“Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.”
– Peter Drucker
Given the rapid pace of change in the financial services industry, many innovative credit unions are reinventing themselves to continue to meet their members’ needs. Unable to maintain the traditional “go it alone” approach in the face of competitive pressures, shrinking interest margins, and rising operating costs, a number of credit unions are reevaluating their existing operating models and exploring a variety of outsourcing alternatives.
Credit unions generally consider vendors or credit union service organizations (CUSOs) when seeking an outsourcing partner. While both vendors and CUSOs can be effective partners, a third option exists that, when properly executed, realizes the cooperative spirit of the credit union movement: credit unions outsourcing to credit unions.
Why Build A Branch When You Can Share One?
One successful and innovative outsourcing arrangement is the longstanding relationship between Local Government Federal Credit Union (LGFCU) ($580M) and State Employees Credit Union (SECU) ($12.6B), both located in Raleigh, North Carolina. Through a contractual arrangement, LGFCU outsources its entire branch operations needs to SECU. LGFCU’s 130,000+ members are able to conduct all their financial transactions at any of SECU’s 185 branches. In return, LGFCU pays SECU on a flat percentage fee basis. Although LGFCU outsources its operations to SECU, it maintains separate corporate and administrative functions including setting its own policies and rates and performing its own marketing.
The arrangement is a win-win for both credit unions. SECU benefits from earning revenue on its excess branch capacity. LGFCU benefits not only from keeping its operating costs down (LGFCU’s 2004 operating expenses to average assets was 2.49% versus its peer average of 3.28%) but also from its ability to provide its members with the convenience of a larger branch network. According to SECU COO Sue Douglas, the partnership is successful because both credit unions share a common philosophy: “we do what is best for our members.”
Cooperative Outsourcing: A Merger Alternative?
Although credit union mergers have been grabbing headlines, a number of credit unions and corporates are developing alternative operating models to achieve the scale economies and enhanced member benefits desired while remaining distinctly separate entities. In the past year, Mid-States Corporate Credit Union, for example, has partnered with both Kentucky Corporate and West Virginia Corporate to fulfill their item processing needs. Mid-States manufactures the product and benefits from the additional volumes. West Virginia Corporate and Kentucky Corporate distribute the product at a price that benefits their member credit unions. According to Mid-States Chief Strategic Officer John Carew, the key to this or any other partnership is “trust and mutual benefit.” While Mid-States has a charter that would allow it to compete directly with West Virginia and Kentucky, its philosophy is to cooperate towards the mutual benefit of both parties.
Reassessing Traditional Operating Models
Outsourcing understandably evokes legitimate concerns among credit union executives. Reduced member service, loss of operating control, and potential job loss are some of the most commonly voiced concerns. However, a well-developed strategy and implementation plan can actually improve member service, reduce costs, enhance efficiencies, and ultimately increase revenue.