WEST PALM BEACH, Fla. – Innovation is critical to any businessor industry to remain competitive, and CUSO leaders agree it's notonly imperative for the credit union industry at this time in itshistory to remain innovative, but that CUSOs can be a catalyst inimplementing creativity through collaboration. “The credit unionindustry is at an inflection point,” said NACUSO Vice Chairman, TomDavis, president/CEO of Davis & Company, Highlands Ranch,Colo., a management consulting firm that specializes in memberfocus group research, strategic planning, change management andboard governance. “We have the opportunity and choice to go one oftwo ways – we can stay the same old course or take a new course.But considering the deterioration of the credit union businessmodel, staying the same course is not the wise choice,” he added.Davis cites several statistics that support his argument that thecurrent credit union business model is “broken”: as of Dec. 31,2005, CUs' average net interest margin was 3.25%, the same asoperating expenses as a percent of assets. “So the business modelis dependent on non-interest income,” he says. In addition, therehave been less than 100 new credit union charters in the last 12years while banks have had more than 1,200. Lastly, in 1977, therewere approximately 27,000 credit unions, and now there are about8,900, “so we're losing about a credit union a day,” he estimates.Davis opines that the situation the credit union industry findsitself in now “is partly the industry's fault. We need to respondbetter to the competition. Products and services are a commodity,everyone's got the same deal. “We are an aging industry, but anindustry doesn't age just because of where it is on the growthcycle. It ages because it quits pursuing an idea. We need toembrace the ideal of serving the member better than anyone else. Ithink credit unions still embrace that as a goal or theirobjective, but we're not doing as good a job as we used to.” JeffKline, president/COO, CU Holding Company, LLC and Beyond Marketing,LLC agrees with Davis' assessment. “Credit unions may not have thesame assets as banks, but in many cases such as ATMs they have moreresources. If credit unions can find a way to leverage resourcesand find ways to cooperate, then there's no reason why we can'tprovide ourselves with the same services we rely on banks for,”Kline says. They both concur, “collaboration is key.” So does LisaRenner, president/CEO, CU Holding Company and Beyond Marketing.“The big question is what is it going to take for credit unions torealize they need to do the math and that collaboration is betterfor their bottom line and for the member,” she states.“Return-on-assets for credit unions has been below 1% for the lasteight quarters, there's been a lack of growth in the number of newcredit unions chartered and also in the number of new members.Everything screams out for the credit union industry to dosomething in order to compete with other financials, and thatsomething is innovation and collaboration,” says Renner. CUSOs:Collaboration Machines That sort of innovation and collaboration isalready evident in several CUSO initiatives. Last year, forexample, Allegacy Services, a payroll processing company owned byAllegacy Services, a wholly-owned CUSO of Allegacy FCU, opened forbusiness. In April, the company began processing the payroll forthe credit union's 300 employees. Ray Crouse, managing director ofAllegacy Services and interim CEO of the payroll processingcompany, says the North Carolina Credit Union League will probablymove onto the payroll system “shortly.” In addition, the companyhas sent proposals to two of its more than 400 select employeegroups to handle their payroll processing. “We weren't going tostart doing payroll for anyone else until we were confident wecould do it successfully for Allegacy FCU,” says Crouse whoadmitted, “When we ran our payroll we were holding our breath. Itwas our first complete run of the system. To our tremendoussatisfaction, there were no errors or missed deposits, everythingwent smoothly. He said the CUSO's plan is to extend the service toAllegacy's commercial business members, as well as to other creditunions so they can extend the service to their SEGs. In addition,Crouse said the payroll processing company is working to getoutside investors involved. A credit union in the Midwest, forexample, had a CPA firm review the software, and Crouse said thatfirm will probably be the first outside investor. He expects thecompany will have three outside investors by June 30 – one eachfrom the Midwest, East and West Coast areas. Allegacy FCU, likemost credit unions, used to outsource its payroll processing. Theproblem, says Crouse, was the credit union wasn't getting the levelof service it needed, and the more he talked with other creditunions and CUSOs he found they had similar experiences. Crouse tookhis idea for developing payroll processing software and setting upthe company to Members Gateway, and with their assistance broughtin a payroll consultant to get set up. He also worked with NACUSOGeneral Counsel Guy Messick for NCUA approval to operate thepayroll processing company. The CUSO is currently located in arenovated 4,000-square foot area on the second floor of AllegacyFCU. The CUSO has set up a payroll processing secure room where allthe payroll responsibilities are handled. Including Crouse, thestaff includes five people. “With the franchise possibility for theCUSO across the country for the payroll company, I'm confident witha collaborative effort that we'll be very successful,” said Crouse.Dependency on outside data processors was also the motivatingfactor behind the formation of the multi-owned CUSO CU*Answerswhich is now owned by 73 CUs. Bob Frizzle, CFO of the CUSO,explained that data processor consolidation over the past few yearshas been very active and has resulted in data processors sellingtheir contracts to other processors without their clients'permission. “So credit unions in these situations have no say inthe transactions and may wind up doing business with a processorthey perhaps didn't want to work with. By creating the multi-ownedCUSO, which owns the contracts on the credit unions, the ownerswould have to vote if the CUSO wanted to sell their contracts. Sothey have control,” Frizzle explains. According to Frizzle,CU*Answers advocates local governance “so if something changes in aregion, those credit unions can dictate the action of the CUSO. So,for example, CU*Northwest is owned by four area credit unions andCU*Answers. Using that model, Frizzle is in the process of talkingwith a group of credit unions in the south to do the same thing forCUs there that have expressed an interest. The same thing, he said,could be set up for CUs in five or six states in the Gulf area.“Credit unions are somewhat restricted by what they're approved todo, but CUSOs have more latitude. That's why CUSOs can be greatincubators for innovation,” says Frizzle. The key behind innovationis the willingness to take risks, and that was the impetus behindthe creation of Forum Solutions, LLC in September 2000, as awholly-owned CUSO of Forum CU. Doug True, president of the CUSO waspreviously vice president of lending and branch delivery for thecredit union. When he noticed the CU needed to correct some of itslending technology, it first looked to third-party software, butdecided that was too expensive and didn't meet the CU's needs. SoTrue, along with Forum CU associate Cam Minges, developed the TotalApplication Processing System Enterprise Lending software. Demandfor the software grew with its popularity and use, and eventuallyFCU President/CEO Gary Irvin gave True the go-ahead to form theCUSO to market the lending software to other CUs. The CUSOcurrently has 40 CU partners; it markets the TAPS software too.True says the CUSO has “grown organically through word of mouth,”and he considers it a “living, breathing laboratory for new productdevelopment. We can easily develop something here at Forum beforewe deploy it to other credit unions. Here we can be our own betatest site which makes it easier for us and gives us morecredibility.” Mark Meyer, who heads Filene Research Institute's i3,agrees. “One of the unique aspects of the credit union industry isCUSOs' ability to harness the power of collaboration and blend thatwith entrepreneurial spirit. The CUSO becomes the sandbox whererisk is tolerated. If a credit union tries something it affects itsbottom line. CUSOs have a higher tolerance. But you shouldn't beafraid to fail. If you're not failing on occasion and don't havethe tolerance for risk innovation, you'll always just have safeinnovation and short change yourself.” -

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