One of the credit union industry’s greatest advantages in the frenzied consumer financial services environment is the Credit Union Service Organization (CUSO). A CUSO is a company that provides services primarily to credit unions or credit union members. It differs from other vendors in that it is owned wholly or partially by an individual or multiple credit unions.
CUSOs provide services in many areas, such as:
- Lending
- Operations
- Member Services
- Payments
- IT
- Investments
CUSOs have existed in some form since the Federal Credit Union Act of 1934. However, since the National Credit Union Administration enacted the first CUSO regulation in 1987, these organizations have grown to over a thousand strong as of 2022.
Power in Numbers
The “secret sauce” of CUSOs is in leveraging the collaborative DNA of credit unions. Investing in a CUSO often means credit unions band together to provide a resource they could never have afforded individually. For example, one of the biggest and oldest CUSOs, PSCU, offers numerous services, including credit and debit processing, an ATM network, and technology services. These are services that a single credit union could never provide for itself nor reasonably afford to purchase from a non-CUSO source.
CUSOs and the Future of Credit Unions
Credit unions were simple organizations at their inception. Members' deposits in interest-bearing checking and savings accounts were used to make auto, home, and other loans to those same members. In the lower operating cost environment of the past, the margin between interest earned and operating expenses was adequate to keep these nonprofit entities financially healthy.
However, the financial services landscape has changed since then. Operating expenses have increased with booming competition and consumers demanding more services, which has had an enormous impact on smaller credit unions. The number of credit unions shrank from 6,795 in 2013 to 4,760 in 2022, with much of the change occurring through consolidation. The good news is that assets during the same period doubled from 1.08 trillion to 2.17 trillion, while bank assets rose only 52% (19.95T to 30.35T).
Several factors contributed to the rosy assets trend, but the role of CUSOs cannot be underestimated.
Here are eleven ways CUSOs benefit credit unions:
- Revenue
The traditional spread between credit union costs and revenue has shrunk over time. However, executing strategies to boost income usually involves sophisticated tactics that take time and money to develop. A CUSO can offer resources and expertise to reach income goals effectively and efficiently.
- Investment Gain
A CUSO investment can reap rewards for the credit union in a future sale. If the CUSO is successful, it might become an attractive acquisition target. Any gains in value over the initial investment would be distributed among the credit union owners. However, even if this did not come to pass, the investing credit unions benefit from the CUSO’s services.
- Cost Savings
Credit unions can save significant amounts of money by outsourcing CUSO services. These services can be a fraction of the cost of a do-it-yourself approach. Outsourcing activities such as back-office operations, IT management, and collections can potentially provide more value for less cost.
- Innovation
CUSOs are synonymous with innovation. Good ideas abound among the many intelligent minds in the credit union world. Yet, a scarcity of funding can kill a promising concept in its early stages. Developing innovative ideas with credit union investment capital means competitive and operational advances can be brought into reality more consistently.
- Accelerate Entrepreneurial Effort
Entrepreneurs face the dual challenge of developing innovative ideas while struggling to find funding to catapult them off the drawing board and into the real world. Seeking investments from banks or venture capital firms is difficult since everyone with a good idea clamors for funds from these sources. Credit unions have the fantastic opportunity to fund initiatives that will benefit themselves collectively. This appeals to entrepreneurs since they find credit unions are more accessible and willing to discuss how to bring products to market quicker than otherwise possible.
- Support Growth
Growing members and assets requires a massive amount of organizational energy. Tailoring strategies to meet the unique needs of existing and potential members requires the full attention of the credit union team. Outsourcing certain activities to a CUSO frees the staff to focus on tasks best suited to their skills.
- Having a Say
Unlike dealing with a non-CUSO vendor, a CUSO shareholder has a voice in how the service is developed and delivered. For instance, an investing credit union can advocate for features that more closely meet its specific needs.
- Economies of Scale
Investopedia defines Economies of Scale as “…cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods.” CUSOs create economies of scale as multiple credit unions pool their resources to increase the volume of products and services delivered while managing cost growth, an impossible task for a single credit institution.
- Competitive Advantage
CUSOs create a competitive advantage over banks and fintechs by collaborating to create innovative services specifically for the credit union industry. Non-CU competitors occasionally come together around a new concept. However, their natural inclination is to keep new ideas to themselves to maximize future profit. In contrast, collaboration is a part of credit union culture, which makes CUSOs a powerful competitive weapon.
- Multiple Owners
The collaborative aspect of CUSOs also unleashes the creative powers of multiple credit union minds working together for a common goal. By sharing differing perspectives based on varied experiences, skills, and training, CUSO shareholders can avoid narrow thinking that might overlook potential improvements to new products and services. Instead, there is a cross-fertilization effect that can result in superior creations.
- For Credit Unions by Credit Unions
When a credit union invests in a CUSO, it helps itself and lifts the entire industry by spawning new products and services. While for-profit enterprises operate with a mindset of “my company against the world,” credit unions, working together through CUSOs, can directly strengthen the industry in the face of intense competition.
In a world of financial goliaths, credit unions have a secret weapon in the form of CUSOs. The benefits these innovation factories create represent one of the central keys to the credit union industry's survival.