Ignoring the Echo Chamber: Unsaid Risks and Rewards of Fintech Partnerships

Brian Kaas (00:00): You and I both go to a lot of Credit Union events. The problem is they tend to be comprised of just Credit Union industry people. It creates an echo chamber. You don’t see a lot of Credit Union folks going to these broader FinTech, technology conferences to get a feel just how fast things are changing.

Narrator (00:23): Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending from lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive into the latest in lending.

Vince Passione (00:45): Welcome back to 22 Minutes in Lending. I’m your host, Vince Passione, and today we have a fantastic guest, Brian Kaas, President and Managing Director of TrueStage Ventures. Brian has been at the forefront of innovation, the Credit Union space, helping drive investment in FinTech solutions that support the industry’s growth. Today we’re exploring how TrueStage is shaping the future financial services and what that means for Credit Unions and their members. Brian, welcome.

Brian Kaas (01:07): Great to be here, Vince. Thank you for having me.

Vince Passione (01:09): That’s great. Brian, I see you at every event. You’ve been the key voice in connecting FinTech startups with Credit Unions. But why don’t we just start off, I’d love to hear sort of your career journey. I know you’re an attorney. How the hell did you wind up in venture?

Brian Kaas (01:23): Kind of stumbled into it. I mean, my career path took some twists and turns. I was a partner at a large law firm doing a lot of merger and acquisition and other transitional work. That kind of led me to TrueStage a little over a decade ago and more in legal capacity. And it was right around kind of the early days of where FinTech was starting to take off, and we started to have some conversations in the organization around making some investments in some FinTech companies. I think kind of seeing the potential, both
disruption and opportunity that presented to the Credit Union system and really wanting to kind of be on the front edge of that. So in 2015 is when we made our first venture investment. 2016 is when we
officially launched. At that time it was CMFG Ventures.

(02:25):
So that created an opportunity for me to kind of pivot out of working with TrueStage on a legal capacity, leveraging my background to run the venture fund and really all of our merger and acquisition activity as well.

Vince Passione (02:40): That’s great. So Brian, overview of the funds. So LPs, not really LPs in the true sense, right? Do you sort of have funds… You have a fund one, a fund two, like what I would see with our investors or how does it work? Because this is more of a strategic investing for TrueStage.

Brian Kaas (02:58): Yeah, exactly. So all of our investments are funded by TrueStage. So the large insurance company funds those investments every year. We have sort of a targeted funding allocation that we set with our investment committee. So we don’t have separate funds, but just invest off the balance sheet as and when the opportunities arise. When you look at… To took a look over the last five years, we’ve averaged just under 55 million a year in FinTech investing. I think the funds in total were either close to or have eclipsed about 400 million of total funding since inception.

Vince Passione (03:50): When you’re considering an investment, what are some of the real key attributes you’re looking for or criteria for you to say the fund would invest in that company?

Brian Kaas (04:01): Yeah, I mean, a couple of key criteria. I mentioned the strategic side of things. If it’s a business that’s going to be directly competitive to Credit Unions or a technology that would be relevant to very large banks, but have no applicability to kind of the mid tier banks and smaller, that’s not going to be a good strategic fit for us. And occasionally we’ll invest in a technology that could be hyper disruptive just so that we can get a closer look at those companies. By way of example, and maybe this isn’t hyper disruptive in that it’s going to change the world, but we have a company in our portfolio called Beam, and they have an alternative to a loan where it’s really, people actually pay a subscription to access funds, and it’s not regulated as a loan, it’s not treated as a loan. And let’s say a company like that becomes a completely different model that they use to determine the likelihood of that person in the propensity to pay back that amount.

(05:14): I mean, that’s something where that on the surface competes against Credit Unions, but a very different model. That would be an example of companies that we’ve occasionally invested in. It can’t just be a strategic fit. We obviously also are driven and need to have financial returns, so looking for companies that have a viable business model that have the ability to deliver on some of our return expectations. And then the third thing, which in some cases it can be as important as the other two is, is there a good cultural fit? These are companies that we’re going to be putting in front of Credit Union executives, and if they’re an insufferable founder that thinks they’re above the rest of the world, that’s not the person that I want to spend the next five to seven years of my life hanging around.

