Demystifying the CUSO
This time-tested, collaborative business model drives innovation.
Collaboration is hard-wired into credit unions’ DNA. After all, it’s one of credit unions’ cooperative principles.
Nonetheless, business is business and organizations must establish and follow certain ground rules, particularly in a highly regulated industry like financial services.
Enter the credit union service organization (CUSO), a structure through which credit unions can combine resources to achieve scale economies and critical mass for a variety of purposes, in the back office as well as member facing.
Industry regulars are familiar with the most prominent CUSO names including CO-OP Financial Services, PSCU, CU Direct— all CUNA associate business members.
At the other end of the spectrum, nearly two-thirds of CUSOs are wholly owned by a single credit union. Many of these are a legacy from the days when engaging in certain businesses, such as financial planning and insurance services, required forming a separate organization (CUSO law was updated in 2001, eliminating some of these restrictions).
Sole ownership doesn’t necessarily equate to a single customer relationship, however.
“It’s a lot safer for liability purposes to set up as a separate entity” if the plan is to provide services to other credit unions," explains Guy Messick, president of the law firm Messick, Lauer & Smith PC and general counsel to the National Association of Credit Union Service Organizations (NACUSO).
In an era of credit union consolidation, paradoxically the number of CUSOs continues to grow. NACUSO’s database shows more than 1,100 entries, up from 882 three years earlier.
Messick, affectionately dubbed the “CUSO Guru” for his extensive work in the field, reports his practice sets up “scores” of new CUSOs every year.
He says “it’s not outside the realm of possibility” that CUSOs someday will outnumber credit unions.
One driver behind this rapid growth is the ability for CUSOs to tackle many of the pressing issues confronting the credit union movement. NACUSO CEO Jack Antonini sees CUSOs as a natural barometer for hot topics.
“Whenever there’s an industry challenge, you’ll see a CUSO come together to address it,” he says, noting the recent wave of regtech startups is now being supplanted by fintech companies.
Nonetheless, his organization’s classifications show lending and member services still leading the pack as the primary functions of most CUSOs.
NEXT: A new model
A new model
As the largest U.S. banks plow hundreds of millions of dollars into technology investments to reinvent digital customer experiences, credit unions must find ways to keep pace with innovation or risk becoming irrelevant.
Member intimacy will always be a key differentiator, but credit unions must pair this with the convenience and delivery channels modern consumers have come to expect. Here again, CUSOs are well positioned to convene the experts and resources necessary to meet these challenges.
An intriguing aspect of CUSO regulation is that neither their ownership nor customer bases are limited to the credit union community. Conceptually CUSOs could serve as an avenue for collaboration with noncredit union entities.
Fifty-one percent of a CUSO’s revenue must be derived from credit unions—a condition that rarely poses much of a constraint.
NACUSO was established in 1985, a year before CUSO regulations were amended to provide a legal framework to better realize their potential. Prior to that, Messick explains, similar entities existed in the form of credit union-owned cooperatives.
Traditionally, a group of credit unions would identify a common need and join forces to launch a CUSO. In a promising recent development, however, entrepreneurs have taken a more proactive role in spearheading their formation.
“It’s a model that’s gaining steam,” Antonini observes. “It’s a way to share the risk of a new technology and to improve the odds of adoption and critical mass.”
Messick agrees it’s becoming more common for noncredit unions to take the bull by the horns.
“CUSOs are a sound means by which entrepreneurs can enter into the credit union space in an effective manner,” he says. “If they can share management and revenue, that’s a better proposition in the long run than being a mere service provider.”
It’s also a great path for someone with a compelling new product or service to attract investors without resorting to venture capital, and to jointly build out a solution for a ready market.
“Credit unions still do their due diligence, but after that they’re more invested,” says Keith Kelly, co-founder/CEO of Rate Reset, a CUNA Strategic Services alliance provider.
He also marvels at the “amazingly fast fundraising process” (three to six months) as compared to Wall Street alternatives.
A seat at the table
There’s no single path to CUSO success. In fact, there isn’t even a single definition of success.
“Most credit unions that invest in a fintech aren’t looking primarily for financial return,” Messick says. “That’s the icing on the cake. What they really want is a seat at the table to influence services and products that will be helpful to them.”
Some of the most successful CUSOs are created to contain costs, generate loans, or serve other purposes.
Messick suggests credit unions calculate a baseline before investing so they can compare pre- and post-CUSO performance. “I’m confident that in most cases they’re saving a lot of money after a startup period. I’d like to see more credit unions do that analysis to help their boards and examiners see the full benefit of the collaboration.”
GLEN SARVADY is managing partner at 154Advisors and a payments and technology expert.