VyStar’s ‘Dysfunctional’ System Switch Reveals Risks, Lessons in FinTech Partnerships

Successful collaborations between traditional financial institutions (FIs) and FinTechs rest on one shared goal: offering end-users the best of both worlds.

FinTechs bring speed and innovation, enabling things like real-time payments and access to funds, while FIs and credit unions contribute trust and regulatory expertise. By leveraging their unique strengths, FI-FinTech partnerships allow both to enhance financial services without needing to change their core identities.

But, as the Thursday (Oct. 31) enforcement action filed by the Consumer Financial Protection Bureau (CFPB) against VyStar Credit Union underscores, ensuring appropriate safeguards are in place is crucial to the success of technology projects between FIs and FinTechs.

As the CFPB noted, VyStar’s systems-level transition to a new online banking platform ultimately failed due to “a series of critical missteps” including a “rushed, aggressive” project timeline, ignored red flags and the choice of a vendor inexperienced in handling complex system conversions.

“Credit unions must prioritize their members, yet VyStar’s due diligence fell far short of what was required for completing a successful conversion of the credit union’s mobile and online banking platforms,” National Credit Union Administration Chairman Todd M. Harper said in a statement. “These management failures resulted in consumer harm over the course of not just weeks but months, as well as safety and soundness problems like strategic, reputational, legal, and compliance risks.”

This high-stakes incident sheds light on a broader issue within the financial industry: the balance between FinTech’s promise of speed and innovation and the foundational stability that traditional banks must provide.

Read 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 around services like real-time payments and digital accessibility. For traditional banks and credit unions, partnering with FinTechs can enhance customer-facing services without the institution needing 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 allowing 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 bank collaborations to succeed, 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 sign off on the launch, but management proceeded, accepting substantial reputational and operational risks.

PYMNTS Intelligence research has shown that mobile and online banking are consumers’ most-used self-service banking option consumers, with more than 60% of credit union members saying they rely on mobile and online banking the most.

See also: CFPB: VyStar Hurt Customers With ‘Botched’ Online Banking Rollout

In VyStar’s case, the absence of project “guardrails,” such as formalized statements of work, centralized scoping documents and risk management logs, likely contributed to the problematic rollout. The credit union reportedly reclassified 135 critical defects to push the platform launch, relying on a “fast follow” approach to address issues after launch. But this strategy backfired as ongoing issues frustrated customers and damaged the institution’s reputation.

In a statement issued to PYMNTS, VyStar said it had responded swiftly to make sure its members did not incur financial harm from the system outage, and that it had “proactively worked in good faith” to address inquiries from regulators. “During the disruption, members maintained access to their funds and services through VyStar’s extensive network of ATMs and extended hours at both its contact centers and many of its numerous physical branches,” the statement said. “VyStar has continued to make significant changes, including investments and upgrades to further enhance technical infrastructure, information security and digital services to members.”

Overcoming the Limits of Legacy Infrastructure

Technology has not only changed how credit unions operate internally, but also how members engage with financial services. Lanny Berlingieri, CFO at Cardinal Credit Union, told PYMNTS during a conversation for the B2B Payments 2024 event that the once-complex process of moving accounts has now become streamlined, with FinTech solutions allowing members to transfer accounts and payment data within minutes.

According to the PYMNTS Intelligence report, “Modular Design: Can Composable Banking Find Favor With FIs?,” a collaboration with Galileo, 36% of individuals ages 18 to 24 would choose a FinTech service over their traditional bank for online payments. 75% of consumers of all ages indicated they would consider switching FIs for better offerings, a significant increase from 52% just three years prior.

One of the biggest challenges for small and mid-sized financial institutions is overcoming legacy technology that limits their ability to offer modern payment solutions.

“Banks, in our experience, may have quarterly product releases while FinTechs might be doing real-time or weekly release,” Priority Chief Strategy Officer Sean Kiewiet told PYMNTS. “And the expectations around those roadmaps need to be coordinated and communicated.”

As the competition between traditional FIs and FinTechs intensifies, the most successful institutions will be those that manage to blend speed with stability. The VyStar case underscores the importance of setting realistic project timelines, thorough testing and a willingness to delay launches when necessary to protect customers and brand integrity.