The stories we tell ourselves frame how we view the world, our place in it and how we respond to it.   I call this internal viewpoint our myths, our prisms that interpret the world.  The myths we create for ourselves have a profound impact on our ability to recognize and respond to change.  The prism through which we see the world is formed for each of us, not surprisingly, during our formative years.   For example, the children of the depression in the 30’s were adults in the boom years of the 50’s but they never took prosperity for granted and made decisions based on that view.  The children of the depression could never have been the free spenders of the 80′s and 90′s.  

The myths of credit unions developed in the formative years of credit unions.  Credit unions were a movement then, not an industry.  Members were drawn to credit unions because credit unions met the financial needs of members who were underserved and overcharged by the banks.   Credit unions had better rates and intimate, customized service levels.  Member ownership and self-government gave members a sense of empowerment and independence from the factory owners and bankers who otherwise ruled their worlds.   The “goodness” of credit unions was self-evident and did not have to be marketed.   From those myths we tell ourselves that only credit unions really care about the members and know how to serve them.   Only we know what is best for our members.   These myths comfort credit unions with a false sense of security that the natural order of things will always contain credit unions and people will know through their DNA about the “goodness” of credit unions.

These myths will kill us.   If credit unions are so obviously better than banks, why do we not grow market share?  Why are we losing the battle for the youth market?  Why do our members also use banks and other financial providers?  It is time we see credit unions not through our traditional prism but through the prism the world sees us.  

Myth 1:  Credit union’s fees for services are lower than the competition and at greater service levels.  Does anyone really believe this anymore? In today’s world, members can choose financial service providers that have scale and market power to deliver financial services at fees much more favorable than credit unions can offer and at greater convenience, such as ING Direct and Lending Tree.

Myth 2:  Credit unions go out of their way to give people a hand when they need it.  There is no doubt that credit unions do this and I hope they continue to do this.  Having said this, credit unions cannot stay in business by having a portfolio of “character” loans.  In today’s world, credit unions must use objective safe and sound underwriting criteria or they will go out of business. 

Myth 3:  Credit unions are better because they member owned.  Sounds good but what is the tangible benefit?  Dividend returns are a powerful means to drive home the membership difference.  At DFCU Financial Credit Union in Michigan, a patronage dividend of 50 basis points is paid on loan and deposit balances.  The more a member uses the Credit Union, the more value the member perceives and receives.  This is a game changer. In the four years that the program has been in place in a state where the population is declining, membership has grown 5% and the average deposit balance per member has grown over 23%.  If you give members a tangible benefit for doing business with you over your competition, they will come…and bring their money.

Myth 4:  Only credit union people know how to best serve their members.  This is paternalistic nonsense.  Members want to be empowered to interact with the credit union on their terms.  The world outside of credit union is full of very innovative and effective people.  There are credit unions that are open to new ideas and innovation.  They are open to finding the best service solution whether that is delivered by their employees or in collaboration with CUSOs and third party service providers.  The credit unions that use an open sourced business model to deliver best of breed services to their members will be the surviving credit unions.  

Myth 5:   It is insulting and manipulative to sell to members and credit unions are above that.  There is a reason that a large portion of the media and the public is ignorant about credit unions and credit union growth is stuck in a rut.  Credit unions need to sell themselves to be heard in the very competitive financial marketplace.   The world sees credit unions as just another box of cereal on the supermarket shelf.  Why would the consumer select the credit union cereal over the bank cereal?  If a credit union is proud of its product offerings, promote and sell them.  Find the competitive advantages for your credit union and promote them aggressively.

The mission of credit unions is a noble one.  People helping people.  But we will not survive as an industry unless we see credit unions as a business, a business that needs to use all the tools of business to survive.   We will survive if we embrace our structure and provide best of breed services wherever those services can be sourced and if we provide tangible member benefits.  It is not enough to provide great service and benefits, we need to effectively communicate the credit union difference and use proven sales techniques in order to be heard by our members and potential members.   It is time to shed the myths that are holding us back and embrace the world as it is not as a nostalgic fiction.   Members will be better served and credit unions will survive to serve them.   

The taxes were assessed upon the following types of income:

1. Financial Services such as networking fees paid by an affiliated broker/dealer;
2. Credit Life and Credit Disability Insurance (collectively “Credit Insurance”); and
3. Accidental Death and Dismemberment Insurance (“AD&D”).

The taxpayer, Bellco, has the burden of proof to show that the income was not subject to the Unrelated Business Income Tax. On some points Bellco lost due to inadequate records. Bellco often had to reconstruct records over many years as the UBIT issue was not a consideration at the time some of these services were provided.

