Collaborating for Survival
Credit Union Association of the Dakotas
2012 Annual Summit
Guy Messick
www.CUSOLaw.com
The Function of Collaboration
• Collaborations help credit unions solve the
problems of survival (too little income and
too high expenses) by leveraging scale,
expertise and efficiencies.
• Collaboration can help turn problems into
opportunities.
Collaboration and CUSOs
• Credit unions can collaborate directly or through
CUSOs.
• CUSOs offer the structure to gather capital and
govern an on-going collaboration.
• In some cases a CUSO is needed to legally
provide a particular service.
Collaboration Killers
• Failure to see the urgency to collaborate…no need
to consider changing something that has worked for
50 years (assumes all industry and external factors
remain unchanged).
• Fear of the unknown…fear of getting out of your
comfort zone.
• Fear of losing authority or prestige… authority
within a collaboration is shared.
• Lack of expertise or resources.
CUSO’s Basics
• A limited liability company, corporation (forprofit and cooperatives) or limited partnership
in which a credit union has a investment or loan
• Investment and loan limits
– NCUA: (Part 712) Each limit is 1% of paid-in capital
and unimpaired surplus
– North Dakota: (13-03-23-06) Each limit is 10% of
equity
CUSO Basics
• Customer base – primarily credit unions or
members of affiliated credit unions
• Singly owned CUSOs, CUSOs multi-owned by
credit unions, multi-owned CUSOs with some
non-credit union owners
• Conflict of interest rules with credit union
officials
CUSO Basics - Types of Services
• Financial Services
– Insurance Agency – Trust Services – Real Estate
Brokerage - Broker/Dealer
• Operational Services
– Marketing – Collections – Compliance - Internal
Auditing – Loan Underwriting and Servicing –
Originating Mortgage, Student, Business and Credit
Card Loans – IT Services – Management and
Personnel Support – Shared Branching – Disaster
Recovery - Bulk Purchasing – Vendor Management
CUSOs 1.0, 2.0 and 3.0
Point to Point
A Hub
A Network
A new reality exists…
and it really stinks.
Popping the Credit
Union Income Streams
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Anemic Net Interest Margin
Anemic Investment Opportunities
Loss of Interchange Income
Reduction in Overdraft Fee Opportunities
Net Interest Margin
Seventy plus years of living off
the net interest margin…
…no longer works in the
21st Century.
Dramatic Increase in Operational Costs
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Technology
Compliance
New Financial Services
Accounting & Auditing
Compensation
Strong Downward Pressures on Pricing
• Larger competitors
have lower technology
costs per transaction
• Internet competitors
have a much lower
cost structure
No Risk Mantra from the Regulators
Capital Drain
Was that
guy from
NCUA here
again?
RESTORE CAPTIAL
Before the economic crisis, credit unions have been
consolidating at a rate of over 3% a year
Source: Callahan’s Peer to Peer Software
What is the future of an industry where…
• The industry is no longer able to sustain itself in
the traditional business model;
• Competitors have overwhelming advantages in
both the ability to raise capital to fund
opportunities and obtain scale to reduce
operating costs;
• The industry’s customer base is limited; and
• The industry tends to be risk averse and slow to
change?
The New Reality
• The financial world has changed forever. The old
model no longer works.
• The number of credit unions is shrinking at a rate
of about one per day.
• There is an urgency for credit unions to act before
it is too late.
• How should we react to all of this?
Leave Me Alone
Just as members working together
are stronger, credit unions working
together are stronger.
The Power of Owner/Users
NO STRUCTURAL CONFLICTS
Owners fix user problems and users
reap the ownership benefits.
Path to Capital Growth and
Sustainability
• More income: interest & non-interest
• Less operating expenses: cut & scale
• Acquire capital: merger & secondary capital
Collaboration Strategy
For Capital Growth
• More interest income – non-member loans,
higher risk loans
• More non-interest income – CUSO approved
financial services and Incidental Power
income
• Reduce cost and increase expertise through
collaboration in operational services
• Leverage outside capital
Innovation
• Credit unions are by nature “in the box”
organizations that provide basic lending and
depository services within a tight regulatory
framework.
• By comparison, CUSOs offer a much more
innovative and entrepreneurial environment
that can put capital to use to provide scale
to reduce expenses while increasing
expertise.
