Advancing Innovation in the Credit Union Industry: Part 2

[00:00:00] Ronaldo: the need for more technology, and as we mentioned earlier, credit unions wanting to drive that, I think it has driven, this desire to create more QSOs and to do so around technology. So I’m very interested in what the next decade is going to look like.

[00:00:38] Vince Passione: Talking a lot about aging and the average age of a credit union, the C suite, right? Seems to be in that sort of 50, 55 ish area. So lots of transition, lots of change happening. So as you think about succession planning and giving advice to the C suite, what are some of the industry trends they should consider when they’re thinking about succession planning and. what are they not talking about when they’re thinking about succession planning?

[00:01:03] Ronaldo: you know, I think understanding that the future of our industry will be largely built around technology. It’s going to be hard to. Avoid that, you know, when you’re thinking secession, you’re having to think about how well leaders are developed around that subject matter in particular. And even if they’re not, I mean, listen, it’s funny because when I was supposed to go into college, I was going for computer science, which I should never just be sitting behind anybody’s computer programming all day.

[00:01:30] Ronaldo: That’s not me. but I do think that there’s a proficiency. That you have to have around the subject matter of technology to be successful, no matter what industry you’re going into, the future will be built on tech. It is what it is. So, when we consider that, I think that’s one of the things I think, secondly, this one is very interesting to me, but I feel like even this ability to adapt around agile methodology. So I think agility is something that is, needing to be developed even more. So, and you’re seeing a lot of our industry start to see that other industries have been, you know, leaning into agility much longer, than we have probably, but I think that. that is necessary. Understanding what that truly means, what it means for your organization and how you engage with your end users. I think that’s important. touched on emotional intelligence earlier, but it’s going to be very hard to be successful going forward without that capacity. You know, I will tell you,if you pay attention to most executive searches these days, There is some level of assessment around emotional intelligence now, and that was not the case even a decade ago, right?

[00:02:46] Ronaldo: So when you look at what’s going to be needed, in the future, then that emphasis on a technology, that ability to remain relevant and connected to what’s evolving in culture, is important, being able to have a high sense of, emotional intelligence is going to be important. And beyond that, you know, I think that, I’m of the opinion that as it relates to the executive suite and in particular, the CEO seat, I’m of the opinion that the CEO seat could be filled by people from multiple backgrounds and disciplines.

[00:03:20] Ronaldo: So I don’t subscribe to the old mindset that, Hey, that CEO has to come from one line of the business. I think they can come from any line of the business, as long as they have. The ability to scan the organization properly. they know how to build a team around them, which means that they have to have a high level of self awareness around where they struggle, right. And making sure that they can build a team that could advance the organization. and they remain, you know, open minded. I think if you have all of those attributes at the table, you can pull that CEO from any, department in the organization. And they’ll be able to take that framework and be successful advancing.

[00:04:02] Vince Passione: well put. And as a fellow computer scientist,

[00:04:08] Ronaldo: It’s so funny, I, and I did like several semesters, I was learning to program in c plus plus and I think now I’m like, what are you doing? Like, you know, you need to be talking to people, not sitting behind a computer all day. But when I was graduating they were telling everybody that you need to go in computer science. That’s the only way to be successful moving forward,

[00:04:28] Vince Passione: well, we’ll call it, it was very good baseline and good foundational work, right. For preparing you for this role, especially now, because as we started off, right. I mean, it is very much technology. It is very much part of the fabric of what we do. It’s interesting to see how QSOs have evolved, right? As we started off from being very operationally focused to now really being more about driving innovation and adoption, which is great.

[00:04:55] Vince Passione: So Ronaldo, I know that. QSO has an opportunity to influence regulatory change as well, and to talk to the NCOA, and recently we saw some real big changes occur with the NCOA rule on financial innovation, specifically when it comes to things like lending QSOs and financing. What a lending CUSO can do? and one of the things I just came back from a conference talking to some of my peers, right? This whole concept of a lending Q. So its ability to actually originate loans and not instantly have to memorize potentially holding them for a while, as long as some portion of them become memorized. So what do you think of that rule and how does that impact liquidity?

[00:05:30] Ronaldo: you know, I think that, one, I love the rule, but I actually would like to throw this one back at you. I’d love to know. Your thoughts, specifically, this is your expertise. And I think that people will benefit from hearing what you think about it.

[00:05:43] Vince Passione: So look, conceptually, when we think about it, and I think it’s part of the reason why the rule was written. Is it sort of levels the playing field for credit unions when it comes to different types of lending, specific things like point of sale, and potentially even auto. Where we all go through the experience where, especially in the auto side, where we wind up in the FNI; I office and we find a credit union loan, which is phenomenal, but then we have to go to the memorization process, which could create friction and potentially put a credit unit at a disadvantage, and having someone not be, you know, it’s a hard way to be introduced to a credit union, right?

