Divesture From CUSOs Not a Likely Trend as CUs Seek Revenue Streams
o CUSO collaboration still the norm among credit unions.
o Stressed CUSO financials, vision and management changes may lead some CUs to divest.
o Among best approaches to gaining economies of scale is through a CUSO, advocates tout.
With a vested stake in nearly a dozen CUSOs, Workers' Credit Union has tried, tested and proven theories on why it makes operational sense to extend its reach in several directions.
"CUSOs are the secret weapon of our industry," said Doug Petersen, executive vice president at the $756 million Workers' in Fitchburg, Mass. "Collaboration can enable CUs to gain economies of scale while remaining independent. CUSOs are a means to an end."
Workers' owns eight CUSOs and collaborates with two others in areas ranging from business lending and student loans to credit and debit cards to investment services. Petersen said the credit union has invested $1.76 million in CUSOs. In total, it is actually $2.45 million less capital distributions of $682,000. Workers' is also in the discussion stage of developing an information technology CUSO as well as title insurance subsidiary.
Like Workers', for many credit unions, finding a strategic fit for the services and products offered through a CUSO tends to take the lead on the reasons for collaboration. On the flip side, with all the flux occurring within the industry from corporate credit union restructuring, sluggish loan growth, assessments and a keener eye on operating more lean and mean, some cooperatives are taking a harder look at when to partner with, launch or even divest from a CUSO.
Among the reasons for leaving a CUSO is a deviation from its original business model, Petersen said. Owners and partners may have issues with the changes and opt to sever ties. Another justification is taking the independent route with a credit union wanting to build its own entity in house. A CUSO's financials may show signs of distress, providing another reason for jumping ship to minimize losses. Jwaala Inc., an Austin, Texas-based online personal financial management solution provider, was a CUSO with the $539 million Amplify Credit Union. Jwaala has since bought out the credit union's interest and is no longer linked to the cooperative in Austin. The company continues to partner with other credit unions.
"If a CUSO is doing extremely well, it might be sold for a profit," said Petersen. "By selling it to another credit union, it might bring in more business and then, everybody wins."
The corporates are also experiencing some CUSO shakeups. Eastern Corporate Federal Credit Union in Burlington, Mass. launched 1909 Financial Advisors LLC several years ago. Through the trust and wealth management subsidiary, EasCorp partnered with MEMBERS Trust Co. to serve its credit union clients. Maria Connelly, marketing manager at EasCorp, would not confirm if 1909 is still in operation. After checking EasCorp's website, no information could be found on 1909. It launched Vertifi Software, a payment systems CUSO, in 2009.
Competing on the scale of a Wells Fargo or Bank of America is just not realistic for credit unions, said Mark Zook, president/CEO of MaPS Credit Union in Salem, Ore. Zook is also the CEO of MaPS Service Agency Inc., the holding company for the credit union's subsidiaries. At face value, CUSOs serve as a new revenue source, a natural inclination since credit unions were designed to grab new opportunities.
"But now, with everything happening, there is a much more compelling argument to look at scale so we can leverage our collective organizations to create economic opportunities," Zook said. "So, it's really a scale issue."
The $387 million MaPS owns eight CUSOs including Credit Union Wireless, Advanced Reporting, MaPS Insurance Services and Fi-Linx. Its insurance subsidiary has just brokered a medical benefits program with five credit unions that have signed on to offer coverage at the start of 2011. Zook said the credit union used to own a mortgage company but decided to divest as the advantages of ownership became less relevant with the changes in the industry.
"There are CUSOs that are developed with an intended outcome to sell the CUSO with a potential gain," Zook said. "A credit union might also want to sell if the CUSO is at risk."
Zook emphasized that neither of MaPS' CUSOs are up for sale because to do so would go against the credit union's strategic direction. It continues to get many requests from others to become owners of MaPS' solely owned CUSOs. Zook said no decision has been made to move forward here.
"It has been part of our culture to have our hands in many places. We've grown, we've been innovative. For me, it's second nature to have revenue streams other than portfolio."
Credit unions are juggling so many balls in the air stemming from economic and regulatory changes, anything CUSOs can do to help leads to better control and better pricing, Zook said. As an advocate for CUSO development, he strongly believes that they can reveal opportunities for off balance sheet income not derived from portfolios. Still, if the economy continues to be a challenge, credit unions may start to become creative about how they generate revenue. That creativity will also lead to more innovation, he added.
Petersen offered other reasons why credit unions might sell their stake in a CUSO. A change in management might bring a change in the subsidiary's vision.
"A lot of what happens in CUSOs is a huge relationship game. You have to build trust. You have to do show them you can do a better job than they can."
For all of its benefits, CUSO collaboration is not always a scene of everyone holding hands and singing Kumbaya. Petersen said problems may arise if credit unions are not fully committed to CUSO collaboration as a key strategy. There might be less control and multiple egos, and a need to commit to a shared solution or partnerships may be based on individual relationships. Illiquid investments within a relatively unknown market or industry can also pose problems. Can a credit union operate without a CUSO? Petersen said CUSOs are a long-term strategy and the reality is some can go it alone.
Still, collaboration far outweighs separation and independence, both Zook and Petersen agreed. At Workers', getting into areas such as commercial lending and investments meant connecting with the right expertise. Building an in-house operation made less sense than aligning with others who wanted the same types of services and products. The best approach to gaining economies of scale is through CUSOs, said Petersen, who serves on NACUSO's board of directors and is a staunch promoter of collaboration.
"We view CUSOs as important to the future of our industry," Petersen said. "It's like the fax machine. If only one or two people use, then they only get the benefits. But if everyone uses it, everyone gets the benefits."