SAN DIEGO -- This Sept. 5 will mark the sixth anniversary of the revision of Part 721 of the Code of Federal Regulations, which provided more latitude for credit unions to legally engage directly in activities that had previously been prohibited.
NCUA's passage of incidental powers on Sept. 5, 2001 meant credit unions could earn additional income through more products and services and earn income on a range of incidental powers activities ranging from financial counseling services, certification services to debt cancellation products and trustee and custodial services. Prior to incidental powers, CUSOs were formed to facilitate many of these services and while the regulatory landscape has changed their position in the industry, collaboration is still touted by advocates who remain convinced that collaboration is the key to staying relevant and competitive.
"If we look back five years, CUSO participation was at its height and as I recall, the largest percentage [of activity] was in the financial services area," said Valorie Seyfert, president/CEO of CUSO Financial Services, LP, a broker dealer and registered investment adviser to more than 100 credit unions. "[After incidental powers], most credit unions decided to keep their CUSOs intact for awhile. After a year or two, some started questioning 'do we need the financial burden of running a small amount of business, so let's just move it over.' We saw a lot of our clients shut down their CUSOs."
On the heels of incidental powers came the noted "Chubb letter" from the Securities and Exchange Commission, which essentially said CUSOs were no longer necessary and that all business had to be run directly through the credit union, Seyfert said. The SEC letter also authorized banks, thrifts, and credit unions to enter into third-party brokerage arrangements under certain conditions without the financial institution having to register.
As a result, in 2002, CFS changed all of its contracts from the CUSO to the credit union, Seyfert said. While there was some attrition for the broker-dealer, it continued to evolve and CFS recently reported robust revenue figures between 2003 and 2006. Annual revenue for that time period went from $47 million to $79 million and net profits jumped from $1.7 million in 2003 to $6 million in 2006. Partnership distributions have risen from a $750,000 share of 2003 profits to a $4 million allocation of 2006 net income.
"What has changed has been for the good because CUSOs are being used for more collaboration and entrepreneurial [efforts] and we're seeing more credit unions collaborating with good success," Seyfert said.
Indeed, CUSO growth has been on the rise since 2005, said Tom Davis, president/CEO of NACUSO, citing data from Callahan & Associates, Inc. In 2005, there were 737 CUSOs and in 2006, that number jumped to 887. Wholly-owned CUSOs increased from 564 in 2005 to 697 last year while multi-owned CUSOs went from 173 in 2005 to 190 in 2006. Some of the more popular CUSO services have been mortgages, business services, payday lending, check cashing, technology and trust services. Nearly 2,100 credit unions had investments in CUSOs in 2006, but what troubles Davis is the other 6,000 credit unions that did not.
"The market is far from being saturated," Davis said. "The most important issue is not simply the number of credit unions participating in CUSOs but looking at the challenges and opportunities facing credit unions and how CUSOs can help address those issues."
Some of the challenges are common knowledge, Davis said: a changing business model, growing competition from nontraditional financial service players, slowed membership growth, an aging member base and figuring out how to reach younger people. Credit unions have only a 5.8% corner of the financial services marketplace and so now the shift has turned to collaboration especially through multiple-owned CUSOs, he added.
"We are a speck in the marketplace," Davis said. "It's not just having a CUSO to have a CUSO but having multiple owners to create scale. Shared branching, for instance, can provide more convenience than [a credit union] can provide on its own."
NACUSO has turned its focus towards collaboration and finding specific areas where the alignment needs to happen. The trade group is hoping its new National Center for Collaboration and Innovation launched in May will serve as a repository of who's engaged inside and outside the industry to help drive value back to the member.
Dennis Pierce, president/CEO of $1.5 billion CommunityAmerica Credit Union and a NACUSO board member, echoes the shift towards identifying collaboration opportunities. He said he's not alarmed at where CUSO growth is, saying incidental powers fueled the absorption but it's clearly not a doom and gloom scene.
"The numbers we always focus on are how many members are being touched by CUSOs, Pierce said. "We need to leverage the advantage we have in the industry. There are great organizations like CO-OP Financial Services and PSCU Financial Services that are finding ways to leverage on a singular basis."
Both Pierce and Davis continue to tout CUSOs as a "great tool" for small credit unions. Seyfert has taken it a step further through CFS' launch of an investment program for small credit unions that links them with an investment representative to assist members with their financial needs. One representative will work with three to five credit unions on a weekly basis and through private phone appointments with members.
"It's about shared knowledge and shared risk," Seyfert said. That's going to be the direction to go. As more credit unions are under pressure to stay vital and attract younger people, they have to offer services across the spectrum. When young people talk to us, many of them only have a brokerage account, not a checking account. More and more credit unions are starting to understand that market."
To reach new markets, Davis said certain drivers are key.
"We want to drive profitability and translate that into increased value to members," Davis said. "Where will we get the greatest value to members? We need to prioritize our efforts."