CUSOs and Net Income

The function of collaboration is to help credit unions solve problems of survival,  according to Guy Messick, general counsel for  the National Association of Credit Union Service Organizations and an attorney with Messick and Lauer, Media, Pa.

During the recent CUES Webinar, “Using CUSOs to Generate Net Income,” (which was free to CUES members) Messick said forming a CUSO—a for-profit company owned by one or several credit unions and sometimes outside groups—can help CUs boost income, cut costs and gain needed expertise. They can help CUs be more competitive by leveraging economies of scale.

However, sometimes CU executives are slow to act on the opportunities presented by CUSOs.

“Many people see the need to collaborate but fail to see the urgency,” Messick said. “It’s always next year’s project. There’s also the fear of the unknown, not only what it will do for your credit union but also for your individual career path. Starting a CUSO can be a hard thing to do as a CU CEO or head of department or board member. You’re effectively in the rowboat with someone else and you have to partially depend on them. And some CUs lack the expertise to really explore this and determine whether the CU would be better off for doing it.”

But a CUSO can be really important for getting new initiatives off the ground, especially projects that need capital, entail doing things CUs are not allowed to do on their own, and distributing risk.

To help underscore the urgency of getting collaborative, Messick shared the data in the chart below. He said smaller CUs may not be able to run on net interest margin (interest less operating costs) going forward.

“The larger you get, the larger the return on average assets gets,” he notes. “The very smallest CUs show a negative ROAA. This is a recipe for merging or doing some collaborating to try to get effects of larger scale within those credit unions.”

Messick said the new reality stinks, but it is still reality: “Seventy-plus years of living off the net interest margin (ability to earn interest greater than operating costs and live off that profit) no longer works in the 21st century.”

According to Messick, the key to survival is increasing net income, either by raising revenue or reducing costs. A solid way to do this is through collaboration and CUSOs.

On the side of raising revenues, CUSOs can help CUs generate more interest income by facilitating making more loans. CUSOs exist or can be formed, he said, to help CUs make indirect auto loans, mortgages, business loans, student loans, and lifestyle loans.

CUSOs can also help CUs generate non-interest income (fees) through offering investment, insurance and trust services, Messick noted.

Considering the cost-saving side of the equation, Messick said the cost to run all the CUs in the U.S. for a year is $28 billion—a pretty big tree. “If we can pick off a leaf of a $1 here and there, we can enter into some very significant net income.”

CUSOs focused on helping CUs collectively run collections efforts, call centers, credit union-owned real estate (such as foreclosed properties), debit cards, core IT, back-office support, and internal auditing and bookkeeping can reduce an individual CU’s costs for these functions.

Messick said it takes some work to prepare the soil for a CU to successfully leverage the advantages of owning or participating in a CUSO.

“You can’t just take the credit union the way you do now and overlay the CUSO,” he noted. “You have to make adjustments in the credit union and, frankly, in your mindset.”

He offered these steps to get on the right path:

1.  Adopt a collaborative mindset.

• Decide what is off limits. For example, are you only going to collaborate on back-office activity that’s invisible to members?
• Ask yourself, “What are my partners doing?” Look to leverage those relationships.
• Develop CUSO governance, CUSO investment, and service provider policies. These will help to guide your answer to such questions as, “Should we invest in a CUSO or just use its services?”
• Appoint a collaboration manager. “Nothing happens unless someone is in charge of it,” Messick noted.

2.            Prepare the credit union.

• Educate the board, staff and examiners on the value of collaborative solutions.
• Provide a vision of the opportunity available to staff in the collaborative model. “This is not something to be afraid of, but rather something that will allow them a career path they might not have previously contemplated,” Messick said.
• Structure accountability into your CUSO business model. “Too often CUs don’t like to make hard decisions and create accountability,” he said. “It’s certainly needed for CUSOs. If you have three or four CUs depending on the CUSO, each CU needs to make the CUSO accountable.”
• Reward behavior to support the model and avoid adverse consequences for risk taking.  “Let people make some mistakes,” he advised. “Collaboration is a series of mistakes leading to spectacular success. Understand that there will be some setbacks and you have to adjust.”

3.            Define the CUSO’s goals. Will you focus on service? Cost reduction? Gaining expertise? Generating profit? What will success look like? Keep to those goals with your decision-making.

Lisa Hochgraf is a CUES senior editor.