Does collaboration really work?
CUSO Success Stories
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Open Technology Solutions
Land Bound Title
CU*Answers
CUSO Financial Services
CU Student Choice
CU Realty
Ongoing Operations
MAPS Building CUSO
Collection Services CUSO
Unity Xchange
If collaboration is needed for my credit
union to survive, how do we transform
our business model?
Prepare the Soil
Prepare the soil for
collaboration to
take root.
Operating a credit union in a
collaborative environment
Shared IT
Shared
Business
Lending
Credit Union
Internal Staff
Shared
Compliance
Shared
Vendor
Management
Adopt a Collaborative Mindset
• Is there anything you will not collaborate on
(e.g., member facing services)? A
collaborative solution is considered for all
other activity.
• First seek an existing collaborative solution.
• Second consider forming a collaborative
solution.
• Third, go it alone.
Develop Credit Union Policy and
Staff to Support Collaborations
• Develop a Co-Source Policy for operational
and risk management purposes.
• Reorganize the management structure to
include a staff position to implement the
policy (“Co-Source Manager”).
Co-Source Policy
• Set desired benefit objectives.
• Prioritize the services that will be cosourced.
• Identify the criteria for the selection of cosource partners.
• Establish the method of establishing
performance criteria.
Co-Source Policy
• Establish the method of measuring and
reporting on the performance of co-sourced
services.
• Establish the method of curing deficiencies
in the performance of co-sourced services.
• Establish specific staff responsibilities and
align their performance metrics to promote
the success of the co-sourced services.
Finding Good Partners
• Compatible
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Goals
Style
Resources
Commitment
Urgency
• Truthful
• Trustworthy
CUSO 3.0
Building a Network
A Peek at the Next Generation
of CUSOs
CUSOs 1.0, 2.0 and 3.0
Point to Point
A Hub
A Network
$28 Billion of Capacity to Trade
The Network
• Collaboration as a means of operations and not for
specific services
• Transparency of intellectual capital among the credit
unions - share best practices
• Share excess capacity and expertise among credit
unions
• Find the best providers for the job within or outside of
credit unions – peer rated
• The Network seeks out opportunity for the credit
unions – initiative and innovation are rewarded
Next Steps:
The Challenge of Change.
Change requires you to…
• Accept that a collaboration strategy is essential
to the sustainability of credit unions. There
must be a sense of urgency.
• Understand that the benefits of scale require the
significant revisions your business model and
that will impact your employees.
• Convince some staff, impose your will upon
others and replace the rest to make the necessary
changes.
Change requires you to…
• Give up some personal control by trusting and
working with others in a collaborative model.
• Not tolerate mediocrity and reward results.
• Look outside the industry for ideas.
• Take on the criticism associated with change.
• Experiment with new solutions to old problems.
• Get excited about the opportunity to innovate
and design new business solutions.
Problems cannot be solved by
thinking within the framework in
which the problems were created.
Albert Einstein
And the trouble is, if you don’t risk
anything, you risk even more.
Erica Jong
What do we do now?
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Ignore all this and plan your merger strategy
Develop a collaboration mindset
Network for expertise and ideas
Write down your Top 10 Problems &
Opportunities and share them
• Implement some quick successes and become
comfortable with your partners
Low Hanging Fruit
Operational Services
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Marketing
Collections / Bankruptcy
Compliance
Internal Auditing
Loan Processing and Servicing
Bulk Purchasing
Excess Staff Capacity
Vendor Management
Low Hanging Fruit
Financial Services with Third Parties
• Title Insurance Agency Joint Venture
• Investment Services Network Agreement
• Property and Casualty Insurance Services
Network Agreement
• Real Estate Brokerage
Who are you having lunch
with and when?
Discuss Your Top 10
Problems & Opportunities
The risk of doing nothing now
exceeds the risk of change.
Transformational times call for
transformational changes.
Are you all in?
Resources on Collaboration
• National Association of Credit Union
Service Organizations www.nacuso.org
– Annual Conference – Las Vegas May 2012
• Guy Messick – Messick & Lauer PC –
610-891-9000 - gmessick@cusolaw.com
www.CUSOLaw.com