WEST PALM BEACH, Fla. – Innovation is critical to any business or industry to remain competitive, and CUSO leaders agree it's not only imperative for the credit union industry at this time in its history to remain innovative, but that CUSOs can be a catalyst in implementing creativity through collaboration. “The credit union industry is at an inflection point,” said NACUSO Vice Chairman, Tom Davis, president/CEO of Davis & Company, Highlands Ranch, Colo., a management consulting firm that specializes in member focus group research, strategic planning, change management and board governance. “We have the opportunity and choice to go one of two ways – we can stay the same old course or take a new course. But considering the deterioration of the credit union business model, staying the same course is not the wise choice,” he added. Davis cites several statistics that support his argument that the current credit union business model is “broken”: as of Dec. 31, 2005, CUs' average net interest margin was 3.25%, the same as operating expenses as a percent of assets. “So the business model is dependent on non-interest income,” he says. In addition, there have been less than 100 new credit union charters in the last 12 years while banks have had more than 1,200. Lastly, in 1977, there were approximately 27,000 credit unions, and now there are about 8,900, “so we're losing about a credit union a day,” he estimates. Davis opines that the situation the credit union industry finds itself in now “is partly the industry's fault. We need to respond better to the competition. Products and services are a commodity, everyone's got the same deal. “We are an aging industry, but an industry doesn't age just because of where it is on the growth cycle. It ages because it quits pursuing an idea. We need to embrace the ideal of serving the member better than anyone else. I think credit unions still embrace that as a goal or their objective, but we're not doing as good a job as we used to.” Jeff Kline, president/COO, CU Holding Company, LLC and Beyond Marketing, LLC agrees with Davis' assessment. “Credit unions may not have the same assets as banks, but in many cases such as ATMs they have more resources. If credit unions can find a way to leverage resources and find ways to cooperate, then there's no reason why we can't provide ourselves with the same services we rely on banks for,” Kline says. They both concur, “collaboration is key.” So does Lisa Renner, president/CEO, CU Holding Company and Beyond Marketing. “The big question is what is it going to take for credit unions to realize they need to do the math and that collaboration is better for their bottom line and for the member,” she states. “Return-on-assets for credit unions has been below 1% for the last eight quarters, there's been a lack of growth in the number of new credit unions chartered and also in the number of new members. Everything screams out for the credit union industry to do something in order to compete with other financials, and that something is innovation and collaboration,” says Renner. CUSOs: Collaboration Machines That sort of innovation and collaboration is already evident in several CUSO initiatives. Last year, for example, Allegacy Services, a payroll processing company owned by Allegacy Services, a wholly-owned CUSO of Allegacy FCU, opened for business. In April, the company began processing the payroll for the credit union's 300 employees. Ray Crouse, managing director of Allegacy Services and interim CEO of the payroll processing company, says the North Carolina Credit Union League will probably move onto the payroll system “shortly.” In addition, the company has sent proposals to two of its more than 400 select employee groups to handle their payroll processing. “We weren't going to start doing payroll for anyone else until we were confident we could do it successfully for Allegacy FCU,” says Crouse who admitted, “When we ran our payroll we were holding our breath. It was our first complete run of the system. To our tremendous satisfaction, there were no errors or missed deposits, everything went smoothly. He said the CUSO's plan is to extend the service to Allegacy's commercial business members, as well as to other credit unions so they can extend the service to their SEGs. In addition, Crouse said the payroll processing company is working to get outside investors involved. A credit union in the Midwest, for example, had a CPA firm review the software, and Crouse said that firm will probably be the first outside investor. He expects the company will have three outside investors by June 30 – one each from the Midwest, East and West Coast areas. Allegacy FCU, like most credit unions, used to outsource its payroll processing. The problem, says Crouse, was the credit union wasn't getting the level of service it needed, and the more he talked with other credit unions and CUSOs he found they had similar experiences. Crouse took his idea for developing payroll processing software and setting up the company to Members Gateway, and with their assistance brought in a payroll consultant to get set up. He also worked with NACUSO General Counsel Guy Messick for NCUA approval to operate the payroll processing company. The CUSO is currently located in a renovated 4,000-square foot area on the second floor of Allegacy FCU. The CUSO has set up a payroll processing secure room where all the payroll responsibilities are handled. Including Crouse, the staff includes five people. “With the franchise possibility for the CUSO across the country for the payroll company, I'm confident with a collaborative effort that we'll be very successful,” said Crouse. Dependency on outside data processors was also the motivating factor behind the formation of the multi-owned CUSO CU*Answers which is now owned by 73 CUs. Bob Frizzle, CFO of the CUSO, explained that data processor consolidation over the past few years has been very active and has resulted in data processors selling their contracts to other processors without their clients' permission. “So credit unions in these situations have no say in the transactions and may wind up doing business with a processor they perhaps didn't want to work with. By creating the multi-owned CUSO, which owns the contracts on the credit unions, the owners would have to vote if the CUSO wanted to sell their contracts. So they have control,” Frizzle explains. According to Frizzle, CU*Answers advocates local governance “so if something changes in a region, those credit unions can dictate the action of the CUSO. So, for example, CU*Northwest is owned by four area credit unions and CU*Answers. Using that model, Frizzle is in the process of talking with a group of credit unions in the south to do the same thing for CUs 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 to do, but CUSOs have more latitude. That's why CUSOs can be great incubators for innovation,” says Frizzle. The key behind innovation is the willingness to take risks, and that was the impetus behind the creation of Forum Solutions, LLC in September 2000, as a wholly-owned CUSO of Forum CU. Doug True, president of the CUSO was previously vice president of lending and branch delivery for the credit union. When he noticed the CU needed to correct some of its lending technology, it first looked to third-party software, but decided that was too expensive and didn't meet the CU's needs. So True, along with Forum CU associate Cam Minges, developed the Total Application Processing System Enterprise Lending software. Demand for the software grew with its popularity and use, and eventually FCU President/CEO Gary Irvin gave True the go-ahead to form the CUSO to market the lending software to other CUs. The CUSO currently 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 product development. We can easily develop something here at Forum before we deploy it to other credit unions. Here we can be our own beta test site which makes it easier for us and gives us more credibility.” Mark Meyer, who heads Filene Research Institute's i3, agrees. “One of the unique aspects of the credit union industry is CUSOs' ability to harness the power of collaboration and blend that with entrepreneurial spirit. The CUSO becomes the sandbox where risk is tolerated. If a credit union tries something it affects its bottom line. CUSOs have a higher tolerance. But you shouldn't be afraid to fail. If you're not failing on occasion and don't have the tolerance for risk innovation, you'll always just have safe innovation and short change yourself.” -

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