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CUSOs open new doors

Can't do it all? Chances are you can ifyou band together with other credit unions. Chief executive officers (CEOs) are joining forces via credit union service organizations (CUSOs) to do tasks or provide services they couldn't do alone.

"CUSOs are vital to our success," says Bill Cheney, CEO of Xerox Federal Credit Union in El Segundo, Calif. "They allow us to significantly enhance our service."

A CUSO is a limited partnership or corporation credit unions form to engage in a wide variety of financial and operational services they otherwise couldn't offer. "CUSOs allow us to compete with other financial service providers, particularly because nonbank, nontraditional financial service providers are growing larger and more numerous every day," says Larry Tobin, executive vice president of Fairwinds Credit Union in Orlando, Fla. "CUSOs allow us to compete in areas that we might not have been able to in the past."

Credit unions are involved in a wide variety of CUSOs depending on their needs and members' wishes. Tobin, for example, also is CEO of Fairwinds Financial Services, a CUSO that offers insurance and investments. Fairwinds Credit Union also is part of Centcuso, a CUSO four credit unions formed to provide check processing and deposit services.

Tobin also has launched Fairwinds.net, an Internet company that provides services such as building Web sites, consulting, and Web hosting to other credit unions, members, small businesses, and select employee groups. Fairwinds.net partners with a local Internet service provider.

Xerox Federal is an owner of XCU Capital Corp., a brokerage and insurance CUSO that also offers retirement and investment planning. "It allows us to provide our members with investment products, mutual funds, and annuities," Cheney explains. "And it also provides similar services to other credit unions."

The credit union also participates in Credit Union Auto Finance, LLC, a two-year-old indirect lending partnership with ESL Federal Credit Union in Rochester, N.Y. "We felt that if we partnered with another credit union, it would be more successful for all of us," Cheney says.

Arrowhead Credit Union in San Bernardino, Calif., is involved in several CUSOs-an independent trust company, a brokerage that also owns an insurance agency, and a card processing and payment company, says CEO Larry Sharp. CEOs say these types of arrangements present several advantages.

Cheney, for example, says auto dealers see an indirect lending CUSO as an attractive partner. "By combining memberships of several credit unions, we have a more significant presence in the marketplace in terms of working with the dealers," he says.

Tobin says CUSOs help him manage member services. "We offer a variety of additional services because of our CUSO. For example, say I visit the credit union and I want to open a share certificate for my daughter because I'm saving for her college education. The credit union can do that, but they don't have a complete financial solution. The credit union also needs to offer me a life insurance product, mutual funds, or some type of investment account."

Sharp says CUSOs help him compete more effectively. "We tried to figure out what business members were doing outside of the credit union. One big area was brokerage services. Plus, members are getting older and there's a huge transfer of wealth coming up. We need to position the credit union and the CUSO to play a bigger role in members' plans."

CUSOs also can add to a credit union's bottom line. "XCU provides a significant source of noninterest income to the credit union through revenue we earn on the sales of investment products to members," Cheney says. "If we didn't offer this alternative, our members would purchase these investment products somewhere else."

Tobin agrees that such arrangements, if well-structured, bring solid payoffs. "We do more than $1 million in sales with our CUSO. Our CUSO completes the offerings to our members."

And most important, Sharp says, CUSOs help attract and keep members. "It has added value not only in the dollars that it's returned to us, but by having a broad array of services. We attract people we wouldn't have attracted otherwise. And the services are more sophisticated than they would have been. As a result, members tend to keep larger account balances with us."

Given those benefits, CEOs are eagerly anticipating future possibilities for CUSOs. "Well continue to look for ways to use CUSOs, focusing on ways to combine resources and cooperate with other credit unions for mutual benefit," Cheney says. He envisions more CUSOs that provide trust services. He also predicts more technology-related CUSOs and continued growth in brokerage, technology, and real estate CUSOs.

Sharp says his future efforts will focus on developing new products and alliances to boost member service. "We want to use CUSOs to do what we need to get in front of members to provide services. That includes current members, businesses we serve, and our community. The whole idea is to use CUSOs to meet members' needs in ways we can't with the credit union alone.

"Credit unions are going to have to do a lot more in terms of alliances because they can't always afford to develop products and services on their own and they can't afford technology," he continues. "As we go forward, we're going to need CUSOs to raise capital."

Probably the only development that could threaten the continued growth of CUSOs would be relaxed regulations-the National Credit Union Administration's proposed incidental powers rule that would allow credit unions to provide more CUSO-- type services directly. As credit unions pursue new avenues, CEOs will need to determine the most appropriate CUSO structures.

Many established CUSOs today are forprofit corporations, but Tobin says many new CUSOs form as limited liability corporations or partnerships, which offer more tax advantages and more flexibility.

Taxes pass through the limited liability corporation to the owner-credit unions that are nonprofit and not taxed.

"When you look at starting a CUSO, you're making a commitment to go into a business," Tobin cautions. "The challenge there is having a good plan, being committed to make it successful, and having the patience to work until it's profitable."

"CUSOs change the complexity of the credit union," Sharp warns. "We used to offer shares and loans. Today we provide financial services. Our staff have to understand a lot more about the products and services we're offering. That requires educating them.

"Another challenge is remaining inclusive and not creating silos, where the CUSO people do their thing and the credit union people do another thing," Sharp continues. "You'll never be successful that way."