Over the past few years, credit unions have spent a lot of time and money making sure they remain attractive to today’s mobile consumer. Credit unions have replaced their archaic core processing systems, upgraded digital banking software and deployed new product sets, all to ensure that the needs of today’s bank anywhere/anytime consumer are met.
For better or worse, our work here isn’t done. Among the many lessons already heaved upon us by 2020, credit unions and their vendors both discovered that they also need to accommodate the anywhere/anytime employee, i.e., the remote employee. With shelter-in-place orders in effect, back-office employees either have to work from home or not work at all. Most all credit unions I know have employees working from home right now. The question is: How easy or hard was it to make that happen?
For credit unions that operate their entire IT infrastructure – including their core – in the cloud, I can tell you it was almost effortless. Let me use Prodigy as an example.
When it became clear that both our CUSO and our credit unions would need to shut down locations for the time being, it was largely a non-issue. Because we maintain all our IT infrastructure in our own private cloud, connecting our employees from the kitchen table is no different than connecting them from a cubicle. We were able to move to a fully remote workforce in the time it took employees to drive home. For our credit unions, connecting remote employees to their core and cloud-based ancillary servers to minimize service interruptions was just as easy. Anywhere access is one of the built-in benefits of a cloud deployment. So it only stands to reason that the more you deploy from the cloud, the better off you are.
When we first talk to credit unions about Infrastructure as a Service (IaaS), they can be very hesitant to give up their on-premise servers. It’s almost as if those servers represent some sort of security blanket. Never mind that this particular security blanket consumes ridiculous amounts of time and money that are better spent elsewhere.
What a lot of credit unions decide to do as a baby step is use Prodigy for Disaster Recovery as a Service (DRaaS). Using real-time replication of on-prem server data to the cloud, we’re able to offer an affordable solution that, in practical use, rivals much more expensive High Availability (HA) solutions. A number of our credit unions have yet to take the next step beyond DRaaS.
If ever there was a time to get serious about cloud infrastructure, this is it. We now live in a world where being ready for anything means really being ready for anything. The cloud makes that not only possible, but practical. Too bad dealing with murder hornets isn’t as easy as dealing with remote employees.
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
NACUSO was very excited to hear of the acquisition of OnApproach by our Platinum Partner Trellance. NACUSO CEO Jack Antonini sat down with Tom Davis and Paul Ablack last week to learn more about this amazing partnership.
JACK: Tom and Paul, Congratulations. This makes so much sense since it allows you to continue to bring significant benefits to credit unions where scale is truly beneficial (i.e., understanding data uses, trends, and combining more data for the benefit of all users), just as you did with payment cards! Brilliant move, and keeping Paul Ablack to continue product development of M360, with Trellance’s resources, should be a very big positive for the industry!
TOM: Thank you, Jack, we appreciate the partnership with NACUSO and the support you’ve given us over the years.
JACK: I know these deals don’t just happen and take a lot of work. What was behind the decision to move toward data gathering and analytics, that led to the talks with OnApproach?
TOM: As you know, we’ve been working alongside credit unions for over 30 years and during that time we’ve seen three pillars of growth – member experience, member growth, and operational efficiencies. And when we thought about the key drivers to realize growth in these areas and help our credit unions succeed, we came up with intelligence, insight, and foresight.
We knew that to add real value, we needed to provide credit unions with data analytics solutions that lead to action and better business decisions for growth in the future. When we started looking for a company that could help us make a difference with data, we came across OnApproach and knew they were the best fit.
PAUL: Absolutely. We are very excited to be working with Trellance. It really is a natural fit for both companies, and we certainly see it as a win for the whole credit union industry. Analytics is driving the future of financial services, and by pairing OnApproach’s analytics platform with Trellance’s services and vision, it’s a whole new ballgame for credit unions and data utilization. Our mission at OnApproach has been to enable collaborative analytics, innovation, and revolutionary business transformation for the credit union industry. We’re off to a great start and joining forces with Trellance will only amplify and accelerate our ability to provide credit unions with powerful and effective analytics.
JACK: For those that are not familiar with M360, Paul, can you take us through this model?
PAUL: Your analytics are only as good as your data. It is crucial to ensure the data within your credit union is both connected and trustworthy. OnApproach M360 Enterprise is a system-agnostic solution designed to integrate a credit union’s various sources and ultimately create a reliable single source of truth for disparate data. This means credit unions have full access to their data to improve decision-making, member service, and operations. To take it a step further, it is an industry standardized data model, meaning data definitions are consistent across all credit unions using M360. This creates opportunities for credit unions to truly collaborate around analytics by seamlessly sharing reports/applications, benchmarking, data pooling, and more. By leveraging the efforts, resources, and expertise across the industry, we can advance credit unions along the analytics curve much more quickly, and ultimately create the best possible experience for members.
JACK: Tom, since making the transition from payments services to being a data analytics company, what would you say your greatest success has been so far?
TOM: Since the acquisition, we have been fully committed to ensuring that both our teams and credit unions have what they need. We want to ensure that we listen to those around us to guarantee we have given everyone on the team what they need to be successful so that credit unions truly receive what they need to enhance their members’ experience. This aids in collectively growing together, allowing for collaboration, innovation, and effective planning for the future.
