Four credit unions have decided to produce their own digital-first offering after feeling like neobanks had hijacked the credit union business model.

USALLIANCE FCU, Affinity Plus FCU, Service FCU and Digital FCU are jointly launching Bank Dora Financial, a neobank — a newly launched branch-lite or branchless banking product that focuses on mobile and digital channels — aimed at serving low- to moderate-income, underbanked individuals. Bank Dora is the first credit union-backed neobank, according to a press release.

It will join a crowded, fast-growing field of digital-only banks that are eating into legacy institutions' market share of retail deposits, a core component of depositories' low-cost funding base. Several fintech startups, including Chime Financial Inc., have secured millions of customers and multibillion-dollar valuations through slick digital interfaces and banking policies that emphasize low fees and other consumer-friendly products.

Neobanks' success — built off a financial wellness value proposition that has been core to the credit union business model — spurred the Bank Dora venture, said USALLIANCE FCU President and CEO Kris VanBeek. The depository has long since provided some of Chime's most-touted products such as early direct deposit and free credit scores for a decade.

"We looked out on the landscape and started to see the neobanks doing some of the similar things," VanBeek said. "We started thinking, 'Wait a second, they're using the credit union playbook for their success.'"

The fintech threat has been a factor in several large deals as companies seek the scale that enables greater investment in technology, and many banks have joined venture capital funds focused on fintech in an effort to gain access to cutting-edge technology. The fintech push shows no signs of abating, and more depositories could seek to adopt fintech-type strategies, wrote Sahak Manuelian, a managing director for Wedbush Securities.

"As fintech works its way through the traditional banking system, I would expect to see more and more low-cost offerings from neobanks," Manuelian wrote in an email.

Nuts and bolts

Bank Dora is operated by a credit union service organization, or CUSO, which are entities owned by credit unions that provide permitted financial services to credit unions or the members of credit unions. The CUSO's board is made up of executives from all four credit union partners, and all four credit unions own the CUSO equally.

"It's a mix of putting money in and also the time and other investments, and it's pretty close to an equal venture," Brian Volkmann, CFO of Affinity Plus FCU, said in an interview. "We're all four committed to the same thing."

USALLIANCE FCU provides the banking services and holds all the deposits, but Bank Dora customers are part of the CUSO, not members of any of the credit unions, VanBeek said.

Much like many other digital-only bank products, Bank Dora offers only a checking account. It plans to eventually expand its services beyond the "thin" product offerings from other neobanks, executives said. The credit unions believe their experience with other financial products such as consumer loans could give Bank Dora an advantage.

"What we have as credit unions is we do lending today really, really well. And so the idea is maybe even leapfrogging some of these neobank organizations because it's already in our DNA," VanBeek said. "We already have all that vast experience, so to bring some of these things on is much, much easier."

Further, the credit unions see an opportunity to eventually expand the relationships with customers who sign up for Bank Dora. Kristi Kenworthy, managing director of Bank Dora, described the neobank as a "launching point into the credit union industry for full-service products." For example, Bank Dora customers that need a new mortgage or student loan might be more likely to consider a credit union participating in Bank Dora than a competitor, VanBeek said.

Eventually, Bank Dora hopes to extend its reach by adding more credit union partners. Since announcing Bank Dora on Sept. 28, about a dozen other credit unions have reached out about the neobank, VanBeek said.

Executives from USALLIANCE FCU, Digital FCU and Service FCU all said that collaboration makes it easier for community-based institutions to invest in the technology needed for a digital-only bank and expand their reach as they build a national brand. The credit unions partnered with a company to develop the user interface but built all the back-end technology themselves.

"It's pretty common for credit unions and community banking institutions to be afraid of fintech," said USALLIANCE FCU Chief Information Officer Kevin Randall. "But I think credit unions and community banks can be fintechs if they want to be."