What Credit Union Directors Need to Know about CUSOs

Whatever your credit union’s past experience with and impressions of CUSOs, credit union boards cannot afford to ignore the benefits CUSOs bring to credit unions today.  Successfully using CUSOs requires change, and while change is difficult, it is essential to meet the challenges posed by today’s world.

CUSOs help credit unions solve problems and leverage opportunities.  CUSOs are essential competitive tools for credit unions. Your competition is no longer just other credit unions and banks within your area code.  There are hundreds of financial service providers that are chipping away at your payments, loans and deposit services.   Many competitors have lower operating costs, sophisticated data bases, and slick technology that offer members convenient and efficient financial services at low costs.   How will credit unions successfully compete against bank and non-bank competitors that can deliver mortgage loans approvals in less than an hour and unsecured loans in less than a minute?  If credit unions cannot find ways to meet the increasing expectations of consumers on speed and convenience, the traditional credit union model is at risk of becoming an historic footnote.   Does your credit union have the scale, capital and expertise to build competitive technology delivery platforms on its own?  If not, how will you obtain scale, through merger or collaboration?  CUSOs are a means for credit unions to increase scale and remain independent credit unions.  If you are not using CUSOs to help your credit union compete in this hyper-competitive marketplace, you are putting your credit union’s long-term survival at greater risk.   The benefit of CUSOs is not abstract theory.  There are numerous examples of CUSOs that generate significant net income through either lower operational costs or additional revenue sources.  Time is of the essence. Credit unions can no longer afford to say that they will get around to using CUSOs “some day”.

Decide what functions are open to collaboration.  In deciding what functions are open to collaboration, the board should decide first what functions you want to retain as exclusive functions of the credit union.   Many credit unions say they want to retain member-facing functions and everything else is open to the consideration of a collaborative solution.  Some credit unions may even consider some collaborative member facing functions such as call centers.  So decide for yourself what functions are open to the consideration of a collaborative solution (your “Collaboration Zone”).

Develop a collaborative mindset.  The collaboration model is a very powerful one but only if you are all in.  If the function or service is within your Collaboration Zone, consider joining an existing successful CUSO (you can find CUSOs offering the product or service you need using NACUSO’s CUSO Analyzer tool).  If that is not available, then consider the advantages and feasibility of creating a CUSO.  To effectively leverage the benefits of CUSOs, there will have to be changes.  If you expect the benefits to be significant, it is likely the changes in your credit union’s business model will have to be significant.  But for those credit unions willing to fully leverage CUSOs, the benefits to the credit union and its members can be substantial. It is not a coincidence that the most highly successful credit unions have multiple CUSO relationships.

Credit unions should develop policies on managing the CUSO relationships. Today’s credit union has multiple service provider relationships which include CUSO relationships.  Good vendor management requires policies on how to select, contract with and monitor the service providers.  Likewise, having a policy on the factors to consider when investing is CUSOs is desirable.   Creating a staff position to manage the third party and CUSO relationships is a highly recommended best practice.

As owners, credit unions should organize CUSOs and their credit unions to meet the business objectives of the CUSO.  If you are organizing a CUSO to grow scale to lower operational costs, obtain increased expertise and obtain leverage in vendor negotiations, you will need to make changes to make that happen.  A CUSO has to be given the authority and resources to be successful for the credit union owners.  These changes may mean that a credit union may share control of critical services with other credit union owners, a credit union may transfer ownership of IT licenses to a CUSO, and credit unions may have to significantly change its own internal operational processes to work efficiently with the CUSO.  You can learn how other credit unions have successfully done this by talking with credit union leaders who have developed successful collaborations/CUSOs (NACUSO’s annual Network Conference is an excellent venue to meet these collaborative leaders).

Letting go to grow.  Credit unions sometime start operational services CUSOs as solely owned and later decide to admit other credit union owners.  Additional credit union owners add capital and business to grow scale.  Additional scale can result in lower per credit union operating costs and more efficiencies that benefit all credit union owner/users, including the original owner credit union.  While a CUSO can serve non-owner credit union clients, larger credit unions that bring significant scale usually prefer/require a co-ownership position, especially if the operational service is a critical service where a credit union wants partial control over the services.  The tension is how much control is the original credit union owner willing to give up to attract and retain other significant owners?  If the CUSO is to attract large credit unions that bring scale, the original credit union owner will have to give up complete control of the CUSO and share control with the other owners.  If the shoe were on the other foot, the original credit union owner would want shared controlled of a CUSO providing a critical service.

IT ownership.  If the CUSO provides IT services, a CUSO that owns the IT license is much more attractive to potential credit union owners.  Why would a credit union want to pay significant capital and receive critical IT services from a CUSO that does not own the IT license and the improvements made by CUSO?  If the CUSO owns the license and the improvements, the value of the CUSO as an investment is greater and that increase in value can be reflected in a higher capital amount for the CUSO investment on the investing credit union’s books.  I note that the value of an IT license held by a credit union for its own benefit does not have any capital value.   If the CUSO ceases to do business, the CUSO can distribute the license rights to all of the owners so each credit union can use the IT moving forward and any improvements made by the credit union owners after disbursement will be part of the IT owned by that credit union.  In the unlikely event that creditors are not fully paid by the CUSO upon dissolution of the CUSO, the CUSO can either (a) sell the IT license to a third party with the proviso that the owners may also use the IT on a non-exclusive basis or (b) one or more of the owners can buy the IT license to pay the creditors.  The IT license agreement can provide these options.  The point is that credit unions can protect the ownership and control of the IT license when the IT license is transferred to the CUSO.

Credit union owners in a multiple-CU owned CUSO are in a relationship and not a transaction.   Trust and respect are the coins of the CUSO realm.  Find CEO’s and boards who you trust and respect.  Understand that perfect foresight and planning is not possible and it is normal to make periodic adjustments in the CUSO and business plan as circumstances change.  As long as the owners have the same goals and view the benefits in the long term, all will be well.   This means that the CUSO goals have to be discussed and agreed upon by the owners prior to joining the CUSO.


Guy A. Messick the CUSO Guru, is an attorney with Messick, Lauer & Smith in Media, Pennsylvania and General Counsel to the National Association of Credit Union Service Organizations.  www.cusolaw.com