CUSOs work behind the scenes to help credit unions build their business.
Just as superheroes rely on secret powers to protect Gotham City, Metropolis and other comic book settings, credit unions have a real-life advantage available to widen their reach and improve operational efficiency.
As the three profiles featured here demonstrate, collaboration through credit union service organizations can help credit unions confront operational and competitive challenges on all fronts while staying true to their members-first mission.
… for Trimming Expenses
The origin story of Member Support Services, which was named New CUSO of the Year in 2016 by the National Association of Credit Union Service Organizations, actually dates back to 2012 when three long-time colleagues—the CEOs of New Jersey credit unions—were commiserating about the need to reduce operating costs. That conversation sparked an idea: to create a CUSO to combine the back-office operations for $182 million Aspire Federal Credit Union, Clark, $337 million United Teletech Financial Federal Credit Union, Red Bank, and $334 million Credit Union of New Jersey, Ewing.
“We decided to look at the services that would have the most financial impact that aren’t member-facing or related to brand differentiation,” says CUES member Thomas O’Shea, CEO of Aspire FCU. “We knew that all our credit unions needed to replace our core systems, so that became our first project—to find a core system we could all migrate to.”
Working together as directors of the new CUSO, the three executives led the effort to vet and select a common processing system. In 2015, each credit union in turn converted to KeyStone from Corelation, San Diego, centralized through Member Support Services. The following year, the collections departments of all three organizations were combined under MSS.
Next up were the migration of IT infrastructure, staffing and network management and the consolidation of payments processing, including debit and credit card processing and exceptions processing of ACH and checking transactions.
The credit unions are also working with MSS President/CEO William Arnold and his staff to explore options for consolidating some lending operations and combining after-hour and overflow call center functions—all behind the scenes for members. Credit union executives often refer to the CUSO as “their operations center in Cranbury,” Arnold notes.
In the future, the CUSO might house such functions as compliance, auditing and HR for its owner credit unions. “Those areas don’t have a lot of staff, but they could add up to just as many home runs,” O’Shea says. “We don’t want just to save money. We want to be able to recruit talent that we couldn’t afford on our own.”
With an initial goal of trimming their budgets by 25 basis points by forming the CUSO, the credit unions have actually experienced cost reductions in the range of 40 to 50 basis points, largely through reduced staffing expenses and savings on third-party contracts, O’Shea says.
“When you go out as, in effect, a $1 billion credit union instead of three smaller organizations, you command more respect in negotiations and get better pricing from vendors,” he notes. The idea that the CUSO was negotiating a single contract to serve three credit unions was “a curve ball” for some vendors. In addition to the core system, MSS also negotiated new contracts for credit card processing, accounting software, and an Internet and mobile banking platform for its client credit unions.
Decisions on staffing reductions have been “the most difficult part of our jobs,” O’Shea says. “But we made the investment in overhead and start-up costs for the CUSO, and we needed to be able to offset that investment. The major way to do that was in reducing head count with the message that we have to make these changes to stay competitive and profitable.”
Each credit union decided internally how to handle the staffing reductions through some combination of attrition, layoffs and reassignment to new positions within the credit union or the CUSO.
MSS learned a lot from other credit union collaborations designed to reduce back-office expenses, including Open Technology Solutions and S3 Shared Service Solutions—both jointly owned by $6.8 billion Bethpage Federal Credit Union, Bethpage, N.Y., $3.9 billion Bellco Credit Union, Greenwood Village, Colo., and $3.2 billion SECU of Maryland, Linthicum, Md.—“and we did manage to make our share of mistakes along the way, and we’ve learned from that, too,” O’Shea says with a laugh.
For one, he recommends that credit unions considering a similar venture establish a strong governance framework involving not just the CEOs, but an operating committee of direct reports familiar with day-to-day operations to work together on consolidation efforts.
“Our process was pretty top-down initially, when we might have benefitted from additional bottom-up input and more integration of individual organizational strategies with CUSO strategies to get things up and running,” he says.
Another lesson is not to underestimate the time and costs to get a CUSO up and running. “Multiply [your projections] by three,” O’Shea advises. “Setting up meetings and working through issues takes time.”
In many ways, the opportunities and challenges in this type of collaboration are interwined, says Arnold, who was hired to head MSS in October 2015.
“There is great value in two or more sets of credit union leaders interfacing to come up with the best processes to do a thing,” Arnold notes. “Three mid-sized credit unions bring a variety of experiences and perspectives to problem-solving, which is a big positive.”
At the same time, “managing a huge set of options and how we’re going to implement them can be difficult,” he adds. “There is no veto. Everyone has to agree.”
… for Serving the Underserved
Two Florida credit unions made a bit of history when they formed a CUSO to open the first-ever banking branch in Frenchtown, a low-income section of Tallahassee where the closest thing to financial services to that point had been payday lenders and pawn shops.