The Court focused on whether the income was substantially related to one of the two purposes of Bellco which the IRS agreed is to promote thrift among the members (“thrift function”) and to provide a source of credit upon reasonable terms (“lending function”). The Court also looked to see if the payments were royalties as royalties are not subject to UBIT.

The first decision in the case was on November 12, 2009. The Judge decided the following on a Summary Judgment Motion:

1. Bellco has a networking agreement with CUSO Financial Services, LP (“CFS”) wherein CFS provides non-deposit financial products to enable members to plan and invest in their future. The Court concluded that this meets the thrift function and therefore all the networking fees derived from the services to members are not subject to UBIT. Any networking fees derived from services to non-members is subject to UBIT.

2. Bellco is a co-owner of Member Gateways, LLC. Member Gateways is a co-owner of CFS. While some of the profits from CFS and other sources are filtered to Bellco through the Member Gateways relationship, Bellco did not prove the substantial connection to the thrift function and therefore the income from Member Gateways is subject to UBIT.

3. First Choice Credit Union merged into Bellco. Since Bellco could not establish some of the sources of the income that came over to Bellco, that income is subject to UBIT.

The second decision was issued on Good Friday April 2, 2010. The Judge decided the following after a trial:

1. Bellco has a Credit Insurance Plan for direct and indirect lending programs that pays off the balance of a loan should a member die or is disabled during the term of the loan. This product is the source of the famous credit union slogan, “The debt dies with the member.” The testimony established that Bellco ran a good program that gave good value for the services and was not primarily profit driven. The Court found the Credit Insurance products promoted thrift as a valuable part of a member’s financial planning and therefore the income derived by Bellco on these products was not subject to UBIT. There was certain undefined Credit Insurance income which did not have adequate records to establish the source of that income and so it was subject to UBIT. Finally, Bellco is a co-owner of CUILA, an indirect lending CUSO. There were not sufficient records to establish that the source of the income was Credit Insurance and so it was subject to UBIT.

2. The income from the AD&D products was deemed a royalty and not subject to UBIT. The testimony showed that the only function of Bellco was to manage its brand, e.g., checking to see that advertisements were not offensive to the members. All substantive work was being done by AD&D providers in a turn-key operation.

Conclusion

This was a great victory for Bellco and credit unions. If a credit union can tie the income to a thrift function or royalty, the income derived from the activity will not be subject to UBIT. This was true for networking fees from investment services, credit life and credit disability as long as the credit union is not primarily driven by profits and AD&D. While the IRS can appeal, this case and the Wisconsin case are two big victories.

Since the founding of credit unions, the business model is to exist off of the net interest margin. In 2005, the credit union industry’s average net interest margin dipped below the operating expense ratio. When a business makes less money than it costs to operate, you can only stay in business as long as the capital holds out. In 2009, NCUA began to take an additional bite of that capital to pay for the losses to the share insurance fund caused by the meltdown of the investment portfolios of the corporate credit unions.

Credit unions are merging out of existence at the rate of at least 3% per year. This has been true through both good and poor economic times. Our current troubles are aggravated by the economy but not caused by the economy.

Why has the traditional model failed? Costs to run credit unions have increased dramatically, especially technology and compliance. The economies of scale of the large banks and Internet competitors such as ING Direct and Lending Tree keep a strong downward pressure on the prices for financial services. Credit unions currently have a nonprofit tax advantage but banks have the means to keep their tax obligation very manageable. Their scale trumps the credit unions’ nonprofit tax advantage.

The credit union industry needs to make fundamental changes to sustain itself but our culture is stubbornly resistant to change. There are no big payoffs to sticking your neck out to make radical changes, especially if the CEO is near retirement age. There are no profit-minded shareholders breathing down the necks of boards of directors to make changes to keep credit unions profitable. When credit union boards develop concern over the continued viability of the credit union it is usually too late to do anything about it.

Why is there no sense of urgency to make the changes necessary to sustain credit unions under a revised business model? Why aren’t our trade associations and other leaders encouraging credit unions to make fundamental changes? It all seems like an “Emperor’s New Clothes” dream. We all know credit unions are exposed but we pretend not to notice because everyone else is pretending. It is time to stop pretending before it is too late.

What to do? The only solution that retains the cooperative credit union structure is to establish extensive credit union collaboration networks. Credit unions need to earn more income and reduce operating expenses and collaborations have a proven record of success. For example, there are investment and insurance collaborations that have earned millions of dollars for credit unions. There are also operational services collaborations that have saved credit unions millions of dollars while providing better services. Collaborations work for both small and large credit unions.

