There are over 85,000 financial cooperatives, or credit unions, worldwide. Unlike a bank, these cooperatives are non-profit financial institutions and exist to serve their members. Since these institutions are not-for-profit, their collaborative nature often causes them to work together to achieve the common goal of providing the best service to members, leading to the development of credit union service organizations, or CUSOs. A CUSO is an organization formed and/or owned by one or more credit union(s) to provide a specific product or service within the industry.By collaborating through CUSOs, credit unions compete on a larger scale by trying new technologies that increase efficiencies and improve the member experience. This setting has created the perfect opportunity for credit unions to explore the use cases of some of today’s newest technology — blockchain.
Innovators across multiple industries are rapidly identifying the potential uses of blockchain, and its underlying system, distributed ledger technology (DLT). The financial services sector is a natural fit for this technology and credit unions are playing a key role in this initiative. In addition to being among the first to adopt self-sovereign identity (SSI), a decentralized member-owned digital identity built on DLT, credit unions are seeking to take advantage of some of blockchain’s unique benefits.
Every interaction a member has with their credit union starts by confirming the member’s identity. Credit unions must comply with Know Your Customer, or KYC, requirements, in which the organization must obtain information about the identity of the customer. This is often in the form of verifying the member’s address, transaction history or, sometimes, last four digits of their social security number, and can take more than a few minutes to complete.
DLT presents a faster and more secure alternative way to confirm a member’s identity regardless of the channel — in person, online or by phone. By leveraging SSI, members can confidently and easily prove who they are, often in under five seconds or less. Since this type of digital identity is self-sovereign, credit unions can provide members with a lifetime portable digital identity that does not depend on any central authority and can never be taken away — an appealing offer to anyone concerned about controlling their online data. Additionally, SSI serves as the basis for any future applications built on DLT.
Credit unions often provide indirect lending services, typically in the form of an auto loan that a borrower obtains from the financial institution through a dealership. One of the major benefits of working with financial cooperatives is that they offer extremely low interest rates, typically at least one percent lower than most banks’ interest rates.
Indirect lending is viewed by many credit unions as an opportunity to expand their membership base in the community. In addition to offering better rates, credit unions using DLT can improve the overall lending process by leveraging the benefits of SSI and reduce fraud. When a new or existing member establishes their own self-sovereign digital identity, they are then able to take advantage of a new blockchain application: smart contracts.
Smart contracts can streamline the current time-intensive, paper-laden processes for processing consumer loans. A recent article explains how smart contracts work in a car buying setting. To summarize, credit unions leveraging SSI enable their members to share verified digital credentials ad hoc with car dealerships and credit unions, processing loans within seconds. Utilizing blockchain technology provides credit unions with an opportunity to attract and engage new members in an efficient, yet indirect way.