A Credit Union-Built Fintech

Some credit unions are struggling to navigate a world in which the best financial technology often can come from alien fintechs. A few, like Coastal Federal Credit Union in Raleigh, N.C., learned how more than a decade ago. 

That was when the organization saw a need to centralize teller transactions in video sessions. It partnered with Gene Pranger to build such a product and named it uGenius. It worked for Coastal FCU. It worked for other CUs. It worked for banks. Five years ago, the owners sold it to omnichannel solutions provider NCR, Atlanta. “We made a very handsome return—about 400 percent—on our investment,” notes Chuck Purvis, CLE, CUDE, CCE, president/CEO of the $2.9 billion credit union.

Now Coastal FCU and its partners are in the late stages of building a new fintech, called Constellation Digital Partners. It’s owned by nine CUs and four service providers that pitched in $26 million and about two years of planning to launch last May. It’s in the heavy software development stage now and expects to have live users by July or August, Purvis says.

“It’s clumsy to keep putting more functionality into a single mobile banking app,” Purvis observes. “We’re planning something like an app store for financial services that will be flexible. It will offer greater functionality at lower cost than trying to get it all from one big system provider.” 

Traditionally, CUs have introduced a mobile banking app. Members load it and it’s an icon on their smartphones. As more and more functionality is introduced, that app gets bigger and bigger. Members might have to look harder to find the activity they want. With Constellation, members will get a platform, a place on which members can load small, function specific apps they want. They won’t have to wait for the CU to reprogram its mobile banking app to add the new functions. And members can pick which functions they want, streamlining what members store on their individual phones.

The technology is patented. The baby fintech operates out of Coastal FCU’s headquarters with a staff of five, led by CEO Kris Kovacs, CIE, a CUES member and formerly Coastal FCU’s SVP/CIO.

Purvis and his team learned how to manage growth and regulations with uGenius. “It has to be organized as a CUSO for us to be equity investors, and CUSOs have to do a majority of their business with CUs,” he explains. “When we reached the point where half of our business was with banks, we had to restructure it as a subsidiary business unit, but we kept the intellectual property in the parent and kept our equity rights. We found a way to do it within the CUSO rules.”

Now Coastal FCU and the Constellation group are talking to private fintechs, but from a position of strength. 

“We see them as potential content providers for Constellation,” Purvis notes. “If we see a fintech with a good concept—a new bill-payment app or payment app that would add value to our members, we talk. We may both want to put a version of their app on our platform. Today our mobile and online banking channels run completely through Fiserv (Brookfield, Wis.) and we can’t (directly) put a fintech on Fiserv’s platform. We think we could soon do that on the Constellation platform. That would open the door to a lot of possibilities.”

CUs may have more leverage than they realize in negotiating with private fintechs, and that leverage is multiplied in group solutions like Constellation, Purvis points out. 

“Coastal can offer a fintech access to 240,000 members, which would be pretty attractive to a startup. Constellation will be able to offer more like 2 million members, which would really impress a fintech and allow you to negotiate better prices for members than any CU could do on its own.” It also gives the Constellation CUs more influence on product development, he adds.

$4.3 billion Kinecta Federal Credit Union, Manhattan Beach, Calif., invested in Constellation as a potential gateway into the fintech world. 

“We can’t do much with fintechs today because our legacy systems make the integration difficult,” explains CUES member Keith Sultemeier, president/CEO. “Constellation’s open platform promises to let us collaborate with fintechs and other CUs by making core integration easy.”

Easy core integration could significantly decrease the risk of experimenting with fintech partners. “We’ve looked at a few fintechs while waiting for Constellation’s launch and will probably partner with a couple that offer very focused products like Rate Reset, McLean, Va., on the consumer lending side,” Sultemeier reports.

Eliminating the integration obstacle opens the door to fruitful collaboration, Sultemeier suggests. “I think fintechs will find credit unions attractive partners, and many fintechs have innovations and user experiences that we’d like to leverage. Ultimately, we would like our individual members to be able to choose from multiple fintech apps as easily as dragging tiles for the ones they want into their personal container.”

Sultemeier also likes Constellation because he and the other CU owners control the major decisions. “We’ve been burned by tech providers that have acquired a current partner and sundowned us, forcing our members into an unwelcome conversion,” he says. “Having control lets us shape and protect the technology that’s most important to our future. We expect Constellation to be our main channel for financial services apps for years to come.”

David Pierce, CIE, chief information officer at $2.3 billion Public Service Credit Union, Lone Tree, Colo., speaks highly of Constellation, but has timing issues. “They weren’t ready yet when we needed to move,” he notes, “so we went with Malauzai. Now we’re under contract, but we’ll take a fresh look at our choices when the contract runs out.”

What does it take to launch a fintech CUSO? First, it takes a staff. For Constellation, that’s a team of five. Kovacs has the big CU IT background and connections, but the other four came from outside the CU world. 

“You need a different kind of thinking,” he says. “CU people think about serving members and protecting our future, balancing innovation and tradition in a very sustainable way. You don’t build a fintech by thinking that way. You think about building great technology as quickly as you can and selling it.” 

Kovacs considers himself a technologist and did some coding “back in the day,” but now he’s the big-picture guy. So, he hired a chief technology officer, Ed Brooks, to focus on the technology. Brooks came from the corporate CU tech world and is used to serving multiple CU clients, which fits the Constellation business model. 

Kovacs needed support with the details, so he hired Lauren Moran as chief of staff. She came from the financial services consulting world and looks after a lot of details. Two channel services managers, Robert Pettry and Ryan Talbot, round out the staff. Both came from the digital banking operations of banks.

The staff is not trying to build the product internally but has outsourced the software development to Atlanta-based Xtensifi. “They delivered 1.2 million lines of code last year,” Kovacs notes.

For some operational support, Constellation has a service contract with Coastal that covers some HR and accounting needs. They also rent their space from the CU. Cash flow isn’t a problem. The 10 CU owners each wired their investment to a Constellation account when they closed the deal. “The money is all there, and we spend it according to our annual budget and plan,” Kovacs says.

One key to success, he says, is to jump right into the technology development and not waste much time on organizational issues like who will serve on the board. “We put together a minimally viable agreement to get us through the first phase,” he notes, “so it took us months, not years, to get it running.”

The Constellation venture should be relevant to other CUs, Kovacs insists. “CUs need to realize that they have $100 billion in capital they can invest. They need to manage it more actively by investing in startups.”

Richard H. Gamble is a freelance writer based in Colorado.