Chickens, Eggs and CUSOs: A Recipe for Success

Credit unions that participate in CUSOs are growing in numbers and outpace those who don’t by many measures.

The numbers clearly show that, but in a clear case of the chicken or the egg, it’s not clear whether it’s CUSO participation that drives the difference or whether it’s because those credit unions are doing business overall in demonstrably superior ways.

Either way, and it’s probably some of both, there are insights to be gleaned from looking at how investment and participation in CUSOs has grown in recent years – a movement within a movement, if you will.

Nearly 40% of the nation’s 5,689 credit unions have an investment or loan or both in a CUSO. There are about 1,100 CUSOs, with about 380 of them multi-owned and more than 700 wholly-owned.

The latter are typically outsourced service offerings, while the former tend to be more wide-ranging collaborations that leverage cooperative processes and economies of scale, as credit unions take on the challenges and opportunities presented by changing technology and growing competition.

Charting the Difference

The first chart – Credit Union CUSO Participation – shows that investment in CUSOs more than doubled in the past decade. Loans to CUSOs nearly did, and overall participation increased 11.5 percentage points.

Now, let’s focus on those multi-owned operations and the credit unions that love them. The next chart – Five-Year Growth Rates – shows that performance difference is most marked in the areas of loan and member growth, two undoubtedly crucial and interrelated metrics.

We’re not overlooking the fact that operating expenses on average have grown faster at multi-owned CUSO credit unions than their counterparts. But that growth is likely a result of escalating operating costs required to keep pace with their own growth. It takes more staff, marketing and technology investment to grow loan balances, deposit balances and membership rolls, and to service them. More eggs. More chickens.

Service Types, Assets and Stair Steps

Now let’s look at the chart titled Multi-Owned CUSOs by Service Type. It shouldn’t surprise anyone that lending-focused organizations comprise nearly 45% of all CUSOs. That’s a big pool that includes everything from mortgage originations to collections. Member service is number two and includes shared branching, and at number three are payment CUSOs, representing ownership in the PSCUs and CO-OPs of the world.

Next up is the insight offered by the chart titled Credit Union Participation in CUSOs and Five-Year Average Annual Asset Growth by Peer Group. The larger you are, the more likely you are to be participating in CUSOs. It’s a stair step relationship, although the steps are of different sizes and range from 5% participation for the smallest credit unions to 95.5% engagement in the billion-dollar-plus club.

Asset growth over the past 10 years also shows much the same, again demonstrating that CUSO participation is as much a characterization as tactic in this kind of discussion. The larger you are, the more you can do and the larger you become.

We can see more differences, though, between non-CUSO owners and CUSO owners regardless of size, in the chart titled Credit Union Earnings Model.

Of note is the relatively higher interest income from both lending and investments reported by credit unions utilizing CUSOs, translating into higher net interest margins. Another big differentiator is noninterest income; dividends and operating income from CUSO investments are recorded as NII.

That also contributes to a 21-basis point difference in ROA between non-CUSO credit unions and their counterparts that do participate. That’s a significant difference, and keep in mind, this is in the aggregate. It’s all credit unions of all sizes in each of those pools, not necessarily skewed by asset size.

Common Characteristics of Success

Lastly, we share a key measure of member engagement. The Share Draft Penetration chart shows a 10.8 percentage point gap between multi-owned CUSO credit unions and their counterparts at year-end 2017.

Interestingly, that gap is nearly identical to 10 years earlier and stayed the same as both groups saw their penetration rise in that cornerstone indicator of being a member’s primary financial institution.

So, are members choosing you as their PFI because you’re larger and have more services, or are you growing and have more services because the number of people choosing you as their PFI keeps growing? And does investing and engaging with CUSOs drive that growth?

Draw your own conclusion, but it’s clear that CUSO involvement is a common characteristic of a successful credit union. The diversified revenue stream, efficiency increases and economies of scale combined with the collaborative nature of CUSOs make it easy for credit unions to get all those eggs out of one basket and hatch their own recipe for success.

Sam Taft is AVP, Analytics and Business Development for Callahan & Associates. He can be reached at 202-223-3920 or staft@callahan.com.