Vince Passione (06:18): You mean you’ve actually seen some insufferable founders? I’m only kidding.

Brian Kaas (06:21): I think there’s only one or two. I think we found them both.

Vince Passione (06:24): Well then you’ve been lucky. When you started the fund back in 2016, I kind of remembered hearing that for a lot of Credit Unions too, that TrueStage’s investment was sort of like an endorsement, right? Now, a big endorsement. You’re investing in the company, but has that thesis changed where you say it’s not just about an endorsement? Because clearly what you’re doing is very different. You, you’re investing strategically to help the Credit Union system maintain its viability and grow, because that’s your business as well, right? Attached to Credit Unions. But has that thesis shifted because done some acquisitions as well? So how has it changed since 2016?

Brian Kaas (07:05): Yeah, I think certainly the whole space continues to evolve, and I think our strategy has evolved around the edges. I would say, again, kind of the mission and purpose of TrueStage Ventures in 2016 doesn’t look drastically different today, but I think sometimes just making an investment and putting that on our website doesn’t go far enough in advancing this broader objective, which is we want to help the industry adapt to the change that’s occurring, and making an investment in a company and having that company’s logo on our website isn’t enough. We really, over the last three years have really focused on building out a platform where we can really focus on connecting FinTech companies with Credit Unions to create that dialogue, to educate Credit Union leaders on the benefits of FinTech partnerships, to provide them with knowledge and to hopefully… We’re seeing more of it, but to get the Credit Unions beyond just thinking and talking and actually taking action.

Vince Passione (08:24): When I started selling to Credit Unions, there were probably well over 10,000 of them, and there’s about 4,500 I think as of the last time I checked. So Fintech’s probably outnumber them two to one. At what point do you feel like they’re just too many Fintech’s for too few Credit Unions for this to make sense?

Brian Kaas (08:48): I feel that way now.

Vince Passione (08:49): Okay. All right. All right.

Brian Kaas (08:51): I think we’re already there, to be honest. I was having this conversation last week with a FinTech investment banker and just saying, “Hey, what are we seeing on the M&A horizon?” And we see it too on the investment side of there’s still are some new and innovative ideas, but for most companies, they’re entering a space that in all likelihood has five, 10, 15, 20 companies also competing within sometimes a very narrow vertical within FinTech. And so you do have a saturation point. One thing we’re looking at is are there opportunities to consolidate some of these or merge some of these FinTech companies to provide greater scale? Again, you might be in a vertical that can support four companies. It can’t support14 companies and so

Vince Passione (09:55): In the same business. Exactly.

Brian Kaas (09:57): Yeah. So I think we will see more of that.

Vince Passione (10:01): No, I agree. And I think you’re right about scale and given, I think it just becomes overwhelming for these Credit Unions to perform diligence on all these different vendors. At some point you just want to provide a foundational piece for them to say, “Here. You can get most of it here. And then if you want to specialize, you have options.” I see what we go through from the smallest to the largest Credit Union, the diligence process is pretty similar given the regulatory environment. So you talked to lots of Credit Union CEOs and we’ve got the event circuit. We’re talking about the GAC prior to this. So as you talk to CEOs and executives and Credit Unions, what are the big pain points and then how do you match that to some of the technology you’ve seen that they’re going to be exposed to as they go to these shows?

Brian Kaas (10:52): Yeah, a couple of pain points that I’m hearing from Credit Unions, I think there’s concerns around profitability of Credit Unions. I’m hearing that more and more of, “Hey, we’re getting squeezed on some of the traditional sources of revenue,” whether that be elimination of certain fee income, cost of capital going up, so the margins are getting squeezed. And probably where you have larger financial institutions leveraging more automation. It’s enabling them to drive costs down. So all of these things are creating know pressures on Credit Unions. And so I talk to those CEOs of Fintech’s that can help with that back office automation. There are companies that then can create new of non-interest income that also maybe enable you to deepen that member relationship, to extend that relationship from one product to two products. And so there’s a whole host of kind of FinTech companies that can help address those needs.

