Collaborations, through CUSOs and otherwise, hold the promise of earning non-interest income from non-traditional financial products and of significantly reducing operating costs. Both opportunities are welcomed in an industry where the average net interest income is less than the costs of running a credit union. If collaborations are not extensively used by credit unions, the survival of most credit unions is at substantial risk.
Owing to the fact that CUSOs are so vital to the movement, letâ€™s look at how they evolved and, more importantly, where they are going.
Collaboration 1.0 â€“ Singly-Owned Financial Services CUSOs
The first generation CUSOs were mainly singly owned entities providing investment, insurance, and other financial services. They were formed primarily for regulatory purposes, taking up tasks generally denied to credit unions proper. In revenue sharing arrangements with third party financial service providers, credit union regulations did not permit a credit union to accept any funds beyond reimbursement of the out-of-pocket costs incurred by the credit union. CUSOs were used to avoid that restriction. The CUSOs received revenue from the service provider and the CUSO paid the credit union owner dividends. The non-interest income generated from these non-traditional financial services is still a welcomed addition to the credit unionâ€™s bottom line. For example, CUSO Financial Services, LP, a broker/dealer CUSO 75% owned by credit unions, since 1998 has paid $365 million to credit unions in networking fees and $15 million in owner dividends. Some title insurance agency CUSOs have earned their credit union owners over $1 million in a single year.
Collaboration 2.0 – Multi-Owned CUSO Hubs
The second generation of CUSOs developed so credit unions could collaboratively provide themselves such operational tasks as IT services, collections, shared branching, and lending services (mortgage, indirect, business and credit cards). A few multi-owned CUSOs organized to jointly manage investment and insurance services for a group of credit unions. These CUSOs were organized as hubs, with the CUSO in the middle. Typically the CUSO assembled the people and technology; the credit unions received services from the CUSO; and the CUSO was paid by the credit unions. The credit unions got the benefits of leveraging their resources by dramatically decreasing the costs of operational services while elevating the level of service. For example, there is an IT services CUSO saving each of its large credit union owners about $1 million annually owing to increased efficiencies and increased buying power. And Ongoing Operations, a disaster recovery/business continuity CUSO, has saved credit unions an average 40% – 50% compared to third-party solutions, all the while providing better service. The next generation of CUSOs will not be constructed as hubs but as fully integrated networks in which credit unions provide services to other credit unions through the network and are paid for it. The networks will also provide income and member acquisition opportunities for its member credit unions. A little fuzzy? Iâ€™ll explain.
In order to save money, scale is not enough. You have to manage capacity and have the technology and business model to be effective and efficient. If you need a collector but can only have enough work for a half-time position do you incur the additional and redundant costs of hiring a full-time collector? If you do but then the need is no longer there, do you lay off the collector? To circumvent these problems, what if credit unions were in a network with other credit unions where certain credit union collectors were made available to the network on an as-needed basis? Under this arrangement, managing capacity for the serviced credit union becomes a whole lot easier and cheaper. The credit union employing the collector would be paid a fee for the collectorâ€™s services and earn income on its otherwise idle capacity. All of this could happen without the CUSO independently employing persons to provide the services.
Think of the network CUSO as a switch. A request for services from a credit union needing additional capacity would come into the CUSO and that request would be matched with a credit union having excess capacity. While services are being provided, the person would be working as an agent of the CUSO and not as an employee of the credit union. The CUSO would handle the payment for the services between the credit unions.
An advantage to credit unions in a network model versus the hub model is that the credit unions have a means to transform their underused capacity into an income-producing asset. The annual aggregate cost of operating credit unions in the United States is over $28 billion. In a network model, credit unions get a piece of that pie with an asset they already have. An additional benefit is less pressure to lay off a productive employee in slow times because the network will re-distribute the credit unionâ€™s over-capacity to other credit unions. Excellent services would be rewarded, because the persons providing the best services would be the most requested.