[00:06:17] Vince Passione: You’re not really being introduced to the whole value of the relationship, but it’s necessary and it’s an interesting way to acquire customers. So that’s one piece of it. The other part of the rule is having a lending CUSO sit in the middle and helping credit unions who are different, but not recognizing that perhaps originating loans in a similar way has value because a, it creates more of them. and as a result of having more loans, larger volumes of them originated the same way, it opens up different pockets of liquidity. there are buyers who aren’t going to buy 5 million, 10 million. They might want to buy a hundred, 200, 250 million worth of production at a time just for efficiency purposes. That’s outside the credit union space.

[00:07:05] Vince Passione: And there’s a debate. I’ve heard people go back and forth and say, no, credit unions should never sell loans outside the credit union space. I’m a big believer that all originators should produce organic production and then look to sell it. cause I do think it makes them better originators over time. It improves their underwriting capabilities. it creates a group of buyers who become. Critical right and critique the way you’re originating your production.

[00:07:30] Vince Passione: So I think it’s healthy. I think it creates a little playing field, but more importantly, I think it the right environment for credit unions to aggregate up volume and then take that volume and present it to the broader capital markets, either in a whole loan sale or potentially. This grouped securitization, because that’s the other challenge, right? I mean, I think it was 2017 that credit unions were enabled through the NCOA through special permission to actually securitize loans, but we’ve only seen maybe less than a dozen securitizations. and they’re typically 250 million, most of them auto. So that’s not enough to turn the wheel on some of the discussions we had earlier about the liquidity crisis that potentially, right, our credit unions are going to face or are facing today.

[00:08:43] Vince Passione: I am, I actually learned something today because I didn’t realize all it took was a dollar

[00:08:47] Ronaldo: That’s all it takes.That’s all it takes. I actually, because when you, when that question first came, I was like, it’s interesting. I wonder, and I sent it to Brian just to verify.

[00:08:56] Vince Passione: Fascinating and all those years I, because we actually, we have a CUSO we started, which was member student lending, but we did not participate in it for a bunch of reasons. I think the big concern we had was more about how it might impact our investors. That was the other question I was trying to get at, right? Because a lot of investors look and go, I don’t know that I want that credit union money. If it’s going to be money where potentially they don’t want liquidity the same way, an investor might want liquidity now with payrails. I think that investment lasted a long weekend. It was like less than a year before the credit unions turned around, made the investment. Right. there was lots of broad adoption of it and it really drove the impetus for, I think, Canopy and Circle to then sell Leather Jack Henry. that was an example where I think I looked at that one and said, how much influence do the credit unions really have on the product in the period of time in which they were engaged? Now,for those that were engaged in it, it was a great payday. I think it sold for $365 million. So that had to be the fastest and probably one of the best returns on investment.

[00:10:05] Ronaldo: absolutely. I think it’s just interesting. Like I said, like one of the things that I am enjoying. You know, if I were leading a traditional association in our space that mainly just serve credit unions and, you know, credit unions, the nuts and the bolts are the same, no matter what. I mean, the strategy could be different, but, you know, they’re going to have lending, they’re going to do deposits. There are things, that are consistent across the board. I find CUSOs to be fascinating and that’s one of the aspects of my job, that I find extremely interesting because I’ll. You know, I have to take so much time understanding what each one does, what, lane they’re in. And then there are so many different iterations of QSOs on today. So, you know, I mentioned earlier, there are the traditional QSOs, insurance, wealth management, you know, business lending, indirect lending. and then there are like the traditional QSOs that operate in that way. And then  there are QSOs that are. Delivering some of those traditional services, but are now operating more in a fintech environment. And then there are the really large, you know, Q. So, and it’s just very interesting to see, in this lane and world, how diverse Q. So, actually are, and even for us, finding ways to make sure that we organize ourselves. in ways that we can serve them all, you know, no matter where they see themselves, because I will tell you that there are some that are organized in more of a traditional format and that’s what they want to be and they don’t want to necessarily move into what we’re seeing QSOS grow into.

[00:11:41] Ronaldo: so, and they are also strong and profitable and thriving and should be served well, right? And then there are those who are kind of advancing, we’re seeing this evolution. You know, and I think that, I actually think the need for more technology has driven the desire to create, well, let me say this, the need for more technology, and as we mentioned earlier, credit unions wanting to drive that, I think it has driven, this desire to create more QSOs and to do so around technology.

[00:12:13] Ronaldo: So. I’m very interested in what the next decade is going to look like. You know, I happen to think that what we do at NICU. So it’s going to be very important to our industry over the next decade, because we are going to help, to shape what the future looks like, how credit unions, become entrepreneurs themselves, re imagine themselves, get into new, lanes of business that strengthens them and helps them to reach consumers better. I’m excited about that, you know, so.

