For two Internet pioneers deeply involved with credit unions, the past year has been one of final straws and tipping points, respectively.
The first is Brewster Kahle, the “digital librarian” who sold two of his startups to America Online and Amazon for hundreds of millions of dollars before creating the Internet Archive. He followed up on the impulse to launch the non-profit depository of millions of free books, software, movies, and more, by sponsoring Internet Archive Federal Credit Union ($2.6 million, New Brunswick, NJ).
The second is Digital Insight co-founder Paul Fiore, who used $1 million in seed money from his employer, core processor XP Systems (now a Fiserv platform), to create a company that was one of the first to successfully offer online banking technology.
Digital Insight quickly grew a client list of more than 1,000 financial institutions, most of them credit unions, before its sale to Intuit. Along with multiple other ventures, including the film industry, Fiore has since turned his attention to CU Wallet, trying to create the same kind of success in the new world of digital payments.
The Last Straw
Fed up with NCUA oversight that has included more than a dozen examiner visits in the past couple years, Kahle and his credit union CEO, veteran banker Jordan Modell, have asked the agency for permission to liquidate.
Recommended reading: This New York Times article on the saga of Internet Archive: “Dream Of New Kind Of Credit Union Is Extinguished By Bureaucracy.” Also this from CU Times reporter Peter Strozniak: “Death Of A Credit Union: Internet Archive FCU Voluntarily Liquidates.”
The final straw? Modell says it was after the agency said last year that if “in your next exam, you do everything right, we’ll remove some of those shackles. I already had been working without a salary myself and slept in the office for two straight days preparing everything for two more exams. They still gave us a low rating.”
This is from Kahle’s blog about IAFCU’s “difficult times” on the credit union’s website: “All deposits are safe, all loans performing, great and dedicated staff, wonderful members. So why difficult? Despite five years of effort, $1 million in donations spent (from the Internet Archive) and $1 million in the bank to back any bad loans (from the Kahle/Austin Foundation), we are only further from our goal: To create a financial institution that can justly serve our communities. It now looks likely that overwhelming regulatory burden will force us to give up our quest.”
The 400-member credit union had been restricted to providing only short-term, payday type loans and small car loans and could not make enough money to keep its doors open.
“We wanted to help the underserved, but the restrictions made this too difficult. We tried to offer student loans, but we were limited to lending only $5,000. This was a particular problem when, for example, an under-documented local Rutgers student with a 700+ credit score and a part-time job needed $8,000 to stay in school but others would not help him. We sought an exception from the NCUA, but they said no,” Kahle says in his blog.
IAFCU had made maybe $50,000 in loans, backed by millions in committed capital, and had already helped more than 100 people get individual tax identification numbers so they could become taxpaying, participating members of their immigrant communities, Modell says.
Perhaps true to its roots in the digital revolution, the credit union also had an ill-fated dalliance with bitcoins, but it’s unclear whether that influenced the NCUA’s intense interest in the tiny credit union.
NCUA spokesman John Fairbanks says the agency does not comment on specific credit union supervision issues, but he did say, “There are a couple of thousand low-income-designated credit unions who serve their members very well within the current rules.”
Modell, meanwhile, says he doesn’t know what’s next. “I’d like to, in my warped little mind, think we can maybe help other small credit unions learn from our mistakes.”
NCUA Pays Big Attention To Small Credit Unions
The Tipping Point
It’s a happier tale, meanwhile, for CU Wallet. Fiore says his CUSO’s client credit unions now represent more than 12 million members, passing the 10 million mark that Fiore sees as the tipping point to get the attention of the major national merchants with which it hopes to negotiate terms of engagement.
Specifically, that’s the top 100 that have mobile apps. Fiore says he expects to announce 10 or more takers in the next three to six months.
That’s a shift in strategy from CU Wallet’s sole reliance on the Paydiant payment rail that was acquired in 2015 by PayPal. While that is seen as a positive development, Fiore says CU Wallet is now also working to accommodate as many technologies as possible, including QR codes, near field communications, tokenization, and host card emulation techniques.
The fight over how to divvy up interchange income has created the misperception that retailers are by definition the enemy, Fiore adds. “That’s not our position at all,” he says. “Our vision is whatever the merchant has, we’ll work with that.”
Such flexibility in technology and strategy is intended to allow credit unions using CU Wallet to compete with the likes of Walmart Pay, Chase Pay, Target Pay, Apple Pay, Samsung Pay, Android Pay and whatever else pops up. That does, however, complicate deployment.
The CUSO’s website says it now has 87 credit union members. Fiore says, “We have various credit unions in various stages of development. We’ll be doing trials to demonstrate the consumer experience and that the product does work.”
The veteran financial services technology entrepreneur says this rollout is much different than the birth pangs of online banking in one very critical way. “That was one way,” he says. “This involves two sides of every transaction.”
As for the longer-than-expected delay in widespread consumer adoption of digital wallets in general, the field remains a work in progress. As Fiore notes, “This is not an easy problem, or Google would have solved it five years ago with Google Wallet.”
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