Successful collaborations between traditional financial institutions (FIs) and FinTechs are based on a common goal: offering end users the best of both worlds.
FinTechs bring speed and innovation, including enabling real-time payments and access to funds, while financial institutions and credit unions bring trust and regulatory expertise. By leveraging their unique strengths, FI-FinTech partnerships enable both to improve financial services without the need to change their core identities.
But, like Thursday (October 31) coercive measure filed by the Consumer Financial Protection Bureau (CFPB) against VyStar Credit Union highlights that ensuring appropriate safeguards are in place is crucial to the success of technology projects between financial institutions and FinTechs.
Like the CFPB noteVyStar’s systems-level transition to a new online banking platform ultimately failed due to a “series of critical missteps,” including a “rushed and aggressive” project schedule, ignored red flags and the choosing a supplier inexperienced in managing complex system conversions.
“Credit unions need to put their members first, but VyStar’s due diligence fell far short of what was needed to successfully complete the conversion of the credit union’s mobile and online banking platforms said Todd M. Harper, president of the National Credit Union Administration, in a statement. “These management failures resulted in consumer harm over the course of not just weeks but months, as well as safety and robustness issues such as strategic, reputational, legal and compliance risks.”
This high-stakes incident highlights a broader problem within the financial sector: the balance between FinTech’s promise of speed and innovation and the fundamental stability that traditional banks must provide.
Learn more: Compliance remains a constant for bank-FinTech partnerships
The promise and pitfalls of FinTech partnerships
FinTech companies excel at delivering the rapid innovation and flexibility consumers expect, particularly when it comes to services such as real-time payments and digital accessibility. For traditional banks and credit unions, partnering with FinTechs can improve customer services without the need for the institution to become a technology-first entity.
FinTechs, in turn, benefit from the regulatory framework and consumer trust established by banks. This dynamic has led to a wave of partnerships aimed at enabling banks to deliver advanced digital experiences while enabling fintechs to leverage banking infrastructure.
However, as VyStar’s experience illustrates, these partnerships require more than a handshake and a shared vision. For FinTech and banking collaborations to be successful, both parties must establish rigorous governance standards. According to the consent order, the credit union launched its new platform without simulating transaction volumes or fixing known bugs. The internal quality assurance team refused to approve the launch, but management pressed ahead, accepting significant reputational and operational risks.
PYMNTS Intelligence research has shown that mobile and online banking are the most used self-service banking options among consumers, with more than 60% of credit union members say they rely most on mobile and online banking.
See also: CFPB: VyStar hurt its customers with a “botched” deployment of online banking services
In the case of VyStar, the lack of project “guardrails,” such as formalized statements of work, centralized scoping documents, and risk management logs, likely contributed to the problematic deployment. The credit union reportedly reclassified 135 critical defects to push the platform’s launch, relying on a “rapid follow-up” approach to resolving issues post-launch. But this strategy backfired, as persistent problems frustrated customers and damaged the institution’s reputation.
In a declaration issued At PYMNTS, VyStar said it responded quickly to ensure its members did not suffer financial harm due to the system outage, and that it “worked proactively and in good faith” to respond. at the request of regulators. “During the disruption, members maintained access to their funds and services through VyStar’s extensive ATM network and extended hours at its contact centers and many of its many physical branches,” the statement said. press release. “VyStar has continued to make significant changes, including investments and upgrades to further improve technical infrastructure, information security and digital services for members. »
Overcoming the limitations of existing infrastructure
Technology has not only changed the way credit unions operate internally, but also the way their members interact with financial services. Lanny Berlingierifinancial director at Cardinal Credit Uniontold PYMNTS in a conversation for the B2B Payments 2024 event where the once complex process of moving accounts is now become streamlinedwith FinTech solutions allowing members to transfer accounts and payment data in minutes.
According to the PYMNTS Intelligence report, “Modular design: can composable banking services find favor with financial institutions?», a collaboration with Galileo36% of individuals aged 18 to 24 would choose a FinTech service rather than their traditional bank to online payments. 75% of consumers of all ages indicated they would consider switching FIs for better deals, a significant increase from 52% three years ago.
One of the biggest challenges for small and mid-sized financial institutions is overcoming legacy technology which limits their ability to offer modern payment solutions.
“Banks, in our experience, may release products quarterly, while FinTechs may release products in real time or weekly.” Priority Director of Strategy Sean Kiewiet said PYMNTS. “And the expectations around these roadmaps must be coordinated and communicated.
As competition between traditional financial institutions and FinTechs intensifies, the most successful institutions will be those that manage to combine speed and stability. The VyStar case highlights the importance of setting realistic project deadlines, thorough testing, and a willingness to delay launches when necessary to protect customers and brand integrity.