AUTHOR AND POET Oscar Wilde once said, “My own business always bores me to death; I prefer other people’s.” A little creative curiosity is useful in the arts, but it can be beneficial to credit unions too. Different business models offer lessons and best practices that credit unions can incorporate to support or enhance their own cooperative missions.
Maps Credit Union ($460M, Salem, OR) believes in the ability of credit union service organizations (CUSOs) to accomplish what a financial cooperative cannot do on its own. The Northwestern credit union has been experimenting with CUSOs since the early 1980s, under the leadership of then-CEO Dan Penn. In the 1990s, bank competition became so thick that Maps re-evaluated its CUSO activity in the hopes it could lean more heavily on these organizations as a source of revenue.
“We shed the CUSOs that were losing money and used those funds to emphasize the CUSOs that could serve our members and potentially other credit unions across the United States,” says current CEO Mark Zook, who took the helm from Penn in 2009.
This CUSO strategy — in conjunction with traditional revenue streams — helped the credit union weather the economic downturn of the mid-to-late 2000s.
“There was a year or two that the CUSOs generated more than 50% of the net income for the credit union,” Zook says.
In the years since, the credit union has fine-tuned, adapted, and added to existing CUSO relationships to determine the mix that presents the most stability and opportunity for the credit union.
REFINING THE CUSO MODEL
Today, Maps owns two operational CUSOs and four financial subsidiary CUSOs. It also invests in eight multiowned subsidiaries. The multi-owned CUSOs, in particular, serve the needs of Maps as well as hundreds of credit union clients. The credit union has different expectations for each business.
But when Maps creates a CUSO — as was the case with multi-owned Willamette Business Group and CU Insurance Alliance — it expects them to break even within 24 months. Maps also leases out around 30 of its employees along with work space and support services — such as HR, IT, and some accounting functions — to several of its CUSO partners.
Given the complex nature of these relationships, the credit union’s main measurement for CUSO success has matured into what Zook refers to as “net economic impact,” — i.e., the net income generated by the CUSO as well as the income generated from the contracts for Maps’ services.
Maps has invested approximately $2.8 million in CUSOs. Every year, the credit union expects to generate between 20% and 30% of its net income through these relationships, but the potential financial return is greater than what appears on paper.
“Although particular entities might not be generating net income from an accounting perspective, these businesses are increasing in cash value, which we can eventually realize,” says Kevin Cole, chief financial officer.
“Based on recent transactions, the value of our investment in one of our CUSOs is probably more than the value of the entire CUSO portfolio that we own.”
Within Zook’s first three weeks as CEO, he received an NCUA letter detailing the corporate stabilization plan. The letter combined with the pressures of the economic downturn served as a wake-up call: The credit union needed to proactively address issues that were causing it pain.
“I realized how much a regulator impacts the destiny of our industry,” Zook says. “It becomes a better bet for a CUSO to be involved in things like disaster recovery or pre-employment screening, topics that are ultimately influenced by regulatory oversight. Because of that, we’ve doubled down on our investment with Ongoing Operations — a business continuity, disaster recovery, and cloud solutions CUSO — three different times.”
The countercyclical nature of insurance compared to the credit union’s other businesses made this a good CUSO option to pursue. The credit union is now growing this area of business through acquisitions and additions such as Credit Union Benefits Alliance — a medical benefits CUSO. Other times the decision to start a CUSO is driven less by what is happening today and more by what will be happening to the industry moving forward.
“I was concerned about our industry’s reliance on outside parties to drive the application of mobile and the future of payments,” Zook says. “That’s something we have and will continue to focus on through our CU Wireless CUSO and other options. Without new solutions, its not just interchange that’s at risk, it’s the whole transaction account relationship. If credit unions lose those core dollars, they no longer have a robust business model.”
When it comes to surveying other industries for CUSO potential, Zook advises credit unions to look for iterations that are one or two steps away from their own financial services business. Stepping too far, too fast can lead to troubles in acquiring expertise, creating market share, or maintaining the 51% credit union membership or business clientele required for a CUSO designation.
“There have been all types of CUSOs — from tech development to accounting services — but to me the best are those where it makes sense for members that the credit union would provide that service,” Zook says.
Zook recommends pursuing alternative services or revenue streams that allow credit unions to bring something to the table. Also, it’s beneficial to look beyond a localized market or opportunity and consider the bigger picture. CUSOs — especially multi-owned CUSOs — should ideally center on something that helps move the entire cooperative industry forward. When a Maps CUSO hits its base financial expectations, it reinvests its excess revenue in research, development, or other credit union initiatives.
“We want to keep good ideas owned by credit unions instead of vendors that don’t necessarily have a stake in our business,” Zook says.
Nurturing a CUSO relationship requires a delicate balance of supervision and distance, not unlike parent-child relationships. “Parent” credit unions want their CUSO to reach its full potential and eventually become self-sustaining. And the proximity of a parent credit union can be beneficial in the childhood stages of a CUSO.
“Whenever a CUSO is housed at a credit union, it will adopt the traits of that culture to some degree,” Zook says. “Generally that’s a good thing. If CUSOs are going to serve credit unions, then they need to understand and emulate their philosophies.” At the same time, especially when it comes to matters of governance, credit unions need to know when to step aside.
“We often like to think that because we run ourselves well, we can run other businesses too,” Zook says. “But other businesses don’t run like us. Our CUSOs are run by separate boards, and we employ different experts from outside industries to run them.”
THE REGULATORY COMPONENT
Navigating the CUSO space isn’t just about identifying opportunity and securing resources. It’s also about working with and educating other parties, such as members and regulators. CUSOs do not face the same regulatory exam process as credit unions. Instead, they undergo a more voluntary review of polices and processes. The extent of the review varies depending on how long the CUSO has been operating and on its focus. For example, insurance, reporting, and advisory services all have their own respective industry regulators, while business lending and technology CUSOs do not. Regardless of the severity of the review, Zook advises all CUSOs to be forthright about their business.
“CUSOs miss the mark if they aren’t fully transparent with the NCUA,” Zook says. “Maps is a minority shareholder in Willamette Business Group, which represents the business lending activities of eight different credit unions. But we have the largest single percentage ownership, our leadership manages the operation, and it is housed in our building. Because of that, we have a responsibility to those credit unions and to those who regulate those credit unions to be transparent.”
Maps credits the National Association of Credit Union Service Organizations (NACUSO) for leading the industry’s CUSO conversations at both the credit union and regulatory levels.
“We expect many of these business to succeed, but we communicate to regulators that some might fail,” Cole says. “We are prepared for that. We try to keep it all in perspective. CUSOs offer a lot of potential, and they’re not necessarily a huge risk to Maps.”