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This is a bonus article from “Helpful Wildcard” in the August 2015 issue of Credit Union Management magazine.
While many CUSOs give CUs an ownership stake in a venture that could provide big profits or achieve big savings, they also expose CUs to a risk of failure.
“Not many CUSOs fail, but some innovations will always fail,” concedes Jack Antonini, president/CEO of NACUSO, Newport Beach, Calif. “Otherwise, they wouldn’t be truly innovative. It’s their role to test new ideas.”
Still, when the National Credit Union Administration was authorized to expand its data gathering to CUSOs, many CUSOs—and NACUSO—opposed the move. NCUA will require that CUSOs directly report some information (including their existence) to NCUA, starting Dec. 31, 2015, notes Guy Messick, NACUSO general counsel and a partner in the Media, Pa., law firm Messick & Lauer PC.
“It could put us at a competitive disadvantage,” argues Rick Leander, president/managing director of Allegacy Business Solutions, Winston-Salem, N.C. The money CUs have invested in CUSOs is a very small percentage of their capital, he says. “At most, they pose a theoretical risk to CU financial health, not a demonstrated risk. We support the NACUSO position.”
To mitigate risk, a CU needs to do due diligence before contracting with a CUSO for service, just like it would with commercial vendors, Antonini says. And they need to approach ownership investment with healthy skepticism, especially when dealing with entrepreneurs from outside the CU industry, he suggests. “There will always be entrepreneurs who try to take advantage of others, so you need to investigate before you invest,” he says.
Caroline Willard, EVP/markets and strategy at CUES Supplier member CO-OP Financial Services, Rancho Cucamonga, Calif., points out that the NCUA has long had a right to examine these organizations.
“The type of services that CO-OP provides presents little or no risk to the share insurance fund, which seemed to be the impetus for NCUA’s 2013 CUSO rule,” she says. “Still, we’re a vital part of our clients’ daily operations, so regulators want to examine elements of our business.”
It’s a natural extension of the regulatory push for rigorous vendor management programs, Willard notes. “CUs are expected to exercise due diligence with all their partners, and that includes us.”
Authority to regulate does not equal having the knowledge and ability to regulate, and here NCUA may have its hands full, suggests Mike Atkins, CEO of Open Technology Solutions, Denver, a shared-services technology CUSO owned by three large CUs. “Credit unions are a fairly homogenous group of financial institutions. You can collect data, crunch it and generate key numbers or ratios that give you a fairly good idea of how that CU is performing.”
CUSOs, on the other hand, have a broad range of different business models, he notes. Net income is a key number for a CU, he points out, but OTS is not structured to generate income. “To ask an examiner to understand the vast array of business models that exist in CUSOs is a tall order. I don’t see how they could do a good job without expanding their resources at great cost.”
Richard H. Gamble is a freelance writer based in Colorado.
