Every financial institution is looking for the next big idea or next generation digital app that will differentiate their organization by making banking easier and deployment of products and services less costly. With most banks and credit unions unable to build this type of digital capability internally, it is vital to be able to reach out to the largest possible number of creative thinkers. An alternative to searching for a single partner, one at a time, is to work in conjunction with an innovation platform, where fintech organizations and traditional solution providers compete under a single umbrella on behalf of a consortia of financial institutions.
An innovation platform is unique because it brings together small and large providers, with different business models and solutions, but with a common vision of working to create better digital banking solutions on behalf of member financial institutions. These providers may design and implement solutions as a group or individually. Motivated by competition to create partnerships, the innovation platform is able to provide a large menu of solutions to their member financial institutions and an array of potential clients for the solution providers.
Innovation platforms are particularly useful in financial services because the dynamics of regulations, compliance, risk and customer needs can be complex. By bringing together solution providers from various backgrounds and skill sets, innovation platforms can identify and address common concerns more effectively, solutions can be prioritized and the speed of deployment can be vastly improved.
Another advantage of innovation platforms is the ability to have multiple solutions created for any single business challenge, eventually allowing for highly personalized solutions being available for individual consumers. With innovation platforms, not only is ongoing innovation encouraged, the flexibility of the platform allows financial institutions to deploy an iterative process as opposed to the common process that has ‘updates’ to solutions occurring at a snails pace.
Finally, with an innovation platform partnership, if a specific innovation is successful, the platform organizer works with all of its members to get the solution deployed quickly and widely. This may include the documentation of the solution, training and even marketing to the public.
In the end, success of an innovation platform depends on the buy-in of the member financial institutions and the ongoing participation of fintech firms and traditional solution providers. The member institutions must be able to work together, trust each other and trust the innovation platform organizer. Despite the investment in money and energy by financial institutions, if the culture to implement the solutions and actively embrace the process is not present, an innovation platform is no more of a solution than an innovation lab that is simply in place to make shareholders happy.
For a perspective on this innovative way for fintech firms and financial institutions to partner, we interviewed Kris Kovacs, president and CEO of Constellation Digital Partners. Kris and his team have built an innovation platform focused on open solutions for traditional financial institutions. In the interview, Kris discusses his organization’s mission and the benefits of open innovation for fintech firms, financial institutions and the consumer.
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What is Constellation Digital Partners?
Kovacs: Constellation Digital Partners is a credit union service organization, started by 11 credit unions, each with well in excess of a billion dollars in assets. The organization was created for the purpose of developing an open development environment that allows fintech firms and solutions providers of all shapes and sizes to create content that takes the form of digital financial services.
Using our platform gives credit unions the ability to choose which of those services they want to use to replace their legacy online and mobile banking experiences. So, instead of going to one provider at a time, a credit union gets to reap the benefits of an entire fintech community in order to derive the services that they ultimately deliver to their members.
So, you serve as an ‘innovation ombudsman’ on behalf of your credit union members?
Kovacs: Yes. Our platform focuses on four key components: the development of content, the security of content, the integration of that content, and the delivery of solutions. So instead of building a web page that shows balances, we build a platform with these key four reusable components – then we openly share these with fintech firms and traditional solution providers as well as with our credit unions who invested in the company – giving them the ability to access these services on demand.
How did you get your first round of investors for this platform?
Kovacs: As the CIO at Coastal Federal Credit Union in Raleigh, North Carolina, I realized that the idea of building a digital innovation platform would require the involvement of multiple credit unions. Initially, we went out and shared the idea and raised a $2 million seed round. We used the seed money to buid a proof of concept, business plan, development environment, development requirements, etc.
We demonstrated that [the concept] would work. We’ve demonstrated that you can create fintech content, you can distribute it, secure it, and integrate it all the way to a credit union core. Then we said, “If we want to build this platform to its full production capabilities, we want to operate a credit union service organization with investors.” So, we set out to raise $27 million dollars, and actually raised $32.5 million and ultimately had to shut the door and focus on building out the concept.
How is the investment money being used?