[00:12:40] Vince Passione: I love that. ’cause I think that was great the way you described what happened. I have a different question I wanna go back to. because I think the change in the way the roles of QSOs, like years ago, when, in the days of like when Co op was first formed or Cuddle was first formed, for a CEO to assess whether or not they wanted to become part of that CUSO, I think the first thing they had to decide was, am I a user of this service? And then the second was, I’m making an investment and then for that investment, what I’m going to get is probably maybe preferential pricing and a patronage dividend. Did I have that right? Yeah. Was that sort of the full value circle of what it looked like then?

[00:13:17] Ronaldo: I believe so. You know, although that happened when I was being born, basically, but from my history lessons. yeah, I would agree with that assessment.

[00:13:28] Vince Passione: Right. And then today, right. And you think back to when you’re in the CEO spot and now what is requires to make this decision. Now you’re looking at a new piece of technology, potentially the investments probably a bit more, right? Cause the stats are showing right. That this isn’t about putting a couple of hundred thousand dollars in this potentially might be millions of dollars that you’re investing. So how does that raise the bar and has that changed knowledge that. Current CEOs and future CEOs will have to have, because this is an investing decision in a piece of technology.

[00:14:02] Ronaldo: What I think it does is It increases responsibility on both sides, right? So if you have those who are organizing as a QSO, let’s say I’m not in the original discussions and this QSO concept has emerged and now I’m being , you know, brought into the discussion or I’m being asked to be an investor, I think that it. Increases the responsibility on the Q. So to be able to adequately convey what it is that they’re doing to be able to show how the business model is going to be strengthened and to make sure that that credit union knows that they are going to be safe in investing in that Q. So, from a financial perspective, but then also that they will be able to adequately deliver the service that they promised, right? but then I think on the credit union side, the responsibility has also increased.

[00:14:54] Ronaldo:  How are you evaluating? You know, we all have a sense of responsibility around vendor due diligence, you know, as you are trying to invest in anything, right. But I do think if you’re going to become an investor. In a QSO in particular, then making sure that you’re digging deeper,, because this happens to be members of money that we are investing with that understanding, you know, it’s like, if I, let’s just say I had a group of five people that they said, we trust you to take our money and you’re going to do the right thing with it. And, you know, we don’t totally know what we’re doing, so we’re trusting you. I’m going to think long and hard about what I do with their resource because I don’t want to be frivolous and lose something that did not originally belong to me anyway. So I do think that it is important to be able to evaluate properly, which kind of goes back to what we were talking about earlier around even talent.

[00:15:46] Ronaldo: You know, have we prepared talent to be able to assess in that way? and some of that is, you know, how we, you know, brought in the necessary education into our industry. Hello, NACUSO. So let’s, you know, bring in some education onto the table and also, do we send our employees to the right types of, places to get the information that they need to grow and to learn and to be able to make better decisions. So, yeah do think that on both sides, there’s an increased responsibility in how we evaluate opportunity to make sure that it’s safe and sound. I’d like to add this to the discussion a bit. What I’d love to see is stronger sense of, CUSOS and fintechs, helping to drive sustainability, and especially when I say that, especially as it relates to small credit unions.

[00:16:40] Ronaldo: So I think that, when you look at our industry, you know, I understand the power of collaboration and consolidating to do so. I am not someone that will advocate against it, you know, because I do believe that there are times. That it is absolutely the right thing to do. But I also believe that we have to protect our industry and part of protecting our industry is protecting smaller credit unions. So at my first credit union, which was a lot smaller, I came very close to organizing a CUSO you know, I pulled together. About 10 credit unions. And what we were trying to do was achieve economies of scale by merging in our back office operations.

[00:17:18] Ronaldo: So building that collaborative environment, being able to get collective bargaining and things of that nature by coming together. Because my thoughts were, I want to make sure that we can survive so that I, you know, I think that. trying to move forward in that way and protecting that aspect of our movement, it’s not only great for consumers, but it also brings a sense of dignity to those who are working every day to try to do what’s in the best interests of their communities.

[00:17:46] Ronaldo: And there are times I think that we can lose sight of that. in ways that I wish that we wouldn’t, and I’m not saying everyone does, but I do think sometimes we lose sight of that. So really want to see, the emergence of QSOs or even the focus of those that are already out there and FinTech. So I think that we need to be thinking, how do we strengthen sustainability? especially in the small credit union environment.

[00:18:10] Vince Passione: Oh, look, it’s, it goes back to, I think something you’ve said in a prior podcast that QSOs exists to allow credit unions to gain a competitive advantage by being collaborative. and I agree with you, especially when it comes to smaller credit unions that don’t have the resources. in some cases, men don’t have all the knowledge, right? That’s required. And the wisdom of the crowds does matter. It does help. It does allow people to come to common understandings of potentially complex technology, pooling resources to afford that technology, and then sharing best practices and how to deploy that technology. So, you know, we go back to your comment about why QCELs exist, that collaboration can be applied even to the smallest of credit unions.

[00:18:51] Vince Passione: Well, listen, Thank you for the time. This has been really awesome also appreciate all our listeners tuning in. Make sure you subscribe so you can join future episodes and I’ll meet you back here for our next 22 minutes in lending.