Collaboration works but only if you are truly committed to making it work. Credit unions could share excess capacity through a network. For example, if one credit union needed a collector but did not need full-time capacity, another credit union could sell its excess capacity to that credit union transforming this underutilized capacity into an income stream. The collective cost to run credit unions in this country is over $28 billion. Credit unions with excess capacity can tap into this huge market.

The network is invisible to the members. Each credit union would still control the member interactions and protect its members’ privacy. Mergers would not be needed to gain scale. Networks would be competing with other networks to provide the best solutions to attract more credit unions. Networks could also join forces for even greater economies of scale. With networks, all credit unions would have ready-made operational platforms-true plug-and-play solutions to help form and sustain new credit unions.

To start, list 10 problems related to income and operations plaguing your credit union. Prioritize the problems and examine existing collaborations that might help. Ask other credit unions to do this exercise with you and find common ground to work on. Start with services that will bring benefits early in the collaboration.

NACUSO is committed to helping credit unions unleash the power of collaboration and has established a Certified Collaboration Professional Program with Pepperdine University to teach the strategy and skills to be successful collaborators (www.nacuso.org). However, credit unions will remain at risk until you, our credit union industry leaders, promote the widespread use of collaborations.

We have a very short window to make changes before the momentum of the industry makes it nearly impossible to correct. As the current stewards of credit unions, we owe our best efforts to the credit union pioneers who came before us and to the future generations of members. Let us not shirk our responsibility.

Guy A. Messick is an attorney with Messick & Weber PC in Media, PA and General Counsel to NACUSO. He can be reached at 610-891-9000 or gmessick@cusolaw.com and www.CUSOLaw.com

1. Make a CUSO business plan that makes sense for you.
CUs often explore the idea of a CUSO before they know what sort of CUSO they want to start. Different CUs arrive at their ultimate CUSO business plan by different paths. How can you hone your ideas into a felicitous business plan? Some CUs look for existing CUSOs as models. Others look at their own strengths and identify an area in which a CUSO might complement that strength. A CU heavily involved in mortgage lending may, for example, frequently use a local title insurance agency. “That’s a lot of money they’re leaving on the table,” said Weber. “That’s a great opportunity for a CUSO.”

2. Ask yourself: Does your potential CUSO need to exist?
CUSOs have been around for a number of years and there are a lot of them out there. It may be that the CUSO you and your CU have in mind already exists. Its partner CUs have already put in the work and revised the business model. It may ultimately be a better idea for you to partner with them, rather than start a CUSO from scratch.”It doesn’t make sense to reinvent the wheel,” said Weber. “If there’s the potential for a good partnership and a good relationship with a CUSO in the same geographic region, why not?”

3. Find good partners.
CUs that form CUSOs need to work well with the CUSO’s management and with any other partner you choose to bring to the business. If you already have a good working relationship with another CU, if you’ve partnered with one another on other ventures successfully, that relationship may make a solid foundation for a new CUSO, says Weber.

4. Understand your CU’s needs.
A CUSO may sound like a good idea, but unless you’re adding value for your membership, it may not benefit anyone. That’s why you need to consider your CU’s needs and your membership’s needs before you start the CUSO, said Weber. “If you can’t sell member business loans to your members, then maybe you should think twice about forming a member business loan CUSO,” she added.

5. Convert your staff to the CUSO’s cause.
If you don’t have buy-in from the entire CU team, you can be in for trouble. It can ultimately sink a CUSO, says Weber. “Too many times, [the addition of a CUSO creates] an us-versus-them mentality,” she said. “You can have a management team that is gung ho about the CUSO and the services it provides, but if your front-line staff doesn’t understand that the CU is now offering products through its new subsidiary, the CUSO, then your members aren’t going to know about it.” CUs with CUSOs that offers products directly to the members need to have the support of the front line staff. Ideally, they’ll know what your CUSO offers and they’ll pitch those products and services to the members. “Obviously, you don’t want to condition a loan on the purchase of insurance from a subsidiary,” she said. “But, there’s nothing wrong with saying, ‘Hey, do you know that the CU’s subsidiary is an insurance agency and they can give you a quote on your homeowners policy?” It may not be so apparent, but the usefulness of this strategy holds even for CUSOs that offer back-office functionality. Executives at CUs network constantly, said Weber. When those executives communicate with their counterparts at other CUs, they could promote your CU’s CUSO and its services. “Word of mouth is such a powerful marketing tool for CUSOs,” she said. “It’s just as important for your credit union employees to know that the service is being offered and to have the confidence to offer the service to another credit union.”

