An update from an attorney with long experience with credit union service organizations
How credit union service organizations structure and seek funding begins with the type of relationship they intend to form with their client owners and investors, says Guy Messick, partner with Messick Lauer & Smith, Media, Pennsylvania.
The National Credit Union Administration and state regulators oversee credit unions’ investments in CUSOs, not the businesses themselves, Messick notes. To qualify for credit union funding, a CUSO must (1) engage in any of a long list of permitted services, ranging from payroll administration to IT development and (2) primarily serve credit unions and/or their members. A CUSO can be 100 percent owned by credit unions or 1 percent. Typical forms of CUSOs are wholly owned subsidiaries, small consortiums and larger companies begun either by credit unions or industry vendors seeking investors.
Expanding member services. The most common form of CUSO involves a single organization or small group of credit unions forming or buying an insurance agency or offering investment services to members. In that case, “they capitalize the venture with whatever they need to make the deal go through, determining whether there’s enough value there over time to justify the purchase price,” Messick says.
Sharing operations to cut costs. Multiple credit unions partnering to achieve economies of scale in shared operations such as lending services, compliance or IT systems can pool funds.
“The way those credit unions get an economic advantage is through reducing costs,” Messick notes. “They create a business plan with assumptions based on their current costs so that they can reduce staffing requirements and increase negotiation power to reduce vendor costs for savings that can turn out to be quite significant in these types of CUSOs.”
With those projections in hand, the participating organizations can “back into” calculations for what each credit union will contribute. These operational CUSOs are often formed by like-sized credit unions, so the funding arrangement is more or less an equal split, though there may be different charges for services depending on level of use.
Combining forces. When CUSOs are formed to allow credit unions to keep pace with or gain advantage on the innovation front, funding follows a different path. The successful capital campaigns of Constellation, Raleigh, N.C., and CULedger, Denver, may offer a pattern for future organizations intent on developing artificial intelligence or robotics solutions for credit unions—or whatever the next big thing in technology may be.
“Credit unions that have the vision and the resources are going to put large amounts of cash behind the effort to meet the changing service expectations of their members,” Messick notes.
Joining forces with vendors. Still other types of CUSOs might be formed by financial services vendors looking to increase their footprint in the industry with credit union investors and promoters. “In some cases, the vendors contribute very little capital but supply the in-kind contributions in the form of their expertise, while the credit unions provide the cash,” he says. “It’s just a question at that point of whether there’s value there for the credit unions—in the way of lower fees, an investment return and/or a ‘seat at the table’ to influence the direction of the company and how it can better serve their credit unions.”
CUSOs with shared ownership must address such structural issues as credit unions that want to leave the partnership or vendors who want to take profits or sell out at some point. “There have to be ways to meet the needs of all the owners in the operating agreement or bylaws,” Messick says.
NCUA’s CUSO Registry offers basic information on 944 (as of year-end 2017) organizations. In addition, NACUSO has developed a CUSO Analyzer in cooperation with Callahan and Associates to facilitate research on these businesses from several angles, including business model, structure (for example, wholly owned vs. multiple owners) and investment opportunities.cues icon
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.