We started Innovative Strategic Solutions (ISS) about eight years ago. It is a CUSO completely owned by FedFinancial FCU. It offers several services, some of which are partly or wholly owned by others.
Our work with ISS began when the three members of the management team newly arriving from very small credit unions at FedFinancial – at the time called Public Health Service FCU – saw a need and opportunity for services to small credit unions. Having come out of credit unions of under $20 million assets we saw that small credit unions had difficulty achieving economies of scale but that CUSOs could do a lot to boost them.
Our strategy was to find functions that were not differentiators for credit unions, that is, functions for which persons did not choose a credit union but that could be offered to a number of credit unions both for savings and better service. Settling in to our new posts we took note of a collector at the credit union who was very efficient. Six months into our new work we wanted to pay him more but realized the only way to do so was to share him with another credit union.
We set that up and the collector did well with this second credit union as a client. When he was comfortable with the two clients, we found him a third. Then we set up ISS and offered collections as a service. The collections portion of ISS now has 20 clients in the eastern portion of the country. Small credit unions cannot afford a collector six days a week, working evening hours, who keeps up on the latest laws, and is bilingual. But for a fee credit unions can afford to hire that kind of service and expertise.
Expanding the CUSO
In the beginning we also did some planning session facilitating, but we soon dropped this service because of a potential conflict of interest arising from our CUSO handling meetings for credit unions in our region.
However, ISS did go into partnership with Frank Hackney. A trainer and facilitator, Hackney runs a conference and training company called InnerShift. ISS is the majority owner of Conference Group LLC with Frank Hackney being the managing partner and minority owner. We believed Conference Group could fill a niche, providing high level training for credit union leaders with top business experts in a foreign setting. There is also a continental U. S. component of two divisions. The CU Philanthropy Group offers training and team building with a twist: It engages the participant credit union employees and board members in assembling prosthetics for persons around the world who have lost their hands. A second option is to assemble bicycles that are then donated to boys and girls clubs. CU Development delivers development training locally.
Another aspect of ISS is establishing partner arrangements with companies that have a great offering but are little known among credit unions. We have a partnering agreement with both Sydel and Primax to act as a sales agent. Sydel creates software for risk management as it pertains to third-parties – we saw a demand for this service when NCUA was concerned about such risk. Primax is a debit and credit card servicing firm run from Massachusetts.
How has our CUSO been doing? We have good years and bad. Sometimes the CUSO contributes to the bottom line and sometimes it takes away. We’ve found it’s difficult to grow a CUSO with limited financial and other resources. We are a $60-million credit union and cannot devote a great deal of resources to ISS. So we run it by taking some time away from the credit union, time covered by the other credit union managers. When we have good earnings we plow them back into the CUSO in the form of upgraded IT, internal programming, more highly skilled staff, or the like. The collections portion especially has been doing well; its clients on average have a combined delinquency/charge-off rate 25 bp below that of their peers.
Although ISS has only marginally provided us a net gain over eight years, we feel it is a benefit to our credit union in other ways. It brings us exposure as well as discipline, and we believe the CUSO will deliver large gains in the future.
No Partners for Now
To this time we have not sought credit union partners. Our biggest worry is that if we did, there might be a lack of flexibility at a time we thought a greater investment had to be made.
If we did seek partners we’d want ones who had experience with CUSOs and who had realistic expectations about CUSO results, persons who knew most CUSOs lost rather than made money. You can’t start a CUSO and think it is going to be a steady money machine from its early days.
Our advice to other credit unions considering starting a CUSO: Be very careful that you get the right people in place, and recognize how expensive the right people are. We tried to step away from the operations a couple of times only to realize that those whom we had left in charge could not perform to our expectations.
We also found there’s a large difference between having 5 to 10 clients and having 10 to 20. With the smaller operation you are really managing the clients, but when you have 10 to 20 clients you are really managing a business and that is a different skill set.
From our point of view, we are happy we started ISS, and we expect good things in the years ahead, but so far it’s been a kind of a close thing.