Kovacs: We used the investment to build a cloud-based platform inside an Amazon Web Services environment – giving us the ability to respond to demands faster and be able to grow the services more easily. We built the key infrastructure inside the cloud, developing the core integration components necessary to be able to connect to our credit unions.
We spent the last nine months or so developing those key digital services that will stand as kind of the hub of services for the credit unions. This includes the ability to do balances, transactions, transfers, remote deposit capture, and bill pay the way a digital bank should. This provides the credit unions a starting point to which they can add fintech solutions from any number of our 86 (and growing) development partners.
Do some of these solutions actually compete with each other?
Kovacs: Definitely. We won’t do any exclusivity deals or any deal that creates exclusivity for any particular developer. We are an open platform – meaning we are open to all fintech and traditional solution provider developers. They can come in and create services without even paying us anything to do it. That’s how committed we are increasing the options that are available to credit unions.
We even coach and train on how to create services, because in the end, it isn’t about building a company and flipping it to one of the large fintech service providers. For us, it is only about getting the maximum number of great services for credit union members.
How do you ensure the right solutions are being worked on?
Kovacs: We look at our customer base as two separate groups – our credit unions and the fintech firms themselves. If we don’t take care of the fintech firms, by helping them understand the platform and training them on how to adapt services to the platform, then we haven’t been successful in gaining access to those services for credit union members.
We do everything from training classes to online briefings for the developers. We even have a Launch Conference where we have a hackathon allowing developers to use our platform to create services and then demonstrate those services – in less than 24 hours – for our credit union customers.
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Does a member organization need to implement the entire platform solution at once?
Kovacs: No. We provide flexibility in how the services can be deployed. They can be deployed as a form of overarching digital banking conversion, or they can be deployed alongside their existing platform.
Can traditional service providers participate in your platform?
Kovacs: Definitely. The more we talk with them, these organizations realize we’re really just another potential channel for them to sell services through. So, we actually have a number of the very large traditional players who are partners of ours inside of our developer environment.
The ability to access multiple institutions by adapting one innovative digital service to our platform is universally appealing to the solution provider and the credit union. Instead of the traditional ‘every 5-year RFP model’, we allow our credit unions to make decisions every five days, because access to the platform is different than the services that run on top of it.
The credit union doesn’t have to wait till the end of a contract to be able to deploy a new solution. What that does for even the large service providers is it gives them more flexibility in distribution. Credit unions can make decisions on demand to add new services as they go, which is radically different than what’s been provided before.
With so many participating fintech providers, is there a way to personalize solutions for members?
Kovacs: Yes. Credit unions today usually deliver the lowest common denominator to our members – the least offensive banking product we can. The reality is we’re delivering something to, for example, my 17-year-old son and my 70-year-old father, that frankly doesn’t entirely meet either of their needs.
By using the services of Constellation and our fintech partners a Boomer can tailor their online services to meet their needs through the same platform of solutions that a 17-year-old future college student can. With a platform, customization and personalization of solutions is much easier.
What challenges have you faced?
Kovacs: The biggest challenge that everyone is facing, including us, is how tough it is to find really great technical talent. We have relied on a lot of contractors as we’ve gone through this process. We are expanding our own technical and development teams now. The competition is cutthroat for developers and full-stack engineers.
What has been the biggest positive impact you have seen so far?
Kovacs: It is exciting to see how interested the fintech firms are in working with community-based financial institutions. For a long time, these institutions have been told that fintech firms are coming for your customers. In reality, fintech providers are very interested in working with community-based institutions.
We hear many times that working with credit unions and working with community-based banking institutions is easier for the fintechs than working with the very largest banks. They realize that they are looking at institutions that can be responsive and can make decisions. And in a platform scenario, they can reach many organizations at the same time, with a faster decision (and deployment) timeline.
How do developers get involved?
Kovacs: We released our developer environment that allows developers to go in, create services, access our documentation and API, be able to connect to our sandbox core, and be able to submit tiles for certification to us. Today, there are 177 individual developers creating content with nearly 180 projects on the fly, in real time. And, all of those projects represent future services to credit union members.