Of the 160+ respondents to Callahan & Associates’ 2009 Non-Interest Income Survey, less than half reported unconsolidated CUSO income. That dovetails with industry averages: Just 32.2% of credit unions have an investment or outstanding loan to a CUSO as of March 31, 2010. With continual earnings pressures, a record-low interest rate environment, and ongoing regulatory reform, non-interest income is critical for maintaining credit union bottom lines. Threats to established sources of non-interest income include changes to Regulation E, the CARD Act, and debit card interchange legislation.
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Concentration Of Non-Interest Income From CUSOs
CUSOs provide an alternate source for credit unions to diversify their income. Survey respondents in 2009 reported that, on average, 3.6% of non-interest income is derived from CUSOs. For a smaller group of credit unions that report an income or loss, rather than no data, that average rises to 5.9%. Beyond the average, individual credit union entries display a range of CUSO non interest dependence. At the top end, half-a-dozen credit unions indicated more than a third of their non-interest income comes from CUSOs.
It is important to note CUSOs, like any investment or business, carry risk and might require ongoing support ─ 4% of respondents reported an overall loss from CUSOs, averaging 2.9% of non-interest income.
Using CUSOs As New Revenue Streams
The first quarter 2010 edition of Credit Union Strategy and Performance presented a case study about Purdue Employees Federal Credit Union. The credit union ($640.8M,West Lafayette, IN) is one example of a credit union that uses its CUSO to work beyond its normal bounds. In the course of expanding its Intranet in 2002, the credit union discovered two student software developers with big ideas and untapped potential.
“Together, these two had developed software for an Intranet portal for financial services companies,” says Gail Koehler, PEFCU executive vice president and head of IT. The two men “demonstrated the viability of the product,” but fell short in their “business plan, financing, and management experience.”
The credit union invested in the portal through its mortgage CUSO, CU Channels, which took minority ownership but management control. The joint venture between CU Channels and the two young developers paid off. Passageways, LLC became a booming new service offering for area credit unions and provides a strong return for the credit union, says Koehler.
“Passageways has been quite successful,” Koehler says. “It has sold more than 200 portals to financial services organizations, most of them credit unions.”
“Passageways contributes significantly to our CUSO’s bottom line, which then flows directly to our credit union’s net income” says Koehler. One lesson the credit union learned from expanding into new markets with its CUSO: “Keep out of the way of the creators,” Koehler continues. “Let them follow their vision.”
“Our feeling was that Passageways would go best if the two creators kept developing the product in the way they envisioned,” Koehler says. “A lot of people would not be comfortable with this approach, but it worked for us. If you want a CUSO to earn money in the traditional way, set up a traditional product or structure.”