(12:13):
I think we’re seeing liquidity slowly return to the Credit Union market. We’re starting to see with some Credit Unions, I think an interest in, “Hey, we have extra capital to deploy, so how do we work with some Fintech’s in the lending space?” I think everybody asks about, well, what should I be doing around AI? And it’s again, I look at what are some of those pain points you need to solve? Could AI be a technology utilized by a company to help solve it? Again, I go to some of the back office automation and things of that nature. I think hyper-personalized engagement with your Credit Union members is also becoming more and more the norm. And so those are just some of the things that we’re hearing from Credit Union CEOs.

Ron Draper (13:12): This is Ron Draper, CEO of Somerville’s Credit Union. So in 2014, we were looking for a turnkey student lending solution, one that was simple and efficient for our members to access. And eventually we chose LendKey because it just integrated seamlessly for quick member mobile access and was easy to remotely review and approve from a loan officer point of view. And I should know, because I’m that loan officer. I still recommend LendKey to people whenever I get the chance because after almost a decade, it continues to offer consistent product and service delivery both to our membership and to our staff.

Vince Passione (13:50): Another topic I’ve heard you talk on, and it’s a really important one, it’s embedded finance and what that means to traditional lenders, Credit Unions. We had Eric Stadleon from Caribou on the podcast and we were talking about his world of auto refinancing, but in spending time with Origins as well and talking to them about the work that they’ve been doing with Tesla, it flips the entire model on its head, right? The Credit Unions are big indirect lenders. They’re very few in them that do direct lending. And now we have to deal with this new model where it’s really an open marketplace and finance is being introduced at the point of sale. Your opinions there and how Credit Unions manage through that transition because auto is a very large part of their book.

Brian Kaas (14:44): I agree. I look at this as maybe being a topic that people, the potential impact it could have on the industry. And I think, let’s use auto lending. I think that’s a perfect example. We are seeing Amazon now offering vehicles through their platform. They’ve announced their first few partnerships. We have Walmart that is in the process now of launching their own marketplace and financing is embedded at the point of sale with these partners. Tesla doesn’t have traditional dealerships like other auto manufacturers. And so yeah, there’s just such a major shift that is occurring. And if Credit Unions aren’t involved or have access to the Amazons or the Walmarts, they’re going to get squeezed out of financing opportunities. And I think we’re starting to see a little bit of that. I mean, the auto lending numbers are a little bit weaker and there’s a variety of reasons for that, but I don’t know that the trend is going to reverse itself with what we’re seeing unless Amazon and Walmart find, hey, car buying isn’t the place for us to play.

(16:19): But again, I feel like things are evolving. We have a company in our portfolio called CarSaver. They’re actually the technology that’s powering Walmart’s auto marketplace. And so we invested in CarSaver because we wanted to basically have an entry point into that relationship and how do we ensure that Credit Unions get a crack at providing auto loans that are used to finance vehicles purchased on that marketplace? We invested in a firm, a firm powers the BNPL option when you check out of Amazon. They were the first and maybe only option of financing provided. We want to provide entry points into those large embedded finance players so that again, hopefully we can bring Credit Unions into that ecosystem, otherwise they’re going to be shut out. And even the largest Credit Union isn’t probably big
enough to try to be a single partner to a Walmart. They’re going to look to one of the five big banks to partner with, unless we can aggregate the Credit Union industry as a whole to kind of plug into some of
those large players.

Vince Passione (17:50): Yeah. Look, some of the old platforms still, the basis of those platforms, when you look at Cuddle Dealtrack Route one, I just think they get recreated, but in a different model where you don’t have that F&I manager in place, but you’re right and the numbers are coming down and there is a shift.

Brian Kaas (18:08): Financial services continues to evolve very rapidly. The concern I have, and I talked to Credit Union leaders about this is you and I both go to a lot of Credit Union events, the problem is they tend to be comprised of just Credit Union industry people and it creates an echo chamber like, “Hey, we’re not doing a whole lot. And therefore… Well, I talk to this Credit Union and they’re really not doing much either, so we must be okay. We’re keeping up with our Credit Union colleagues.” You don’t see a lot of Credit Union folks going to these broader FinTech technology conferences to get a feel of just how fast things are changing. And that’s my concern. I really encourage Credit Union C-suite leaders go to some of these events because I think you’ll be blown away by how fast the industry is evolving. And when you look at the Credit Union member continuing to get older and older each year, it’s a real problem. If we don’t fix this, we’re going to have an industry that’s going to go in decline in both membership numbers, deposits and lending.

