What Does Fintech Innovation Look Like In Credit Union Land?

A nonprofit program launched by Digital FCU fosters next-gen talent and ideas, and the nation has noticed.

 
 

Top-Level Takeaways

  • Digital Federal Credit Union introduced a center to foster innovative companies and solutions in 2014.
  • The center has graduated 55 companies, many of which have become nationally recognized.

CU QUICK FACTS

Digital FCU
Data as of 06.30.19

HQ: Marlborough, MA
ASSETS: $9.0B
MEMBERS: 834,258
BRANCHES: 23
12-MO SHARE GROWTH: 6.6%
12-MO LOAN GROWTH: 6.3%
ROA: 0.72%

Until 2014, Digital Federal Credit Union ($9.0B, Marlborough, MA) encouraged innovation to produce internal benefits. It solicited opinions from staff members about areas of improvement and partnered with local colleges to take the pulse of the youth. The strategy was educational but not so much actionable.  

Then, in 2014, the credit union opened the first iteration of what eventually became the FinTech Innovation Center. The idea behind the Digital Center for Excellence in Financial Services was simple: Create a physical space where startups could work and connect with business executives.

“The startups would gain an institutional, marketplace perspective from the executives,” says Vasilios Roussos, managing director of the FinTech Innovation Center. “The executives would see emerging technologies and understand their need.” 

The Digital Center for Excellence benefited Digital FCU, but the credit union soon realized the center provide benefits beyond the cooperative’s walls. The space where forward-thinking companies could work and learn and introduce new products and services had communitywide benefits, too. So, the center evolved into the FinTech Innovation Center.  

Acceptance Into The Accelerator

If the Digital Center for Excellence was a place where fintechs and executives could learn from one another, the FinTech Innovation Center is more akin to a classic accelerator.

Companies arrive without a minimum viable product (MVP). They learn, work, and iterate while in the center, which gives them the time and the tools to create a business that is ready to take to market.

Located in a co-working space in Boston, approximately 30 miles from the credit union’s headquarters, the FinTech Innovation Center sits among a collection of colleges and universities that graduate young adults with an entrepreneurial bent, although the center attracts a diverse collection of CEOs that hail from places beyond Harvard and MIT.

“Our mandate is to find companies that are impact-oriented and mission-focused,” Roussos says. 

Vasilios Roussos, Managing Director, FinTech Innovation Center, Digital FCU

More specifically, Digital looks for companies with banking, lending, financial health and wellness, personal finance, or advanced technology — think blockchain, AI, and crypto currency — solutions.

“We’re looking for the best and brightest fintech leaders,” the managing director says. 

To that point, the center is an equity- and fee-free space where companies work without occurring office space expenses.

The center doesn’t charge rent. It also doesn’t select participants based solely on their ability to work with the credit union.

“Some of these companies might not have a direct impact on DCU,” says Nancy D’Amico, senior vice president of technology and innovation at the credit union. “But, there is a positive impact in so many different ways in the community, which is a core value of the credit union.”

Since 2016, Digital has opened twice-yearly application periods during which dozens of companies apply. From each period, the credit union selects a cohort of eight to 10 fintechs to spend one year in the center, which means at any given time 16-20 companies share the space.

According to Roussos, the application process is simple. An applicant submits a 20-question application form. Among the questions, a few stand out:

  • How do applicants pitch their idea?
  • What is the value of the idea?
  • Who does the applicant see as competition?
  • How do they plan to stand out against that competition?

From there, the credit union holds two rounds of interviews before selecting applicants for the cohort. Cohorts are small compared to the number of applicants, and Digital tends to have pre-existing knowledge of many of these companies, which helps in the decision-making process.

Companies that make it into a cohort must have well-considered answers to the questions above. Their technology also matters. But more important than either is the applicant itself.

“We have smart, savvy applicants who come from a local ecosystem that does a great job teaching, encouraging, and supporting entrepreneurs,” Roussos says. “Our job is to pick those we think have the skill and the gumption to succeed.”

There are additional rules, as well. Companies must have raised less than $1 million and employ fewer than five people. In practice, they should be close to having an MVP but not be quite ready for primetime.

“It’s our focus to bring them from pre-MVP into production,” Roussos says.

A Center For Innovation

Companies begin their yearlong term at the center with a six-week orientation program. During this time, credit union representatives and other local technology leaders teach the cohort companies concepts — such as product pitching, fundraising, and working with customers — that will help them make the most of the next 12 months. They also learn about credit unions and the cooperative difference.

Companies then enter the next, less-formalized phase of their stay. During this time, Digital provides time and space for companies to build and test their concepts. It also offers these companies access to executives and other mentors who offer voice of the customer feedback and advice on going to market, technology and distribution partners, and more.

4 Names In The Crowd

Of the 55 graduates of Digital’s FinTech Innovation Center, several have gained traction within the cooperative movement. Vasilios Roussos, managing director of the center, highlights four:

  • Project Finance: “This company is delivering the newest challenger bank digital experience in a way that is focused on financial health and wellness.” [Editor’s note: Digital is adopting Project Finance’s solution for its mobile and digital channels in 2020.]
  • Posh: “Posh has developed next-generation conversational AI for voice and telephone banking.”
  • Coalesce: “Coalesce is working in the compliance and fraud space, including email surveillance and synthetic fraud.”
  • Cranberry: “Cranberry was founded by an ex-credit union employee from South Carolina. It’s in our center right now, working to develop a lease-to-own product for homeownership.”

“It’s here they learn the skills and build the connections to succeed through certain pivotal stages of growth for startups,” Roussos says.

By accepting two cohorts per year, the center mixes new, green groups with others who’ve put in six months or more at the center. In this way, the center gives companies more exposure and the opportunity to learn from those in similar, if slightly more advanced, situations.

“We’re hoping to encourage different thinking among our startups,” D’Amico says. “We want them to form their products or think about where they want to go based on real business input.”

Once a company graduates from the program, the door is open to the classic venture capital route. Unless a company decides to partner with Digital, the credit union’s job is done.

“We feel confident that we’ve done our job in getting them there,” Roussos says.

Since its inception, more companies are taking notice of the opportunities the center presents. In total, 55 companies have graduated from the program — including multiple that have subsequently become nationally recognized. The number of high quality applicants increases each open enrollment period, and its geographic reach continues to grow, too. In its last application period, companies from San Francisco and Florida applied thanks to word-of-mouth marketing, Roussos says.

Of those 55 graduating companies, 10 have had some form of partnership with the credit union. That’s a number the credit union is happy with, as those companies have introduced next-generation strategies and technology to the $9 billion shop. On the flip side, some 45 companies have gone on to introduce their solutions into communities where they are needed.

“We started this not fully knowing what was going to come out,” Roussos says. “We knew we wanted to foster companies that would do the right thing for our communities and for the credit union. We feel like things are only going to get better. Each class that has come in is stronger than the last.”

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Oct. 7, 2019


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