Diversify or Specialize? Both Work for CUSOs
CUSOs trying to choose between a strategy of diversification or specialization may find there is no wrong answer.
Case in point: two CUSOs that took different approaches and have both enjoyed considerable growth.
One offers a wide range of services, while the other focuses on business lending. The common factor seems to be taken straight from Business 101—find a need and meet it.
Xtend, based in Grand Rapids, Mich., offers a varied menu that includes bookkeeping, mortgage servicing, a call center and compliance monitoring. The CUSO is owned by 72 credit unions, and provides services to 175 credit unions.
“We encourage ownership, but some credit unions simply want services without being an owner,” President Scott Collins said.
Collins said Xtend was formed 11 years ago by 12 credit union CEOs using the CU*Answers core processing system. They decided they needed a CUSO that could provide three things: access to markets, shared resources to help with back office and call center functions. And, the services had to be priced be attractive to mid-market credit unions.
Today there are 55 Xtend employees, between both the back office and front office. Back office handles tasks such as bookkeeping and compliance modeling. The call center is considered front office.
“My bookkeeping team, for instance, will do back office work for eight to ten credit unions,” Collins said. “Right out of the gate we were able to work closely with the core provider and add new functionality to the software.”
All products and services are available a la carte. Most credit unions pay $150 a week for bookkeeping, he said, adding that some credit unions may use five or six services, while others may only use one.
Call center activity, with 27 employees, is about 50% outbound and 50% inbound. There’s a lot of outreach to keep members informed about their credit union’s products and services, Collins said, and leads can be forwarded to the credit union.
Member Reach is another Xtend service aimed at keeping members aware of their credit union, sending approximately 3 million targeted electronic messages a year. The messages range from a simple happy birthday greeting to congratulations for advancing from a gold to platinum credit card.
“Credit unions that use it are communicating with their members more often and in a more targeted way than they would on their own, I think,” Collins said.
Collins said at Xtend’s recent board planning session, he reminded the group that the CUSO’s business is about eliminating barriers for the mid-market credit unions that form its ownership base.
Next Page: Making it Easier
“If I can make it easier for a credit union to bring their credit card portfolio on-line because I can do their back office daily work, then that’s a win-win,” he said. “If I can drive more loan activity because I’ve got folks that make 20,000 outbound calls a month to create member awareness, that’s a win-win. A lot of the credit unions might not be open on Saturday, but the call center is open on Saturday.”
Another growing CUSO is Cooperative Business Services in Cincinnati, Ohio. While Xtend offers a range of services, CBS instead focuses on business loans.
CBS was formed in 2003 by seven credit unions in southwest Ohio that wanted to cost-share back room expertise for business loan underwriting. Today the CUSO has nine owners—eight credit unions plus the Ohio Credit Union League—and 75 client credit unions in 10 states. CBS has an office staff of 22, plus six business development officers out in the field.
“Credit unions are in different places when it comes to their internal level of expertise in business lending,” President/CEO Keith Reed said. “Some credit unions are using CUSOs, some are doing business lending on their own, and others have a hybrid of that. It depends on where the credit union is in their competency.”
The hybrids occur, he explained, when a credit union handles business loans up to a certain level, but turns to outside help once a loan exceeds a certain level of complexity. It may then use a CUSO for underwriting and syndicating.
Each credit union handles as much of the personal relationship with the business owner as possible, he said. If it is a more complex situation, the credit union would explain the relationship with the CUSO to the business owner. The business owner would then expect a phone call from the appropriate CUSO representative.
On a positive note, Reed said he believes credit unions have done a good job of communicating the credit union option to small businesses. The challenges are the rate environment and competition.
“There are a lot of community banks and larger banks vying for the same opportunities we are. The market is very competitive. We really have to be on our A game,” he said.