A CUSO Evolution

The growth of CUSOs has mirrored the challenges and issues CUs have faced over the years.

April 8, 2014

Time was when a credit union service organization (CUSO) was viewed as a hobby not a business, says Guy Messick, an attorney who over the past 25 years has had a hand in creating many of the estimated 1,500 CUSOs currently in existence. CUSOs have come a long way during that time.

“Now they’re a critical part of credit unions’ success,” says Messick, who’s also general counsel for the National Association of Credit Union Service Organizations (NACUSO).

CUSOs allow credit unions to reduce costs and increase income. In fact, Messick says, some credit unions today remain in the black largely because of the savings and income they derive from CUSOs. Without these collaborative enterprises, he adds, “the credit union industry would be much weaker.”

Expanding possibilities

In the early days, credit unions formed CUSOs so they could provide services that, at the time, they weren’t allowed to offer themselves, such as investment services.

“That has evolved into leveraging the CUSO model to help credit unions become more efficient and share risks,” says Jack Antonini, NACUSO president/CEO.

Today you can find CUSOs that do just about anything credit unions need. Take, for instance, Buffalo Pacific, a CUSO that created Telepresence.

This offering allows users to “sit across the desk” from someone who might be a thousand miles away. The users interact, look each other in the eye, and soon forget the person isn’t actually sitting across from you.

This product could be a boon for remote service delivery. “The difference between Telepresence and video conferencing,” Messick says, “is like the difference between going to the moon and a horse-and-buggy ride.”

Many newer CUSOs, however, focus on more mundane tasks. More operational CUSOs exist today than ever before, Messick says.

Also increasing in number are CUSOs that help credit unions with compliance responsibilities and loan generation.

Northwest Credit Union Collaboration, for example, is a relatively new CUSO four Washington state credit unions formed to reduce their compliance costs.

Another CUSO, Mortgage Liquidity Solutions, helps its five founding credit unions deal with liquidity issues that arose after corporate credit unions could no longer lend funds to CUSOs for mortgages.

“When you look at the evolution of CUSOs,” Antonini says, “it has mirrored the challenges and issues credit unions have faced over the years.”

New CUSOs are constantly emerging, and existing CUSOs are always reinventing themselves. Here’s a look at a few of them.

NEXT: Bringing members back

Bringing members back

Among the newer CUSOs is San Diego-based CU Revest, which addresses one of life’s hard truths: Bad things happen to good people.

“People are suffering who normally wouldn’t have fallen victim to these economic times,” says Mike Joplin, president/CEO. “We reach out to those people and bring them back as members.”

CU Revest was launched in March 2013. It’s owned by Servatus, a company owned by Joplin, his wife Raechelle, and five credit unions.

Here’s how it works: A credit union turns over its charged-off accounts to CU Revest, which contacts the former members who owe money. Many have gotten back on their feet financially but have been left with no banking relationships.

“They’re prime candidates for coming back to the credit union,” Joplin says, “with the caveat that they pay what they owe. There’s no free lunch.”

Other than the charged-off paper, credit unions make no investment in the CUSO. “They give us something that’s worth zero on their books,” Joplin says, “and we give them back money and happy members.”

When CU Revest succeeds, it gets a percentage of the recovered dollars.

Kinecta Federal Credit Union in Manhattan Beach, Calif., for example, turned over 12,000 charged-off accounts to CU Revest at the end of June 2013. By year-end, the $3.3 billion asset credit union recovered more than $300,000 and welcomed back 300 members.

Getting the CUSO off the ground was “a daunting task,” Joplin admits, largely because he approached credit unions as someone from outside the industry. He had been in the debt-buying business since 1989, initially buying charged-off loans from government agencies and later from banks and finance companies.

Joplin discontinued all of that in 2012 to focus solely on credit unions, figuring that banks don’t value a restored customer relationship as much as credit unions do.

Credit unions also badly need capital, Joplin says, and CU Revest is a capital recovery model. “Credit unions have left 10% to 15% of their charge-off money on the table,” he says. “When you have $20 billion in charge-offs since 2008, 15% of that is huge.”

Perpetual self-cannibalization

When Ongoing Operations, Hagerstown, Md., opened its doors in 2005, President/CEO Kirk Drake says he wouldn’t have predicted the fast pace of change the CUSO would face.

“It’s perpetual self-cannibalization,” he says. “When we create and roll out a product, that product generally is dead 18 months later.”

That’s due to rapidly advancing technology and users’ increasing expectations. The CUSO, which is owned by 18 credit unions and three CUSOs, now serves 500 credit unions. It started out offering disaster recovery and business continuity services.

Today’s credit unions rely heavily on not just their core systems, but also on numerous ancillary systems that allow them to be competitive and maintain margins. That drives the need for faster recovery and less data loss, Drake explains.

“When we started,” he says, “a credit union was happy with a 48-hour recovery. I had a client today who was upset because their recovery wasn’t done in less than four hours.”

The expectations keep rising. That’s one reason why Ongoing Operations, a CUNA Strategic Services alliance provider, will roll out an upgrade in the coming year that will enable recovery in just a couple of hours.

Ongoing Operations added cloud services to its business offerings in 2011. Cloud services provide scale in information technology, Drake explains.

“The difference is improved availability and performance, which enables us to meet changing expectations” in business continuity, he says. By using Ongoing Operations’ cloud, participating credit unions leverage the CUSO’s platform for their technology needs without the huge costs involved in building their own infrastructure.

For Ongoing Operations, the biggest challenge is the constant need for working capital to finance technological innovations. “We have 20 or so owner/investors,” Drake explains, “who have to provide capital for all 500 users. That has been a challenge since day one.”

NEXT: Opening minds

Opening minds

When two large credit unions proposed starting a technology CUSO in 2003, skepticism was rampant, recalls Mike Atkins, CEO of Open Technology Solutions. “Some consultants told us point blank that we were out of our minds,” he says, “and that large credit unions would never collaborate.”

Some years later, one of those consultants had a couple of clients who wanted to create something similar. He asked Atkins if he’d share his CUSO’s business plan.

“So we went from being complete lunatics,” Atkins says, “to being an organization that others wanted to mimic.”

Today, Open Technology Solutions has three credit union owners who are the sole participants, with combined assets of nearly $11 billion. These include the two founders—$2.3 billion asset Bellco Credit Union in Greenwood Village, Colo., and $5.5 billion asset Bethpage (N.Y.) Federal Credit Union—plus $2.8 billion asset SECU in Linthicum, Md.

During the CUSO’s early days, the company maintained and processed one core system for its partners.

“That’s all we did,” Atkins says. “Today we provide our partners anything a large credit union would need in the way of technology services.”

The partners reap huge savings and efficiencies. For instance, the CUSO has an information security staff of three people rather than the six required if each credit union were on its own.

“That gives us enough capacity and redundancy,” Atkins says, “and we can afford to hire better expertise than each credit union could afford alone.”

Other savings occur on the vendor side. The CUSO can negotiate better deals with third parties because of the aggregated volume the partners represent together. Atkins estimates that each partner saves about $2 million per year on the operational side plus another $2 million each per year on third-party agreements.

With that kind of track record, the three partners decided to start another CUSO called S3 Shared Service Solutions to create operational scale in the back office.

As of early 2014, it’s 50% live, with the remaining functions set to launch this year. Currently, the biggest challenge for Open Technology Solutions is establishing priorities.

“It takes a lot of dialogue,” Atkins says, to keep the partners headed in the same direction.

“We’ve created a fair amount of formal governance around the collaborative process,” he adds, “for us to be successful."