$191 million Florida State University Credit Union and $458 million Envision Credit Union partnered with Bethel Missionary Baptist Church to open the Frenchtown Financial Opportunity Center in June 2016 in a church-owned facility. Rather than obtaining its own charter, the center operates under an independent brand powered by the two CUs, explains Chuck Adcock, executive vice president of Florida State University CU and chief operations officer of the Frenchtown CUSO.
The Frenchtown Financial Opportunity Center is staffed by three Florida State University CU employees who volunteered for the assignment to provide financial education in step with basic transactions and to help build community connections.
“They share a passion for working alongside members to help put them in a position to be financially successful,” Adcock says. “The model at many credit unions today is to get members in and out of the branch as quickly as possible. Here, every transaction takes a little longer. We kind of slow things down to provide the education they need. Members want to sit down and talk to someone about how to break the cycle of payday debt or to set and work toward their financial goals.”
When center employees aren’t working directly with members, they’re making outbound calls to community groups and businesses on potential financial education opportunities. For instance, the Frenchtown Financial Opportunity Center staff is working with a local kitchen share project that offers space to small caterers, cooks and bakers to provide guidance on how to manage the finances of their fledgling businesses.
The center is also facilitating a partnership with Florida A&M University graduate students earning marketing degrees to develop seminars on various financial topics in locations around Frenchtown “to meet members where they are,” Adcock says. For example, a seminar on breaking the payday lending cycle might be paired with assistance to apply for consolidation loans.
Both Florida State University CU and Envision CU have their roots in serving teachers and students, so education is part of their DNA, he notes. “Even with loan transactions, our staff spends a lot of time reviewing credit scores and explaining how members can improve their credit standing. Our team works to become a trusted advisor and give members a road map to improve their financial standing.”
Frenchtown Financial Opportunity Center employees are trained to provide the full range of products and services from both sponsor credit unions. When new members sign on, staff first ask whether they have a preference for one of the credit unions and otherwise aim for parity in enrollment.
The center opens 20 to 25 new accounts monthly and in the first six months funded $1.4 million in loans. The partnering credit unions also hold about $1.5 million in loans from local businesses as a way to support the initiative, Adcock says, and several members of the partner church joined the credit unions to support the financial center they worked so hard to bring to their community.
The center is not the first partnership between the two CUs. They also co-own an indirect lending CUSO, iDriveLending, and share participations on several commercial loans.
“We’ve built up a significant amount of trust and spend a lot of time in discussions to make sure we execute well and keep the regulators happy,” Adcock says. “There is the potential for tremendous synergies if credit unions can set aside egos and focus their energies on competing with the big banks.”
… for Tackling Big Challenges
CU*Answers’ organizational timeline reads like a history of distributing innovation in financial services. Founded in 1970 as West Michigan Computer Co-Op, the CUSO has supported its member CUs through the decades with ATM connections (1980), Fed deposit services (1982), check processing (1984), PC home banking (1999), online bill-pay (2001), Internet and mobile banking—and, in 2017, remote e-signature capability in partnership with eDOC Innovations, a CUES Supplier member based in Middlebury, Vt. The e-signature solution is offered at no additional cost to the 142 CUs using CU*Answers’ online imaging system, which is integrated with its flagship CU*BASE processing system.
The Grand Rapids, Mich., CUSO, which serves cooperatives encompassing 1.9 million members and $19 billion in assets, also looks beyond technology to such big-picture issues as how to keep the movement vibrant by welcoming new CUs. Since 2008, the “Starting a Credit Union with CU*Answers” program has offered start-ups most CU*BASE processing services free for their first two years.
“We stand with the idea that if any industry loses its passion to support and encourage new entries, it is a dying industry,” says CEO Randy Karnes.
As with other industries, the odds of success for a start-up credit union are about one in five, he notes. “I respect my (CUSO’s) owners’ willingness to invest in all five to find the one that gives us all hope that our industry is not dying.”
Sustaining the industry is the ultimate aim of CUSOs, through though they also aggregate learning and minimize risks by serving as “proof of concept laboratories” for all manners of innovation, Karnes suggests.
“CUSOs support the movement by focusing on the agendas and sustainability of their sponsor credit unions and the clients that design the vision for the CUSOs’ contribution,” he says. “CUSOs are not businesses designed to survive without credit unions, so they should be laser-focused on adding to the wins of their clients.”
As member-owners, CUs can steer CUSOs toward the solutions they need to serve the needs of their members and dictate the return. The 127 owners of CU*Answers elect the board of directors and weigh in on ownership requirements, pricing of services and operations transparency.
The concept of member-owners goes to another inherent aspect of CUSOs serving the industry by offering a platform for the full range of CUs to be heard. The movement has always been diverse, serving memberships with geographic and industry specificity, but sheer scale adds a new dimension. A multibillion-dollar, full-service CU serving hundreds of thousands of members and businesses is vastly different from a small cooperative that doesn’t offer business or mortgage lending—but each institution is relevant to its members, Karnes insists.
“We have a problem when we define relevance by a narrow bandwidth or an expectation that everybody is the same. CUSOs can be designed to fit with the conditions and situations of the individual credit unions they serve—not some global idea of what our industry is,” he says.
Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Eugene, Ore.