Why would we create competition within our industry to further fragment the 6% market share we have today? It does not seem logical to fight over who will get what piece of the 6% pie when there’s 94% of the market to go after. We just have to figure out how to get the 94%. Maybe we are sitting on top of the model but have not fully realized its potential: cooperation as a business model.

In these trying economic times, consumers are gravitating to their roots, which is in turn, taking our industry back to its roots. We are seeing phenomenal growth in auto loans. According to Callahan & Associates, at the beginning of 2008, we had 12.9% market share of auto loans. By January 2009, it jumped to a 22.7% market share.
Through the efforts of the National Cooperative Business Association, we have evidence the cooperative model works and is increasing in popularity, but are we using it to its maximum potential

Go to http://www.cutimes.com/Issues/2009/October-14-2009/Pages/Is-There-a-Business-Case-for-a-Single-National-CUSO.aspx?k=Is+There+a+Business+Case+for+a+Single%2c+National+CUSO%3f to read the entire article.

Go to http://www.cutimes.com/News/2009/7/Pages/Biz-Lending-CUSOs-Not-Under-AntiMoney-Laundering-Proposal.aspx?k=cuso to read the entire article.

Perez, a former banker at Banco Popular, which at one point had a $1 billion taxicab medallion portfolio, knew how the financing worked. With hands-on knowledge of the unique licenses, he was recently named president/CEO of Aspire Medallion Funding LLC, a newly launched subsidiary of $170 million Aspire FCU in Clark, N.J. Prior to his new post, Perez was vice president of lending and financial recovery at the credit union.

Go to http://www.cutimes.com/Issues/2009/April%208%202009/Pages/Aspire-FCU-Builds-on-Taxicab-Medallion-Success-With-Niche-CUSO.aspx?k=Aspire+FCU+Builds+on+Taxicab+Medallion+Success+with+Niche+CUSO.%22 to read the entire article.

Russell is the CEO of TMG Financial Services, the credit card portfolio purchasing arm of The Members Group, a card processing CUSO loosely affiliated with the Iowa Credit Union League. TMGFS is offering credit unions the second of its Collateralized Advance Plan offerings, mechanisms through which credit unions can invest in the CUSO’s roughly $32 million portfolio of credit union-issued credit card loans.
“We think the current economic conditions strongly favor investing in a loan program which can offer competitive yields from a very soundly underwritten investment,” explained Russell. “If anything, these days make having a higher yield even more important for credit unions.”

Go to http://www.cutimes.com/Issues/2009/April%208%202009/Pages/TMG-Announces-CU-Card-Securitization-Despite-ToxicAsset-Flurry.aspx?k=TMG+Announces+CU+Card+Securitization+Despite+Toxic-Asset+Flurry to read the entire article.

For most of the 20th Century consumer financial services were offered on a local scale by many community banks and credit unions. There was a simple set of uncomplicated service offerings, i.e., savings accounts, checking accounts, consumer loans and mortgage loans. The people that worked in the banks and credit unions were smart and competent people but they were not paid high wages. The technology investment was the cost of an adding machine. The costs of operating financial institutions were relatively reasonable, stable and predictable. The model was simple. You pay interest on the deposit accounts at X percent and earn interest on the loans at X plus two or three percent. Credit unions were able to live on the net interest margin for years. Credit unions were operated almost exclusively by their own employees. There was very little outsourcing.

At the end of the 20th Century two things occurred that changed the credit union world forever, the widespread use of technology and the world’s adoption of the Internet as a method of commerce. Technology added the significant cost factors of people, equipment and software but technology also made the operational processes much more efficient. How much technology helped the credit union depended on how effectively the credit unions used the technology and the scale that the credit union was operating on, i.e. how big was the credit union.

As the scale of an operation increases, there is little incremental increase in the cost of technology so that the technology cost per transaction is greatly reduced as the scale of the business increases. Banks were at a competitive advantage to credit unions given their larger scale resulting in lesser technology costs per member/customer. The more vulnerable smaller credit unions became less economically viable and merged into larger credit unions where the scale was better but still not competitive in the greater financial marketplace. The technology adoption trend began in the seventies when the number of credit unions peaked at over 21,000. As of March 2009 less than 8,000 credit unions are left, decreasing at a rate of about 300 per year. With the imposition of the share insurance fund assessment in 2009, the number of credit unions disappearing per year inevitably will increase.

