Friday, June 6, 2008

The CUSO Conundrum

In my last post regarding Denis Dollar’s forecast for credit unions in 2020 the comments I got were an eye opener as to what CUSO’s are and what they do (thanks to everybody who commented and helped me further my understanding of the industry).

As I’ve thought about how CUSO’s can benefit credit unions, and more importantly, their members, I’ve had a few thoughts as to the way I feel they should be handled.

Jeffery Pilcher wrote, “My guess is that Dennis Dollar thinks CUs will pursue these ‘additional revenue streams’ wherever they can be found.” I don’t disagree with him, but my support of this is dependant on how credit unions deal with this additional revenue. Jeffery also posed the question of whether credit unions will use CUSO’s “in lieu of traditional, organic growth.”

I certainly hope not. In fact, I see a great benefit in using CUSO’s as a way to increase a credit unions ability to grow organically. By bringing in additional revenue through CUSO business, a credit union should be able to put that extra cash into serving the members. If the CUSO isn’t directly benefiting the membership, that extra revenue could (and should in my opinion) be used to offer lower rates on loans, higher returns on deposits, and research to provide them with innovative products tailored to their needs; which could turn more eyes to your credit union than a generic ad or extra branch.

There is, in my opinion, a place for CUSO’s in the credit union movement. They might even be instrumental in moving forward. More CUSO’s means more extra revenue, which means more (and less expensive) services for members. If we can keep that in mind as CUSO’s are created it could blow the doors open for a lot of credit unions. However, if that extra revenue is misused (which is completely subjective here mind you) CUSO’s could become merely a way to chase a higher profit margin.

I still think it is a stretch to believe that CUSO’s will outnumber credit unions in the coming decade. As Anthony Demangone stated in the comments, “…there are already credit unions out there with more than 10 CUSOs.” However, for every credit union that has 10 CUSOs, how many have zero, or have a stake in a single collaborative CUSO?

I feel like it still comes down to a saturation of the business landscape for credit unions. If credit union mergers continue, it is inevitable that a credit union with existing CUSO’s will merge with a credit union that has redundant existing CUSO’s. In such a situation, I assume that one of the redundant CUSO’s would be eliminated, or they would be merged. Either way you are left with one CUSO from two. Add that to the fact that, as Robbie Wright points out, “Credit unions are limited in what type of activities CUSO's can operate. In fact Jeff Russell at The Members Group can speak specifically to the pains of getting the NCUA to allow certain types of activities.”

So, in conclusion, I see a very valid reason for CUSO’s in the credit union movement. I do, however, still disagree with the suggestion that CUSO’s will outnumber credit unions themselves. Unless NCUA starts allowing some off-the-wall CUSO’s and credit unions are brave enough to go there, there are only so many ventures credit unions can get into. With mergers combining some of the existing CUSO’s, this would lead to a higher ratio of CUSO’s to CU’s, but I don’t think that ratio would ever flip. It would take many mergers and the disappearance of the niche credit union for this to happen. In my opinion, if those niche credit unions disappear, we’ve lost sight of what credit unions are all about in the first place.


Anonymous said...

Andy, it's been a few years since I poured over the NCUA data, but all kinds of CUSO information can be found there, since all CUs must report their CUSO info. Also, for more CUSO info, there is (naturally) an association dedicated to them: NACUSO. Perhaps someone from there will comment further.

I don't have any feelings one way or the other about whether CUSOs will outnumber CUs one day, and I don't think this factor will really have any bearing on CU's long-term viability or relevance.

Yes, most CUs don't have ownership in a CUSO. But really, and CU that is approximately $100m in assets or more can potentially set one up. There are thousands of CUs that fall into this category. The reason why there may be as many CUSO as CUs is that there are many CUSOs that a CU might potentially have need for, without getting into the totally unrelated ones like travel agency CUSOs or gas station CUSOs. Such CUSOs include the mentioned investment services, indirect auto lending, credit card processor, business lending, mortgage lending, ATM networks, data processing, item processing, shared branching, software development, insurance services, and trust services.

