The Future of the Corporate Network: Interdependence or Fragmentation

As the future of the corporate network continues to evolve, competition now includes areas such as item processing, electronic bill payment, securitization, broker-dealer service and ALM advice. Learn about how the corporates got where they are, their future options, and about what types of decision the corporate network is looking to make.


Just like natural person credit unions, the corporate network had its most successful year ever in 2001. At year-end total assets hit $59.1 billion for the 34 corporates plus $32.2 billion for US Central. So far in 2002, new records continue to be set as funds pour in even though short-term rates are still at historical lows. Earnings are good both in total dollars and as measured by ROA, which was at 23 basis points in June 2002.

Yet just at this highpoint, there are forces pulling at the system. Most corporates have national fields of memberships. In February, at CUNA Governmental Affairs Conference in Washington DC, six of the corporates had booths all looking to serve credit unions outside of their historical markets. Mergers continue to slowly change the concept of a "local" corporate in each state.

The corporate business model continues to evolve beyond investments on the balance sheet. Competition now includes areas such as item processing, electronic bill payment, securitization, broker-dealer service and ALM advice. The result is that non-interest income from these newer lines of business of $133.5 million almost equals the total net income of $157.5 million in 2001.

How We Got There
Many credit unions would say that competition is good for them and for the system. In fact many CEOs would question the need for the US Central "third tier," which is still taking 17 basis points out of the food chain. Why not let competition continue to reshape the system until market forces have played themselves out and those left standing become the new corporate network?

To understand why this outcome might not be optimal, one needs to look at the evolution of the corporate network. This history might be summarized in four eras.

  1. The first era is the "emergence" of the corporate system from 1969, when WesCorp became the first federally chartered corporate, to 1983. During this time rules were passed defining a corporate, US Central was moved to Overland Park, investment difficulties with GNMAs and Penn Square CDs were overcome and a consolidated system was put into place.

  2. From 1984 to 1992, a highly integrated system grew from $8 billion in total assets to over $44 billion in 1992. There was much attention to the network's "standards and guidelines," automated systems for settlement were installed, and most investments were placed by corporates in US Central. The CLF made an agreement with the corporate network to reach all credit unions.

  3. The next era, from 1993 to 1999, might be called "regulatory purgatory." NCUA decided to go after interlocks and from 1995 through 1998 engaged in a series of rulemaking and examination efforts to restrict the powers of the network. The Black Report (1994) became an unofficial policy sanctioning more capital, national fields of membership and elimination of the third tier. When Capital Corporate FCU was forced into liquidation after being put into conservatorship, the Black report's analysis took on added weight. NCUA granted the first national field of membership to Mid Atlantic FCU. Five mergers of smaller corporates began the inevitable move to consolidation. Both earnings and asset growth were severely restricted in these years.

  4. Today the system is going through a period of "entrepreneurship." Business diversification continues, Internet communications easily reach national fields of membership and larger mergers become more feasible. With 15 corporates, not including US Central, over $1 billion in total assets, the "system" begins to resemble a series of feudal landlords occasionally paying homage to the center, but not really feeling a need for a coordinating presence.

The Future Options
Corporates grew, much like natural person credit unions, because US Central provided a "sponsor's role" for operational and product development. The costs of 45 corporates developing their own automated systems would have been prohibitive, not to mention the lack of size and expertise to bring acceptable investment returns to the corporate level. However, this "reseller" model becomes much less viable once corporates accumulate the capital, expertise and scale to manage their own core investment business.

The question is whether a need for a corporate "center" still exists to coordinate or carry out functions that would be difficult for 20-30 corporates to do individually. If so, do these still require a credit union, or might they be accomplished by some other organization such as a CUSO?

Before answering the operational options, I do believe there is a political dimension. If the corporate network does not have a center and migrates to a much looser social association, I believe that the political center will be filled by NCUA. The CLF is the means through which NCUA extends the lender of last resort authority to credit unions. In its earliest versions at the Agency, the CLF was to play the role of US Central. Because the interests of individual corporates would be divergent and often competitive, there could be no pushback on critical issues of regulatory policy. NCUA assumes the coordinating function.

The Need for a Center
Certainly the investing role of US Central continues to decline. Even as assets peak, the percentage of funds placed in US Central continues to fall to 45%, the lowest since the system became integrated. Some smaller corporates place over 90% of their investments with US Central while some of the larger members fell to just 12% at year-end. The role of US Central as an investment hub is dwindling.

In terms of borrowing authority, unlike the Federal Home Loan Bank System, the commercial paper lines and term credits negotiated for corporates have not been done on a collective basis. Each corporate has negotiated independently or relied on US Central's external borrowing capability.

The one area of consistent system use by all corporates appears to be automated settlement. Credit unions settle thousands of transactions daily via the corporate network. This highly automated system moves billions of dollars to settle millions of member transactions without human intervention.

In fact, as one looks at other national credit union systems emerging for ATMs, shared branching or even indirect auto lending, a shared operational network becomes a major factor for forming a national system rather than a series of regional operations. National competitors in each of these services force credit unions to also think on a nation-wide scale.

The Core Decision
These operational factors do not answer the question of whether there should be six, ten or twenty regional corporates. But it does suggest that there are some advantages in key areas for a national, coordinated approach. For example, should credit unions build and own their own national switch for ATMs? How should the emerging issues of bill presentment be coordinated? How will ACH systems, both governmental and private, be integrated into the network?

All of these issues suggest the opportunity for a networked approach. For networks to succeed, a central point of coordination and operations is needed. US Central may not be necessary for all of the investment options offered to credit unions, but it could be crucial to a credit union role in emerging systems of settlement. The challenge is to find the best entry point and then create that credit union option with the other corporates. The role of the "sponsor" is changing, but the need for a "sponsor" would still appear vital.




Aug. 26, 2002


  • Terrific article! The nature of the Corporates and US Central has been a little muddy to me. This help a lot.
  • A conclusion to this fine article might be, the corporates, led by USCentral and the ACCU should take charge of their future and the future needs of their member/owners. Instead of taking the "head in the sand" approach of hanging on as long as we can, the corporates should relook at a study as to what their member/owners will need for the future. Oganizations (someone said) do not plan to fail, they fail to plan. If the corporate staffs, USC and ACCU fail to step up to the plate on this issue, The credit union leadership should take on the project. The corporate system has become too valuable; too much of an integral part of the backroom of credit unions to flounder or face the probablity that some of the corporates will fail and question the reputation of this proud system.
  • I am interested in finding out about the different corporates. We always "shop" for the "best buy" and I am interested in finding what the different corporates have to offer. Pam Tucker, CCUE VP Finance Perfect Circle Credit Union
  • If the ROA for the corporate network was 23 bps and the third tier (U.S Central) was taking 17 bps, doesn't this mean that the third tier was more efficient than the rest of the network? I think the consolidation that has been occurring in the middle tier in recent years is reflective of where the inefficiencies truly exist. Many advocate a competitive system in which natural-person credit unions can "shop" between different corporate credit unions. Why not allow us to utilize the services of U.S. Central? I want to utilize the most efficient provider of financial services. Why am I prevented from doing so?
  • You focus most of your comments on whether we can remove US Central from the three tiered system. If we could get politics out of the discussion, wouldn't make more sence to take the corportes out of the three tiered system, make them branches (or contact centers) of US Central and preserve the central point of coordination. This way you would loose some of the 25 bp the corportes take and continue to allow US Central to take advantage of the economies of scale. There would still be competition from other investment cos. and large corporates who choose to stay independent. I think this is a better way to serve CUs and allocate the resources.