Vince Passione (19:34): Look, having been around the industry as long as you have in some cases longer, I’d say that going to money 2020 and seeing Credit Unions on that list is certainly encouraging. You and I were at that underground event and [inaudible 00:19:48] Credit Union stayed on watching Navy Federal’s CEO on stage at money 2020. Those are big deals, and I think it does have an impact. I think Navy Federal had probably a half a dozen board members there as well, which to your point, part of it’s the management of the Credit Union, the CEOs and the CLOs and the CIOs of the larger Credit Unions. Part of it’s also the board members and exposing them to technology and the importance of it because at the end of the day, those CEOs going to go so far without board support.

Brian Kaas (20:24): Yeah. That is probably another whole topic. I mean, it really is. We’ve had a lot of times you’ll have portfolio companies pushing a deal through a bank or Credit Union only for it to stall at getting board approval because they’re not used to working or entering into a contract with a small early stage company, and they think it’s crazy that why would we take that risk or do this? Let’s spend that money and open up another branch because what they did when they were maybe a CEO, retired CEO, and they’re not aware of just how quickly things are evolving. And so it has to start really at kind of the board and CEO have to be big proponents of innovation because if they’re not, and in some cases are blockers, those Credit Unions are going to really struggle.

Vince Passione (21:30): We’re wrapped. Two last questions. So advice. First one is, what advice would you give to emerging Fintech’s that want to partner with Credit Unions? What’s that model that you’ve seen in your portfolios where people have been successful?

Brian Kaas (21:46): I think it really comes down to trust. Do the Credit Union executives that are meeting with this company, have trust in confidence? And that takes a couple of different forms. Certainly trust. Is this company going to be around for the next three to five years or longer, or are they going to fold and go under in the next 12 months? I mean, trust in terms of is this founder or… Because a lot of times these are founder led sales with early stage companies. Is this a person that I trust? Do I feel that that company has my best interest in mind? Or are they really looking to grow their third company as fast as possible and grow at all expense to sell at the highest valuation, at the earliest possible moment?

(22:49): That all matters, and I think if you don’t have trust, you’re never going kind of be successful growing into the Credit Union space. I mean, maybe I’m a little bit biased too. I mean, I think selecting some investors that can help create and build relationships for those early stage companies can be very helpful. We do a lot of work to help build that trust and build that name recognition for companies in our portfolio. I think that’s really important as well.

Vince Passione (23:28): And last question. What advice would you give Credit Unions when they consider a FinTech partnership? You talked about some of it when you’re talking about the FinTech side, but what advice and counsel do you give them in selection and how to prepare themselves for these partnerships?

Brian Kaas (23:46): Yeah, I mean, certainly a lot of the Credit Unions will do a lot of the traditional diligence, and so that might not look that differently. But I think other things that we do suggest that Credit Unions look at, who are the investors standing behind this company, especially if you have a company maybe that is really hesitant to share their financials with a Credit Union. Being able to have a Credit Union talk to maybe one or two of the large investors to get some confidence that they stand behind this company, that’s maybe something that’s not going to be on your diligence checklist that you have when you’re exploring these partnerships.

(24:38): The other thing that I think it’s really important too is the referrals. Is have that FinTech provide a customer list and then reach out to some of their customers. And sometimes I push for more than just maybe the two or three that are provided, because obviously those are going to be cherry-picked, the best relationships. To be able to talk to some other Credit Unions, I think is just vitally important because you’ll learn like, hey, are they a good partner? Do they listen to me? Getting back to that trust? So that’s another area outside of the standard diligence that I think is really important.

Vince Passione (25:23): That’s great. Listen, Brian, fantastic conversation. Thank you for joining me today. That wraps up this episode of 22 Minutes in Lending. To our listeners, thanks for tuning in and be sure to subscribe, share and join us for our next episode. Brian, thanks again.

Brian Kaas (25:37): Thank you so much, Vince.

Narrator (25:39): Thank you for listening to the 22 minutes in Lending podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five-star review.