And even though most CUs won't ever offer more than one investment agency CUSO's services to its members, there are hundreds of investment services CUSOs, serving anywhere from 1 to several hundred (thousands?) credit unions. You can see that these numbers get big quickly. And when CUs merge, their CUSOs don't merge as well.

I hope we get comments here from NACUSO and/or others that are more knowledgeable about the state of CUSOs today.
--Morriss Partee

Anonymous said...

Thanks to everyone that weighed in on the issue of CUSOs.

With credit unions and the credit union industry in the mature phase of their life cycle, we need to develop growth strategies, competitive advantage, and differentiated market position to continue to drive value back to credit union members.

The primary issue is not the number of CUSOs relative to the number of credit unions, but rather how can credit unions grow, survive, and remain relevant to their members and potential members. CUSOs provide a vehicle which allows credit unions to come together to do things collectively that they cannot do independently. At 5.7% of the industry’s assets, credit unions represent a speck in marketspace and enjoy only minimal economies of scale.

By using CUSOs to collaborate and do things collectively, credit unions can:

Gain access to significant scale, drive lower operating costs, and generate more revenue

Leverage infrastructure; provide convenience through shared branching, ATMs

Attract Quality CU Partners & Third Parties

Gain Access to Expertise; all of us is smarter than any of us

Spread the Risk and Capital Investment; assist in raising capital

Own the Intellectual Capital

Provide an alternative to Mergers and Conversion to MSBs

Provide Models for Innovation, and

Drive VALUE Back to the Member.

While the willingness to explore collaborative relationships and participate in cooperative models (e.g., CO-OP, PSCU, Prime Alliance, CUSO Financial Services, CUDL, CU*Answers et. al.) has been increasing, it is still not the dominate theme.

We are an aging industry. But an industry does not age because of where it is in its life cycle. An industry ages because it quits pursing an ideal. When people look back down the corridor of time 50 years from now, what will they see? An industry where credit unions stood alone and said “I can do it better by myself? Or an industry where everyone got together and actively participated in collaboration and CUSOs. We need to re-instill and expand the credit union ideal of cooperating and working together if we are to grow and survive.

Thomas C. Davis
President & CEO

Anonymous said...

I am General Counsel to NACUSO and work with CUSOs everyday. I happen to agree with Dennis that CUSOs have the potential of outnumbering credit unions but whether that will become true or not is not the point. The point is that there has been a fundamental shift in how credit unions operate now and need to operate in the future in order to survive. CUSOs are the principal means to implement the changes.

The traditional credit union model that survives on a healthy net interest margin and run by internal employees is no longer viable in today's world. Credit unions have to find additional non-interest revenue sources and ways to limit operational costs in order to survive.

How are credit unions going to do this? Not by raising additional capital through public offerings like banks. As non-profit member owned financial cooperatives, the only path for credit unions is to collaborate in order to obtain the additional scale to reduce operating costs, acquire first rate operational talent and unlock additional revenue opportunities. It is the multi-owned collaborative CUSOs that will transform this industry.

Case in point is CU Answers, a CUSO in Grand Rapids that has been around since 1970. It started out as a core processor for small and medium sized credit unions. Today it is a highly integrated network of credit unions that provide an array of operational services to enable their 165 credit unions to provide a level of service to their members that is second to none. A $5 million credit union served by CU Answers is more effective in meeting the needs of its members than a local bank many times the size of the credit union. CU Answers is totally owned and controlled by credit unions. The credit unions have taken control of their destiny through the power of collaboration. I am involved in a wide range of other credit union collaborations, many of which have the ability to transform the credit unions they serve.

We will need to recognize that credit unions are becoming more dependent upon third parties, including CUSOs, to provide key services to credit unions. We have to re-organize the management of credit unions to identify, evaluate and manage the risks associated with the using third party providers. One billion dollar plus credit union recently did an audit of their key third party relationships and found they had over 200. Credit unions must recognize and adapt to this new means of operating.

The skills needed to work in a highly collaborative environment have to be developed. NACUSO will soon be announcing some very exciting resources for the credit union industry to learn about and implement collaborative solutions. This is an exciting time to be working with credit unions.

I am glad Dennis's comments have grabbed the attention of so many of you.

Guy Messick
Messick & Weber PC
NACUSO General Counsel