To Aid Innovation, NCUA Should Provide for CUSO Pilot Programs
In the last period of unprecedented economic times, credit unions were formed as cooperative alternatives to the banking industry. But this isn't the 1930s. Financial institutions are on every street corner and available 24/7 via the Internet. The pace of innovation is not slowing down. Our competitive challenges are increasing daily. We need to find new methods of collaboration to help create financial solutions for more Americans.
Credit union service organizations have been a key driver of innovation in the past two decades, particularly in credit union payment systems and in operational efficiencies. Yet CUSOs are hampered by restrictive rules that limit the ability of credit unions to work together to bring new products, services and business models to the market.
The current NCUA rules, used by many state credit union regulators, only allow for a specifically enumerated list of services as permissible for credit union investment and lending. These include many well known services such as card processing and loan support services. However, this list is not inclusive of many new services that could be developed for the benefit of members. In recent months, two services were proposed that can help credit unions compete in the marketplace-credit card loan origination services and payroll processing. I was personally involved in advocating for the addition of credit card loan origination to the CUSO rule, and the process to add this took 17 months. This is not to suggest a delay by the NCUA-it is just the nature of the rulemaking process.
Our competitors are not hampered by regulations that require specific approval for new types of services to be brought to an industry. Many banks use holding companies to own operating companies not specifically related to banking. New firms introduce financial products and services, funded by private investment, as well as regulated insurance companies and investment banks. Certainly financial institutions should be held to a high standard of regulation; however, there should be a balance between regulation and the needs of the marketplace.
I propose that the NCUA adopt a pilot program provision for CUSOs. The NCUA currently allows for an investment pilot program. The investment regulation specifies the capital, expertise and supervision requirements for a company to participate in a pilot. No such provision is available for CUSOs, despite a clear need. As new products and services are proposed that are not listed in the current guidelines, each CUSO is required to go through a lengthy and formal process to change the NCUA rule.
As an example, if a credit union determined that it was in their members' best interest to start a CUSO that operated a grocery store in an underserved area of their community, they would be unable to own this business under the current regulations without an interpretation from the NCUA. While operating a grocery store is not a likely business for a credit union today, it demonstrates that member needs may not be limited to services currently provided. The current regulations prohibit credit unions from collaborating to take advantage of new market opportunities.
This pilot program would allow for the NCUA to approve a new type of service conditionally for one or more CUSOs that agree to come under a specific set of supervisory guidelines. During the pilot process, states with CUSO parity provisions with the NCUA would allow their credit unions to invest as well. States with their own approval process could take participation in a pilot as evidence that the CUSO was focused on safety and soundness and allow investment.
This pilot would have specific safety and soundness guidelines that would be agreed to by the NCUA and the CUSO, which would likely include minimum capitalization and risk management performance metrics. These would need to be defined separately for each pilot program and in conjunction with industry and business experts. The CUSO would then take their service to the marketplace operating under these rules. If the pilot was successful in meeting the performance guidelines within a defined period of time, say 24 to 36 months, the NCUA would then move to an expedited rule-making process that would allow for others to enter the marketplace and make the new service category permanent.
This would allow innovation to move relatively quickly into the marketplace, with a regulatory balance. In my experience working with the NCUA, the concern is often not about a particular CUSO but about opening up an entire market without understanding the potential unintended consequences.
A number of states allow for judgment by a credit union regulator to open the door to innovation. In fact, individual states have become incubators for new credit union innovations. However, this limits investment and ownership to a particular state, in effect prohibiting a national presence. A pilot provision to the federal CUSO rule would stimulate a new wave of innovation and collaboration, while balancing the needs of our industry for safety and soundness.
Jeff Russell is president/CEO of TMG Financial Services and chief information officer and vice president, strategic development for The Members Group. He can be reached at 515-457-2000 or firstname.lastname@example.org