Passageways LLC has an unusual history, but as unusual as Passageways has been, it has also been quite successful and has earned a good deal of non-interest income for our credit union.
In 2002 our credit union decided it should upgrade its Intranet and we were prepared to devote resources to the effort. But about this time a professor at Purdue recommended us to two of his students, one a grad student, Paroon Chadha, and one an undergrad, Christopher Beltran. Together these two had developed software for an Intranet portal for financial services companies, they needed to go to the next step, and the professor said we gave warm welcome to innovation. I was PEFCU’s VP of Technology at the time. Paroon and Christopher set up a meeting with Bill Arnold, then Assistant VP of IT, who then recommended the two to me. I set up a 30-minute meeting.
I let them stay three hours. Clearly these two had a wonderful product. I was thrilled with it and told our CEO, Bill Connors so. Although I wanted to purchase their product, I told Bill I had concerns about whether the young men’s company would survive without some kind of capital investment and suggested that we invest through our CUSO. He thought I’d gone around the bend, but pretty soon he saw the light. Paroon and Christopher had already demonstrated the viability of the product – Christopher’s father was CEO of Security First FCU in Texas and that credit union had installed a version of the portal platform for a proof of concept. What Paroon and Christopher lacked was a business plan, financing, and management experience.
Structuring the CUSO
Here’s what we did. PEFCU already had a CUSO – CU Channels LLC, whose primary activity was originating and servicing mortgages for other credit unions. With an investment of $100,000, the CUSO took a minority ownership interest in the portal company, to be called Passageways, the rest taken by Paroon and Christopher. We issued another form of stock by which CU Channels took 65% management control of Passageways and the creators 35%. We set up milestones in the operating agreement such that when milestones were reached greater management control would transfer to Paroon and Christopher. Thus Passageways became an LLC, partially owned by CU Channels, which also continued to have its mortgage services arm.
In March 2003, PEFCU became the first full installation for Passageways. We no longer needed to upgrade our Intranet; Passageways took over and expanded the former Intranet functions. Within two years Passageways had met its first milestones, and CU Channels’ ownership percentage in the company, as well as our management control, decreased and shifted to Paroon and Christopher. Within five years all the milestones we had set up for this period had been met. I serve as the president and COO of Passageways but I serve at the request of Paroon and Christopher, who, as majority owners, have the ability to hire (or terminate) and officially have management control.
Product and Payback
Passageways has been quite successful. It has sold more than 200 portals to financial services organizations, most of them credit unions. Four years ago, we sold one to a community bank (a credit union executive left his credit union to join a bank and recommended the purchase), and we sold to other bank entities. We’ve also sold a portal to a hospital in Illinois and are looking to expand in the healthcare field. In addition, we have a standalone Board Portal offering, which we make available to any organization that has a board of directors. We are the nation’s leading provider of portals to credit unions.
Twenty-eight modules are available, including email, HR, alerts, meeting packets, links for tellers to communicate with back-office experts without leaving a member at the window, and so forth. Passageways has won numerous awards and distinctions, and Paroon and Christopher have been recognized as among the top entrepreneurs in Indiana and the nation.
Passageways never needed further outside funding or investors. Our $100,000 initial investment has gained us a minority ownership of a multi-million-dollar growing company. The CUSO’s ownership of Passageways contributes directly to the bottom line of PEFCU not only through profits on our investment, but also through cost recovery to the credit union. Passageways continues to be housed at our administrative headquarters in West Lafayette, Indiana. What originally began as a very small rent payment to the credit union has increased over time as the company and its number of employees has grown. At this time, Passageways contributes significantly to our CUSO’s bottom line which then flows directly to our credit union’s net income. In fact, since we started the company in 2003, the cumulative contribution has been over $1 million, a good return on our $100,000 investment.
Our advice to credit unions looking to start CUSOs for non-interest income is as follows. Try for diversification. Our investment in Passageways is balanced by our CU Channels mortgage services arm; over time, we have been fortunate that when one is having a bad year the other has had a good year, smoothing cash flow.
Understand that you are taking a risk and that your venture could be a failure. Ours was not. The worst case for us would have been a nice, but expensive, portal that worked for us but that could not be sold to others. We ended up with the best case, which was that the value of the portal was recognized by a great many other financial services institutions.
Another lesson: Try to keep out of the way of the creators; let them follow their vision. A lot of people would not be comfortable with this approach, but it worked for us. Paroon and Christopher come to us for business advice, and they tap the advice of our staff and their customers, but our feeling was that Passageways would go best if the two creators kept developing the product in the way they envisioned. It’s worked for us.
If you want a CUSO to earn money in the traditional way, set up a traditional product and structure. If you have a faint heart for risk, avoid risk.