The for-profit business world is moving to just such networked models. Jobs are brokered out to workers who bid on projects and assemble to perform the work on a â€œjust-in-timeâ€ basis. To keep up, credit unions should adopt some of the same practices. Although the concepts are a bit trickier to realize in a regulated financial institution, they can be accomplished.
While the cost savings for in-network credit unions will be substantial, the networksâ€™ more significant role will be to proactively seek out and provide growth and income opportunities for its member/owners. The mindset is that the network is an active agent for the growth of its member credit unions. The network will be paid by credit unions for delivering new credit union members, and for new income producing and new cost reduction opportunities.
The CU*Answers Network
An example of a network including some of the features I am proposing has been established by CU*Answers, a Michigan CUSO that provides core IT services to medium and small credit unions. CU*Answers created a network for struggling small and medium credit unions. The network offers a two-year â€œscholarshipâ€ of free IT services; credit unions that take advantage of the scholarship join the network. At the end of two years, the credit union decides whether to merge or remain independent. If the credit union remains independent, it signs a five-year IT agreement with CU*Answers. If the credit union merges with a credit union in the network, there is no charge, or if with a credit union outside the network, then there is a charge.
With an investment of providing two years of IT service, CU*Answers gives a struggling credit union a chance of making it on its own as well as the experience of being a part of the network. Likely the network will retain the credit unionâ€™s members either as part of the reinvigorated credit union or as merged. More members mean more market share and more scale for the network and its credit unions.
Network CUSO Principles
Below are 12 principles on which I believe a new kind of network CUSO would operate:
- Collaboration is consensual. A network earns the loyalty of the participants by providing value. Barriers to move in and out of a network are low or non-existent. Termination clauses are short and do not mandate fees or penalties. Credit union members use core services to be in the network and may elect optional services.
- The owners are exclusively credit unions and all owners must be network participants. The co-interest of owners and users insure the focus on the quality of the network’s performance.
- The network is governed by CEOs of the credit union participants. The CUSO Board is elected by the credit union owners and composed of credit union CEOs who have the strategic vision and decision-making authority to keep the interests of the CUSO aligned with its credit union members.
- Services are brought quickly to the market. A network organizes initiatives and deals with the due diligence and contract reviews on behalf of participating credit unions to create the efficiencies that fully leverage the network benefits.
- Performance standards are met and measured. The credit unions and network have mutually acceptable and measurable standards to judge the networkâ€™s performance.
- The network is accountable. If a network is not performing, it is in the interest of the owner/users to correct the problem. If a problem is not corrected, a credit union may readily withdraw from the service or the network.
- Fee structures encourage and reward usage. Tiered pricing and rebates are used. Transactional pricing is the norm.
- Personal member information is protected from unauthorized disclosure. Employees from other credit unions who are working for an employee-sharing CUSO network are provided member information as needed to perform the task requested but a network’s technology and practices prevent unauthorized disclosures.
- Except for personal member information, everything is transparent and shared. The power of sharing best practices and policies raises the performance level for all participants. The transparency of the business relationships creates trust and credibility.
- Credit unions control the personal member interaction. A network interacts with credit union members only as agreed by the credit unions.
- Network capital investment is not driven by returns. Because all investment returns come from fees charged to the owner/users, there is little incentive to drive up revenue at the expense of the owner/users. While some returns may be built into the model, it should not be a driving force of the network.
- A network rewards performance. Employees providing excellent services are sought out. A network and its managers are rewarded for delivering outstanding service to members. Performance-based rewards encourages personal entrepreneurship to deliver innovative and effective solutions.
How We Get There: NACUSO and Classes
The skills necessary to successfully build a network model are not intuitive. In order to jump-start the development of these skills in the credit union industry, the National Association of Credit Union Service Organizations (NACUSO) is partnering with Pepperdine University to provide a Collaboration Professional Certification. The Certification will require completion of a year of web-based classes and a collaboration project. The first class began in October 2009 to be followed by new classes every six months.
Collaboration is a powerful tool that can leverage credit union capabilities through networks. But it takes vision, leadership, and effort. Now is the time to set up 3.0 CUSOs.