As someone who has worked with CUSOs for the past thirty years, I am often asked by credit union CEO’s what are the “hot” services for CUSOs? “I need more revenue streams and I need to contain my operating costs. What works?”
Revenue streams come in two flavors, fee revenue and interest revenue. Looking first at fee income, investment services can provide significant returns. After paying the financial advisors and costs, credit unions can earn between 30%- 45% of the commissions shared with the credit union which can be 80% to 92% of the total commissions. There are many credit unions that have affiliated broker/dealer relationships that generate over a million dollars per year in commission income (note that this model is direct with the credit union and not through a CUSO). The amount of capital needed to start up and support an affiliated investment services program is a pittance comparted to the capital needed to source, underwrite, fund, service and reserve for loans. The key to success in investment services is to hire the expertise to actively manage and support the program. For those credit unions that cannot afford to hire the expertise individually, there are CUSOs that provide that service on a collaborative basis at affordable rates.
The net income generated through offering property and casualty insurance services takes longer to grow. Buying an existing insurance agency tends to be the best way to enter the market. If the credit union has its own insurance agency CUSO, it can take about five years to become profitable. It takes time for the book to mature to a point that the CUSO is receiving a portion of the premiums from the underwriters based on favorable loss rates. Think of property and casualty insurance services revenue as a reliable annuity and not a quick hitter.
Title insurance can be very lucrative if offered through a CUSO title agency. Title insurance agencies tend to earn 85% to 90% of the premium with the balance going to the companies that provide the insurance. With a strong mortgage loan program supporting the title agency, especially in a re-fi market, the earnings can be substantial. The members pay the same rates as they would to any other title agency. There are states that require a title agency to have access to a title plant. In those states, the cost of owning and maintaining a title plant renders the title agency option uneconomical.
Trust services have never been a revenue generator but some credit unions work with a CUSO to provide trust services as it is a service needed by members and it can be a good defensive move. If the children of a deceased member are forced to use a bank as a trustee, the children’s business may be lost to the credit union.
CUSOs enable credit unions to acquire the expertise to offer additional lending products and contain the costs of lending. By aggregating technology and expertise, scale and skill are created to reduce the costs of sourcing, underwriting, closing and servicing loans. Credit unions retain more “profits” from the interest charged while remaining competitive on rates. Mortgage lending is much more lucrative with greater scale. A real estate broker CUSO can source new mortgage loans. The business lending expertise is much more affordable if the costs are shared among several credit unions. Auto lending opportunities are more available if credit unions can source loans from car dealers and national loan aggregators.
What is the advantage of having the CUSO make the loan? Currently there four types of loans a CUSO may make: business, mortgage, credit card and student. Mortgage loans are the most common type of loans CUSOs make. The challenge for CUSOs making loans is liquidity. With the CUSO investment and lending limitation, CUSOs do not have the capacity to hold a large loan portfolio. However, this is not an issue where the mortgage loans are closed and sold within a short period of time. This is a model that exists in the commercial world and is facilitated by a highly structured secondary market. In this model, the credit union owners will usually provide a warehouse line of credit to the CUSO to fund the loans they refer to the CUSO. Often the referring credit union will have the option to purchase the loans after closing.
Business loans are sometimes made by CUSOs. It is not as easy to replicate the mortgage broker model for business loans. The sums are usually greater in business loans which puts more pressure on the liquidity factor and the secondary market is not as standardized and efficient. CUSOs are sometimes used to make loans to non-members and loans that do not meet the credit union’s lending criteria. Some credit union have a wholly owned CUSO that will buy foreclosed property from the credit union, some with environmental concerns. A CUSO is used to reduce the legal risks to the credit union of holding a foreclosed property while the property is being marketed for resale. A CUSO is also used to shield the credit union from unwanted publicity in the foreclosure process.
Containing Operational Costs
Some credit unions have formed wholly owned CUSOs providing operational services on a fee basis. Some are successful but the majority of the CUSOs providing operational services are multi-owned and designed to use the scale of a larger owner/customer base to contain costs. The risk for these CUSOs is reduced by the fact that credit unions are already incurring operational costs in providing the specific services. Current operational funds are re-directed to a collaborative model to reduce or contain the costs. The collaborative model can save significant staff, vendor and technology costs while increasing the service expertise level. The hurdle to this type of CUSO is the time and effort to find the right partners and develop the collaborative model.
For those services that are not member-facing, there is a very compelling case for collaboration. Members do not care what happens behind the “curtain” if the services provided are effective. These non-member facing services include compliance, internal auditing, debit card processing, payroll processing, bill payment, disaster recovery, business continuity, service bureau for technology management, cyber security, and asset liability management. While the following services are member facing, there are CUSOs that provide them more effectively and cheaper than the credit unions can do them individually: collections, call center, and shared branching.
There are CUSOs that are developing technology for credit unions, such as a block chain system, app development, connecting apps to the core, mobile loan decisioning and delivery platforms and sophisticated financial coaching. There are CUSOs that own their own core. These technology CUSOs are less of a net income play than a means of control and influence. There are great benefits to being able to influence the development of critical technology tools. However, the CUSO investment limits and the conservative nature of credit unions tend to make credit unions make poor technology company owners. Technology companies require a constant infusion of capital. Prior to investing in a technology development CUSO, a credit union should realistically assess the capital needs of the CUSO and how they will be met.
Several long time vendors to the credit union industry are now forming CUSOs to take in credit union investment. The pitch is that credit unions will be given an opportunity to influence development decisions and when the vendor is sold, the credit unions can participate in the proceeds. This can be an attractive proposition but it is a long term income play.
Credit unions that look to CUSOs as quick fixes for their net income needs will be disappointed. The benefits of CUSOs take some time to ripen and mature. The investment of time and funds to leverage the benefits of collaboration has proven time and time again to be worth the effort.
Every day the effort is postponed, is a day the realization of the benefits is postponed.
Guy Messick, CUSO Guru – Messick Lauer & Smith PC – General Counsel to NACUSO – www.cusolaw.com