Three Ways Community Financial Institutions Should Invest in Innovation

From its in-house innovation lab to its investments in fintechs to the launching of two digital-only brands, a small financial institution shows what other credit unions and community banks can do with ingenuity, collaboration and an entrepreneurial mindset.
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It usually feels more comfortable to stay in your bubble or your own swim lane, depending on which analogy you prefer. But by playing it safe, you risk becoming irrelevant. You’ll also miss out on opportunities to invest in successful technology companies.

Michigan State University Federal Credit Union (MSUFCU) balances remaining true to its roots with being an innovation leader. The credit union, with $7 billion in assets and 320,000 members, was founded in 1937 during the Great Depression to provide loans to the campus community in East Lansing, Mich.

It’s mission then and now is to provide superior service while assisting members and employees to achieve financial security, their goals, and ultimately, their dreams, says April Clobes, President and CEO.

There’s nothing in that statement that mentions technology. But technology does have a prominent spot in MSUFCU’s overall vision. “Our vision is to create a world-class omnichannel member experience utilizing personalized digital and human services to deliver accessible financial solutions,” says Clobes.

It’s a balancing act between the old and the new.

“Our members include Michigan State University students as well as alumni “who send me handwritten notes asking me not to forget about them,” says Clobes. “We have to meet all members where they are by still providing in-person service, not only digital.”

How a Fintech Investment Subsidiary Fuels Innovation

As a regulated credit union, MSUFCU has to work through regulatory requirements to invest directly in fintechs or startups. So, it created Reseda Group, a wholly-owned Credit Union Services Organization (CUSO) in April 2021. “Reseda allows us to invest in companies creating technology specifically for credit unions,” says Clobes. “If the companies have great financial success, we can reinvest those earnings back into our membership.”

Through the CUSO, MSUFCU invests amounts ranging from $250,000 up to $5 million in a diverse portfolio of companies, giving it a minority ownership position typically for three to seven years.

Opportunity for Growth:

A subsidiary digital brand enables traditional institutions to offer innovative products and services without impacting their core systems.

One investment was in Spave, which created an app that deducts micro-payments from member checking accounts when they make a debit or credit card purchase. The market is MSUFCU’s younger demographic who would like to give to causes but don’t yet have the wealth to make significant donations.

MSUFCU’s total investment in Reseda Group to date is 1% of assets or about $64 million. Most investments are in technology companies, but Reseda also recently acquired a printing company, Foresight Group and an ad agency, M3 Group.

In addition to CUSOs, community financial institutions can leverage other options to co-create fintech solutions specifically for smaller banks. For example, Alloy Labs’ Concept Lab facilitates partnerships between startups and banks to launch new products.

A Lab Brings Ideas to Market

In addition to the Reseda Group CUSO, MSUFCU launched an innovation lab in September 2020. The lab is what Clobes calls a “safe space for technology innovation.” The credit union selects interested employees to generate ideas for products and services and then build and test the prototypes. Feedback from a member research panel allows MSUFCU to determine if the prototype is a viable technology that members will respond to before investing too much time or resources. The panel then become early adopters.

The lab has percolated several initiatives ready for prime time:

CVV Key, developed in partnership with Keyno, is an app that allows members to register their Visa credit card and receive a unique dynamic CVV code each time they use their card online or over the phone.

MSUFCU debated whether to create a separate app downloaded from the App Store or Google Play or to integrate CVV Key into their native mobile app. Members had the final say: they preferred a standalone app. So far, MSUFCU has seen a significant reduction in credit card fraud.

Fin-Life is an app that coaches members through ten financial wellness themes and provides live access to guidance from financial planning experts. Members enter their financial goals and set parameters and Fin-Life provides advice on everything from saving for your first home to creating and sticking to a budget.

More than 20,000 members currently use Fin-Life.

Building a Banking Talent Pipeline

MSUFCU isn’t immune to the talent shortage rocking nearly every industry. But its university location feeds its intern program, called Campus 2 Career, which creates a pipeline of software developers, operations specialists, financial educators, and more. About one-third of interns stay on after graduation.

The credit union also works at creating a workplace environment and culture attractive to new recruits, along with a strong benefits package and flexible work schedules, says Clobes.

In addition, the credit union supports Filene Research Institute’s i3 program, a two-year innovation leadership program for credit union professionals. However, leadership development can be a double-edged sword since those employees may be recruited by another credit union or fintech.

Clobes says she is okay with that as long as the skills and talents the former employees developed working for MSUFCU stay within the credit union industry at large.

Since MSUFCU, like just about every financial institution in the U.S., is unable to fill all open positions, the credit union is using technology to offer more self-service options to members. For instance, placing a chatbot on the front-end of their live chat alleviated the need to hire an additional fifteen employees.

Filling In the Gaps:

Maybe your institution struggles to attract employees. Technology, such as chatbots, can offset the open spots.

Reasons for Launching Two Digital Bank Brands

A further innovation MSUFCU is undertaking is the launch of two new digital brands in partnership with Nymbus to target niche markets. One brand, AlumniFi, will target MSU alumni who may be paying off student loans, saving for a home, or want to become financially savvy. The second digital brand, Collegiate Credit Union, will provide high school and college students with straightforward transaction-based checking and savings accounts.

These subsidiary digital brands enable MSUFCU to reach a younger demographic whose financial needs and habits align with digital offerings while still addressing its legacy membership and not impacting its core systems. The hope is that AlumniFi and Collegiate Credit Union account holders will utilize MSUFCU products as their needs for financial services expand.

“If every fintech takes 100 members from each of us, they will be successful, and we will continue to erode.”

— April Clobes, MSUFCU

Clobes anticipates that the brands will launch in early 2023 and that MSUFCU will partner with colleges and universities to offer these brands.

Partnership with technology companies is critical to all of MSUFCU’s innovations. Clobes welcomes collaboration with fintechs and encourages other bankers to change their fintech mindset.

“If every fintech takes 100 members from each of us, they will be successful, and we will continue to erode,” warns Clobes. Instead, traditional financial institutions should explore how to partner with fintechs and use the best technology to serve members.

“We provide a distribution channel for fintechs while they provide technology that allows credit unions to grow revenue and retain membership,” adds Clobes. “It’s not a competition, but an enhancement.”

Learn More: Catch more of April Clobes’ insights at The Financial Brand Forum 2022 where she is participating in a panel, “Strategies to Accelerate Innovation in Banking,” moderated by Jim Marous, Co-Publisher of The Financial Brand and CEO of the Digital Banking Report.

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