Collaborations, through CUSOs and otherwise, hold the promise of earning non-interest income from non-traditional financial products and of significantly reducing operating costs. Both opportunities are welcomed in an industry where the average net interest income is less than the costs of running a credit union. If collaborations are not extensively used by credit unions, the survival of most credit unions is at substantial risk.
Since CUSOs were established, they have evolved from singly-owned financial services to CUSOs to multi-owned "hubs." Today, we are on the cusp of a new model: the Integrated Network CUSO.
Collaboration 3.0 – The Integrated Network CUSO
The next generation of CUSOs will not be constructed as hubs but as fully integrated networks in which credit unions provide services to other credit unions through the network and are paid for it. The networks will also provide income and member acquisition opportunities for its member credit unions. A little fuzzy? I'll explain.
In order to save money, scale is not enough. You have to manage capacity and have the technology and business model to be effective and efficient. If you need a collector but can only have enough work for a half-time position do you incur the additional and redundant costs of hiring a full-time collector? If you do but then the need is no longer there, do you lay off the collector? To circumvent these problems, what if credit unions were in a network with other credit unions where certain credit union collectors were made available to the network on an as-needed basis? Under this arrangement, managing capacity for the serviced credit union becomes a whole lot easier and cheaper. The credit union employing the collector would be paid a fee for the collector's services and earn income on its otherwise idle capacity. All of this could happen without the CUSO independently employing persons to provide the services.
Think of the network CUSO as a switch. A request for services from a credit union needing additional capacity would come into the CUSO and that request would be matched with a credit union having excess capacity. While services are being provided, the person would be working as an agent of the CUSO and not as an employee of the credit union. The CUSO would handle the payment for the services between the credit unions.
An advantage to credit unions in a network model versus the hub model is that the credit unions have a means to transform their underused capacity into an income-producing asset. The annual aggregate cost of operating credit unions in the United States is over $28 billion. In a network model, credit unions get a piece of that pie with an asset they already have. An additional benefit is less pressure to lay off a productive employee in slow times because the network will re-distribute the credit union's over-capacity to other credit unions. Excellent services would be rewarded, because the persons providing the best services would be the most requested.
The for-profit business world is moving to just such networked models. Jobs are brokered out to workers who bid on projects and assemble to perform the work on a "just-in-time" basis. To keep up, credit unions should adopt some of the same practices. Although the concepts are a bit trickier to realize in a regulated financial institution, they can be accomplished.
While the cost savings for in-network credit unions will be substantial, the networks' more significant role will be to proactively seek out and provide growth and income opportunities for its member-owners. The mindset is that the network is an active agent for the growth of its member credit unions. The network will be paid by credit unions for delivering new credit union members, and for new income producing and new cost reduction opportunities.
The skills necessary to successfully build a network model are not intuitive. Next week, I will layout the 12 Principles of a CUSO Network.