Today, it is not unusual for multiple credit unions to target the same pool of potential members. As credit unions adopt overlapping fields of membership, they are faced with a new challenge: their credit union counterparts are now competitors. Yet with limited resources in comparison to other financial service giants like Bank of America or ING, many credit unions recognize that cooperation—not competition—is a necessity to create a competitive advantage.
Eight credit unions in Ohio are proving a case in point. Two years ago, these credit unions expanded their product offering to include member business loans through Cooperative Business Services (CBS), a credit union service organization (CUSO).
These credit unions have experienced multiple benefits as a result of their particiption, including:
- Lower cost entry point: Everyone shares in the cost of the physical assets (software, office space) and intellectual (people) assets.
- Allocation of scarce resources: Business lending specialists that meet NCUA’s guidelines are scarce in certain geographic areas. Partnering allows credit unions to utilize the same individual.
- Shared risk: The loans come from a larger geographic territory and the risk is spread across more organizations through participations. In addition, each credit union doesn’t invest in their own individual who then is open to competitive offers from other institutions.
- Broader market appeal: More service offerings widen the credit unions’ appeal to potential new members looking for a full service institution.
- Diversified portfolio and higher returns: Loan participations allow the owners to earn a higher rate of return with a lower cost of funds since the costs of the loan are shared.
The financial results for the CUSO have been notable considering it has been open for business just two years. Over a two-year period CBS has reached $25 million in funded transactions and averages about $1 million a month in business loans. The breakdown of loans is
- 85% commercial real estate, investment properties or small business offices;
- 10% term finance, machinery or working capital;
- 5% lines of credit.
“Our approval rate is now averaging 55%, which is lower than I would like it to be,” said Keith Reed, chief operating officer for CBS. “We expected it would take three to five years to be profitable, but as of August 2005, we’ll be profitable. The first year we had a small loss, which was expected.”
The members of CBS CUSO, all located in Ohio, are:
More information on this CUSO’s impact on its owner credit unions, as well as a dozen case studies on other credit unions that are experiencing bottom-line results as a result of their CUSO ownership, can be found in the 2005 Directory of Credit Union Cooperatives. The all new design for this year’s resource focuses on the value that credit unions are delivering to their members through their cooperation with other credit unions.