With that comes being agile and flexible in our decisions so that we positively impact our credit unions now and in the future.
JACK: CUSOs are collaborators, and to have two powerful CUSOs decide to come together is a real success story. Where do you see Trellance in the next 5 years now that you’ve brought the power of OnApproach on board?
TOM: As an organization, we are constantly looking to provide products and services that not only aid in the growth of a credit union but that allow credit unions to remain relevant and competitive. Also, to provide each member with a truly unique experience that is custom to their needs we believe that real-time predictive analytics is going to be the future for credit unions.
As thought leaders, we operate with the belief that there is always more to learn, and this allows us to understand the issues and opportunities we are facing. We are continually motivated to learn more, grow more and research more. Our desire to constantly learn keeps us humble and motivates us to continue to look beyond the horizon.
JACK: Your IMMERSION19 event looks pretty amazing, how do you plan to highlight this acquisition at your event?
TOM: Thanks, Jack. We will be hosting a roundtable discussion on Thursday, April 9th to talk more in-depth about the integration plan and what’s next as we put the power of data in the hands of credit unions. We will also answer any questions our attendees may have.
Additionally, we have secured a roster of relevant speakers within and outside of our industry, like Peyton & Archie Manning and Jim Nussle. Our agenda is full of educational workshops and informative sessions on data analytics, card portfolio growth, member experience, vendor evaluation, and fraud. So, we are looking forward to welcoming our credit unions and partners to IMMERSION19 in Fort Lauderdale.
JACK: Paul, congratulations on winning the NACUSO 2018 New CUSO of the Year Award. We look forward to seeing you both at the 2019 Network Conference in April in San Diego. Big Data and Data Analytics was our most popular break-out sessions track last year, and we think this year it will be even more popular as this is a very hot topic.
PAUL: Thanks, Jack. It is a real honor to have been named the 2018 New CUSO of the Year, and we’re proud to be working now with another CUSO to further our vision for credit unions. The NACUSO Network Conference is always one of our favorites, and we are very excited about what credit union attendees will witness and learn this year in the Big Data and Data Analytics track.
TOM: We are looking forward to being in San Diego at the Network Conference and connecting with credit unions that we can partner with to drive real growth with predictive analysis. Along with the data analytics track powered by OnApproach and a break-out session on “Using Data to Create a Unique Member Experience” led by our AVP of Product Development & Thought Leadership, Lou Grilli, our team will be in the Network lounge answering any questions credit unions may have. We look forward to seeing everyone there.
Constellation Digital Partners, LLC is pleased to announce the groundbreaking release of Boötes, the third major development milestone for Constellation following the launch of Aquarius and Aquarius 1.1 earlier this year.
The Boötes release is paramount as it enables the first three core connections on the Constellation platform, and takes the developer experience to a new level by providing access to core data that allows developers to build services for authenticated users. Additional core connections will be coming soon.
“A major road block has been removed for developers with the release of Boötes,” said Developer Evangelist Daryl Thornton. “Fintech service providers can now scale their solutions across three core banking platforms by integrating with one solution. The Boötes release lays the ground work needed for developers to authenticate members and access member data on the Constellation platform.”
With Boötes, fintech service providers can develop a single instance of a service that can communicate with multiple credit union core systems. The effort of connecting to individual core systems for member data, balances, transactions and more will soon be a thing of the past. Fintech service providers can add new credit union customers quickly without the challenge of core integration. In addition, user authentication is also handled by the Constellation platform.
“The speed and flexibility of our platform is resonating with our fintech partners and our credit unions,” said Founder and CEO Kristopher Kovacs. “Before we even released Boötes, we had 37 fintech partners working on 45 new digital services through our Developer Portal. With this release, we are providing our developers with reusable security and seamless core integration, which is similar to throwing an accelerant on their innovative fires.”
Constellation is making it possible for credit unions to access resources needed to provide the digital services members expect and want. Constellation’s patented secure marketplace enables credit unions to engage members in a way that’s never been possible before.
To learn more about the 2019 NACUSO Next Big Idea Competition click here!
Constellation provides a patented, secure and flexible cloud-based marketplace that enables upper to mid-tier credit unions and innovative app developers to provide safe, reliable, and next-generation digital financial service experiences while giving the freedom to compete, innovate, and thrive in the financial services industry. Constellation redefines what credit unions offer, delivering digital financial services in a way that enables them to place members at the center of their business strategy. Visit www.constellation.coop to learn more.
Combines dark web intelligence with real-time authorization to prevent fraud before it occurs
PSCU – the nation’s premier payments CUSO – has announced another tool in its fraud-fighting arsenal with the addition of First Data’s FirstSenseä. By leveraging threat intelligence and analytics garnered from the dark web, FirstSense enables PSCU Owners to identify at-risk payment cards and prevent fraud before it happens.
FirstSense employs a variety of proprietary data collection methods and advanced analytical tools to identify accounts at risk throughout the fraud lifecycle. Integrated with First Data’s DefenseEdgeTM fraud decisioning solution, FirstSense enables financial institutions to use indicators of risk exposure to create rules and strategies that allow institutions the ability to prevent potential fraudulent transactions in real time.