credit unions are beginning to minimize their administrative costs and offering better rates through the syndication.

[00:14:49] Dan Berger: And it’s going to be important in this low margin environment that they’re operating in to continue to have those relationships through QSOs. But ultimately, I think the 2021 QSO rule will continue to grant the crediting industry a powerful tool to compete more effectively with fintechs in the financial services marketplace.

[00:15:10] Dan Berger: The marketplace has become an increasingly digital and disaggregated across the whole spectrum, but I think the QSO rule will continue to be expanded.

[00:15:20] Vince Passione: So, 16 months ago, I sat at a conference and credit unions were sitting with an excess of almost 500 billion of deposits. They couldn’t deploy it fast enough, and the loan participation rule change came up, and this was part of the NCOA’s financial innovation proposal.

[00:15:39] Vince Passione: And I think you remember this because your organization was very involved. Melanie wrote on this as well, right? This is the issue of the difference between loan participations and eligible obligations. So, it came on the docket. Everybody was really excited about it. It seems like it’s still on the docket.

[00:15:54] Vince Passione: The comment period came back. Everybody was positive.

[00:15:57] Dan Berger: Where’s the progress. The thing about rules is just a proposal. And this one’s like no other, like any other, it’s still just a proposal. So it seems to, we’ll have to wait and see what the final rule looks like. And ultimately what the impact will be on the on credit unions.

[00:16:14] Dan Berger: Overall, we’re hoping that it’s principles based, that there’s more improvements in the rule to enhance the loan participations and eligible obligations, and to adjust any of the regulatory requirements that would help crediting, especially the smaller credit unions, one of those under a hundred million dollars in assets.

[00:16:33] Dan Berger: To continue to participate in those programs. So we’ll have to see what happens. Loan participations, as you know, allow creditors to collectively share in all the lending risk. And so to be part of those type of programs is extremely helpful and beneficial. It reduces the capital commitments that are required.

[00:16:51] Dan Berger: It enhances the ability of credit unions to serve customers within their field of membership. And then of course, probably the most important one for the communities, it enlarges their economic impact by assisting other credit unions and their members. So it’s just, it continues to expand out and it seems to help everybody.

[00:17:10] Vince Passione: No, it does. And look, we’ve been at it for 14 years, and we do believe that loan participations are a great way for credit unions to distribute risk. FOM has its benefits, but it also turns around and provides the opportunity for them to have a geographic concentration. And loan participations not only provide liquidity, but they provide a lot of opportunity to diversify the risk geographically.

[00:17:32] Dan Berger: Oh, and then that diversification is extremely important, but we’re also pushing them the industry, right? Pretty hard to further encourage loan participations for credit unions by making permanent the COVID era, temporary regulatory relief language that was there. And so at a time of increased economic uncertainty and volatility and everything.

[00:17:53] Dan Berger: The potential credit crunch within financial services sector is heightened right now. And so to really get this done and to expand it would be extremely helpful for all credit unions.

[00:18:04] Vince Passione: So we have another two minutes left.

[00:18:06] Dan Berger: Wow, that went fast.

[00:18:07] Vince Passione: Come on, you talk about kids in that garage in Palo Alto, you didn’t think I was going to pick that up and run with it.

[00:18:13] Vince Passione: So, we started out as disruptors, then they’re partners, then the creatines are investing in them, now creatines are talking about acquiring them. We’ve seen the entire evolution. You’ve talked about this several times in different interviews. How do you see the future? What are the next five to 10 years look like with fintechs and credit unions?

[00:18:30] Dan Berger: You can’t go it alone. Very few credit unions have the financial power, 200 programmers on site, like bank of America or JP Morgan chase. So you have to partner with fintechs and with technology companies like Linkey and others. You have to do it. The problem with fintechs. It’s a commoditized term at this point.

[00:18:50] Dan Berger: Everybody has a different definition of it that’s out there, but you can’t go it alone. If you’re a credit union or a smaller community financial institution, you have to partner with FinTechs to be successful. And so our point is, if FinTechs are getting into the financial services marketplace, we just want to make sure they’re part of the same schematic that other financial institutions are part of, and they have that regulatory schematic that they have to jump through that we do.

[00:19:16] Dan Berger: You know, they start these companies oftentimes and they venue shop, which regulators easiest and everything else. And they go out there and operate in that fashion. So their partners are at risk, the consumer is at risk. And so we don’t mind competing. Let’s compete on a level playing field. And Dan,

[00:19:33] Vince Passione: do you think the level playing field is a regulatory or legislative piece?

[00:19:38] Vince Passione: How does it work?

[00:19:40] Dan Berger: I think it, it is probably a little bit of both. I think it’s a little bit of both. I do believe that the C F P B does have the authority to look at some of these fintechs that are operating in the consumer space, and I think they are keeping an eye in looking at some of ’em pretty closely.

[00:19:55] Dan Berger: But I also think there’s a, a legislative component too that if depository institutions have to be under a credential regulator, I think some of these fintechs should be as well if they’re gonna be operating in this space.

[00:20:07] Vince Passione: Yeah, look, certainly the ones that have acquired banking licenses, right, because they’ve made that transition, right, and starting with a product and then acquiring customers and then eventually reaching that point where they want to turn around and become a financial institution.

[00:20:22] Vince Passione: And I think for their own sakes, they’ve pursued it as well.

[00:20:25] Dan Berger: Right. Yeah. And I think they realized, and that’s the reason, the one thing they’ll never have, then, and you know this better than anybody, is that trust factor. Credit unions are trusted in the financial services marketplace, where the white hats, the financial services industry, for a reason.

[00:20:40] Dan Berger: And so they can never do that. And the Googles are never going to have that trust. Facebook’s never going to have that trust. The only person that you have to keep an eye on that does is Amazon. Everybody’s got that click and go. And so the people seem to trust Amazon and some of those other thin techs, but you have to keep an eye on some of that, but they also should go through the regulatory hoops that my members go through in order to have a level playing field. Yeah.

[00:21:03] Vince Passione: Yeah. We can talk about customized experiences and why that matters, but that’s another show that’s all the time we have for today. And thank you so much, Dan, for your comments and thanks for the folks listening in. Make sure you subscribe so you can hear more future episodes like this, and I’ll meet you all back here at the next 22 minutes in lending.

[00:21:19] Vince Passione: Thanks again, Dan.

[00:21:20] Dan Berger: Thanks Vince.

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