The introduction of the Internet enabled the power of technology to be leveraged nationwide. As a consequence, national financial service providers have arisen to compete for your members’ business. In the good old days a credit union’s only effective competitor was the bank down the street. Now the bank down the street is a regional bank with much lower transaction costs due to its relative scale and a credit union’s competitors now include Internet providers such as ING Direct and Lending Tree that have much more scale than any regional bank. More competitors with much greater scale, lower transactional costs and, the convenience of the Internet have put a squeeze on the original credit union model that is permanent and potentially fatal. The comfortable non-interest margin is a thing of the past. The scale of these Internet competitors enables them to live with razor thin margins earned with interest rates that are often more competitive than interest rates offered at most credit unions. The credit union’s non-profit advantage only helps to a point. Scale is king and picks off the weaker credit unions left and right.

Without more scale, credit unions relying on the traditional model will run through their capital and disappear through merger or liquidation. With the downturn in the economy and the NCUA assessment that process has accelerated. Mergers mean that the unique identity of the merged credit union with its members is lost. Even if the continuing credit union does a great job, special connections to the members and the community are diminished by the loss of the merged credit union. Having fewer and larger credit unions diminishes the political strength of credit unions.

The good news is credit unions can acquire scale without sacrificing the existence of the credit unions through collaboration. Credit unions have already begun to use CUSOs to collectively provide operational services to each other. CU*Answers (IT core processing), Xtend (phone center and bookkeeping services), Ongoing Operations (disaster recovery/business continuity), CU Business Partners (business lending services), CUMAnet (mortgage lending), Open Technologies Solutions (IT support), PSCU Financial Services (credit card processing and phone center), CU Student Loan Choice (student lending), COOP (shared branching), TMG Financial (credit card lending) and CUDL (indirect lending) are a few of the examples where credit unions are creating scale to bring less expensive and more effective and efficient operations to their credit union owners and clients.

These CUSOs are a big step in the right direction but it is just the first step in the evolutionary process. All these services help solve the scale issue for one or more portions of the operations but it is not an integrated systemic solution. It is like a golfer who is a pro when it comes to driving but is still a rank amateur when it comes to the iron play and putting. The golfer will benefit from his professional driving skills but will never will able to compete with the other professional golfers until he improves the rest of his game.

The next step of systematic collaboration is being taken by a few credit unions. CU*Answers is assembling a more comprehensive model for its 100 plus small and mid-sized credit unions that enables a five million dollar credit union to serve its members with the same degree of effectiveness as a credit union many times its size. The four credit union owners of Open Technologies Solutions are saving millions of dollars on IT support. Encouraged by that result, they are in the process of building a back office model that will combine all operational services. This integrated systematic model will address governance and due diligence issues to insure that the credit unions are able to define the service and performance standards, monitor the standards and compel compliance if there are deficiencies.

Scale is not enough. To reap the benefits of scale, one has to address the process and people issues. To save money there has to be less people involved in the process and the process has to be modified to operate more efficiently with a different set of operating procedures. Through natural attrition or terminations there has to be less people involved in the operation of the collective credit unions or the benefits will not be realized. I acknowledge that credit unions are uncomfortable with making these types of decisions but the wolf is at the door and credit unions have to react. We cannot pretend any longer that everything is fine. Things are not fine. There is an urgency that must be recognized.

Credit unions are based on collaborative principals and structure. The evolution of the credit union model is to fully extend those collaborative principals among credit unions to obtain sufficient scale for the credit union industry to retain as many viable credit unions as possible. If we do not, the merger option becomes the only option by default.

Implementing an integrated systematic collaboration requires substantial change and trust of your fellow collaborators. It takes courage to champion the change. While the challenge is great, so is the reward. For the sake of your credit union and its members, please find a way to walk down the only path that will preserve the future of a viable credit union industry.

The author is Guy Messick, Messick & Weber PC, 610-891-9000, www.cusolaw.com.

If you want to learn more about collaboration, NACUSO is a resource (www.NACUSO.org). NACUSO offers educational and networking opportunities. NACUSO’s has an Annual Conference and a Business Services Conference. The website has a searchable database to learn more about the current service offerings of CUSOs. Recognizing that collaboration is a learned skill, NACUSO is offering a certification program in partnership with Pepperdine University. The first class is in July.

Imagine how surprising it was the first time I attended a credit union chapter meeting on a cold winter night in Chicago when the issue of the evening was the free exchange of ideas around dinner and a few drinks! It was truly an eye-opening evening, and I believe that the expansion of CUSO’s have become a direct extension of this philosophy and possibly the avenue for many credit unions and CUSO’s to thrive in the new financial climate that has engulfed the world.

Go to http://www.cutimes.com/Issues/2009/March%2011%202009/Pages/CUSOs-Move-From-Collaborations-to-Collaborating-.aspx# to read the entire article.