A Future of More CUSO, Bank Alliances?
The consideration may be controversial, but discussions are happening on the possibility. NCUA regulations allow a CUSO to sell to nonmembers as long as at least 51% of sales are to credit union members. With that regulatory threshold in mind, Credit Union Times sought feedback from three proponents of CUSO collaboration to get their perspectives on partnering with banks and if such collaboration dilutes the movement's competitive edge.
Randy Karnes is CEO of CU*Answers, a Grand Rapids, Mich.-based multi-solution provider with more than 165 credit unions in 16 states. Together, the CUSO's clients represent nearly 1.5 million members and $10 billion in credit union assets. CU*Answers is the 2008 recipient of NACUSO's collaboration and innovation award.
Vic Pantea, is president/COO of Member Gateways LLC, a South Bend, Ind.-based CUSO that serves as a platform for new-product incubation and is owned by 24 credit unions and one non-credit union partner. Among its recent creations is the XCalibur Card, which, through a partnership with IBM Global Engineering Solutions, aims to detect fraud during credit, debit and ATM card transactions.
Tom Davis serves as president/CEO of NACUSO, which was formed in 1985 to help credit unions explore the use of CUSOs and the delivery of nontraditional products and services. Davis is a strong advocate of alliances, having launched the National Center for Collaboration and Innovation in 2007. Since its debut, the center has created an online CUSO directory and spearheaded the "Buy CUSO" campaign.
Credit Union Times: In the spirit of collaboration, what are your thoughts on CUSOs opening up their services to banks--from what you've seen and heard, has it been a common practice?
Karnes: It's easy to say that CUSOs and credit unions have cooperated as far as vendor relationships. It's a bit rarer for CUSOs to say they have community bank clients. In some respects, credit unions and community banks share a lot of things in common. They're both more local-driven and the scale is easier. Ten years ago, it may have been as simple as 'them against us.' Today, there are many changes in the marketplace that are positioning CUSO CEOs to say, 'I can see us doing business with community banks.' Some CUSO boards believe whatever adds to the bottom line as a good thing. Then you have others who say, 'Our services are creating a competitive advantage, and we only want credit unions to have that advantage.'
Pantea: I haven't seen very many [CUSOs offering services to banks] at all. The only ones that I am directly aware of are the business lending CUSOs. I do primarily believe that credit unions should work with other credit unions and look to CUSOs. My position for years has been sell your services to banks. Don't buy from banks. There are very high quality financial solutions that CUSOs have developed. If we can make money from banks, why not. When I got started in the '70s and '80s, credit unions were using [bank] services like share draft clearing and credit card processing. For years, credit unions were forced to buy some services from banks. If a CUSO has excess capacity and can provide a better return, they could provide solutions to banks.
Davis: I don't think it's that common. The No. 1 driver of the decision on whether a CUSO works with a bank should be the criterion in evaluating any decision--to what extent would it drive value back to the members? We can't forget our roots. That should be the guiding and overriding criteria. This is a highly emotional thing. There is a lot of emotional consideration in working with our competitors in addition to the rational component in the business case.
CU Times: Randy and Vic, do either of your CUSOs have any bank clients?
Karnes: We only serve credit unions at the current time. We have some investments in companies that service banks. We bought 70% of a business called eDOC. In buying that, we are partnering with [eDOC Innovations], and they have non-credit union clients [eDOC tools are used to capture electronic receipts with signatures, archive them for approval and scan driver's licenses for later identification of members.]
Pantea: We work strictly with credit unions. We are a new product incubator. The businesses we help start up are not directly working with banks.
CU Times: Generally speaking, how would you say relationships with banks are handled compared to credit unions?
Pantea: Sell your [CUSO] services to credit unions at one price and to banks at a higher level. Banks are not driven to save their customers money. Some service CUSOs provide direct retail services that end up in the hands of members. But there are some solutions that don't go to the members.
Davis: If there is a CUSO offering services and banks want to use them, what is it doing for members--directly or indirectly? Does the amount of revenue we gain from a bank have an impact on the members, in terms of driving value? That's our overriding mission. If we're not doing things to bring value to the members, then we're not honoring our mission. Buy CUSO first. I'm not saying don't work with banks. Say a credit union has shopped around and finds that no CUSO solution exists. I think they should evaluate the cost benefits of developing a CUSO. Don't dismiss [the idea] prematurely and just go to a bank. We have a lot of intellectual capital right here in the industry and the people who can deliver a phenomenal solution.
Karnes: Every CUSO and CUSO board has to go through philosophical issues on "why do you help" and "when do you help." Is a CUSO's business plan more important than being competitive with a client's plan? I'm not saying it should be. There are a lot of shades of gray here. CUSOs that are held by one credit union, the issue is probably going to be far less complicated. Then you have [business-to-business] CUSOs. For CUSOs that sell directly to members, this would not be an issue. I wish CUSOs would focus on the business plans of their owners and clients and providing competitive advantages. Then it becomes a less gray area.
CU Times: And, here is where it gets even grayer. What about a CUSO credit union client that has converted to a bank? Do you end that relationship?
Pantea: I know some of the organizations have had to look at credit unions converting to banks. I think it needs to be evaluated on a case- by-case basis.
Karnes: That's another thing that is changing the mindset as every CUSO faces the question of credit union to bank conversions. Then that bank will be your client. As a CUSO leader, you start thinking about this. The happenings of the last few years, the clear emergence of local banking, conversions issues--it has CUSO leaders thinking [working more with banks] may be inevitable. If you go back five or 10 years, this would be unthinkable. I had a [request for proposal] the other day that asked, "What would happen to the relationship if my credit union client converts to a bank." Most [credit unions] that converted to banks were big players in the community and had created strong bonds with CUSOs. Now, you have an organization that has to start thinking about banks as potential clients. With CU* Answers, we make concessions and software changes to deal with a credit union that had converted to a bank. I asked my board a long time ago not to make any iron clad statements. You have to review the marketplace, current political environment and what's best for members, credit union capital and potentially, the credit union industry. All of those things are constantly in flux.