CUSOs Strive to Maintain Credit Unions’ Cooperative Culture

CUSOs serve as models for the credit union industry’s culture of cooperation, and they have continuously cultivated solutions for improving member services.

In 2017, the NCUA reported 946 registered CUSOs in the U.S., a jump from 882 in 2016. Ninety-six percent of CUSOs serve fewer than 100 credit union customers, 74% have one credit union owner and two CUSOs have more than 1,000 credit union owners.

CUSOs provide competitive advantages and economies of scale, and deliver tech innovation, new visions, reduced service expenses and sometimes additional revenue streams.

“The arc of technology innovation has never been greater than it is today. The use of the latest coding languages, architectural design strategies and APIs makes it possible for CUSOs to deliver powerful, state-of-the-art services that level the competitive playing field in the marketplace,” Michael Carter, EVP for the Memphis, Tenn.-based independent contract advisory firm Strategic Resource Management, said.

There are multiple benefits for credit unions that partner with a CUSO, Larry Nichols, president/CEO for the Farmington Hills, Mich.-based CUSO Member Driven Technologies, which provides a secure, hybrid cloud alternative for core banking and other IT needs, stated. “CUSOs understand the credit union culture and business. At MDT, added efficiency is one of the greatest benefits we provide to our clients. We host the Symitar core platform along with dozens of other critical IT solutions necessary to run an institution, while allowing credit union clients to maintain a high level of control over their own data,” Nichols said.

CUSOs do experience some growing pains. For MDT, which has been in business since 2003, the biggest challenge in the beginning did not involve the service or solutions it planned to provide, but rather the legal and operational building blocks required to start a business, Nichols explained. “Once we got those squared away, it’s been a bit of a fairytale for us; we’ve grown tremendously over the past 15 years and have expanded to now serve more than 115 credit unions representing more than $22 billion in assets.”

Carter said one challenge in a CUSO’s early years is reaching the critical mass necessary to operate profitably. “Once there are enough participating credit unions, it provides the CUSO operator with the economics that make the business model viable.”

Carter noted scaling for growth is less of a challenge today than it was in the past due to cloud computing. “This delivery model offers a number of options for scalability favorable to any CUSO looking for a strategy that supports ongoing growth,” he said, also explaining the cloud model allows organizations to “pay as they go” for bandwidth used and typically offers them a nearly limitless level of scale (e.g., Amazon Web Services).

The Raleigh, N.C.-based CUSO Constellation Digital Partners, which provides a cloud-based marketplace that enables credit unions to connect with app developers, recently announced the release of Aquarius, the first implementation of its open development digital banking platform since its launch in 2017. The official release of the platform marked one of the first online and mobile banking platforms built exclusively on AWS.

“By utilizing Amazon Web Services, we have a degree of scalability and extendibility that other legacy providers simply cannot match, such as the potential to react to increases in traffic, new clients and new opportunities,” Constellation Founder and CEO Kristopher Kovacs said.

For CUSOs and their partners, an important goal involves member service. “Outstanding service has always been our number one strategic driver, as well as key differentiator,” Nichols said. He added MDT grew primarily through word of mouth marketing, as the credit union community is tight-knit, and that if a CUSO has a strong reputation of service, it can position itself better for growth and success.

Another key to CUSO success is its relationship with its board. “A key practice here is to make sure all board members understand they’re coming together to strategize and talk about the CUSO – not their own singular credit union. Our board has always done a great job of this,” Nichols stated.

Kovacs said difficulties from a governance structure standpoint sometimes stem from the board’s makeup, which often consist of credit union veterans. They can bring a less-than-ideal mindset, especially initially. “They’re not thinking about credit union management governance over the CUSO and how that needs to be different.”

Carter maintained managing board members requires an ability to successfully communicate the principles of a CUSO’s approach. “The CUSO cannot serve the needs of a single credit union at the cost of the others it serves. The board must guide the organization in a way that reinforces this ‘we are all in it together’ mentality,” Carter said. “This is not easy since increasingly national charters put credit unions in competition with each other. The services the CUSO provides must be at or, ideally, beyond parity with what other institutions offer.”

Additionally, Carter held innovations nowadays must not just offer the latest features and functions members expect. They must be built to scale using modern technology stacks and API-based architectures, and in a fashion that accommodates extensibility. “Many of the software companies in our industry are still struggling with achieving this level of sophistication and modernization.”

Because credit unions operate in a more collaborative manner, this gives them opportunities to share and leverage each other’s innovations. Carter noted banks cannot check their hats at the door, so initiatives often fail when they try to put their heads together. However, credit unions face issues when it comes to collaboration as well. “I tend to be skeptical about this approach as it has failed repeatedly in our industry, typically because an innovative solution for one financial institution may not translate seamlessly to another institution’s operations, business model, goals and strategies.”

Kovacs had identified a fundamental problem in modern digital financial services when he created Constellation, which was the result of a three-year research and development effort. The CUSO affirmed its cloud-based financial services platform allows credit unions and members to choose the services they want to use inside a secure banking environment. “We wanted to own and control the solution that ultimately provides members with what they need. They receive a say over selection, growth path and control, or much more than they would have with a legacy provider.”

CUSOs can serve a critical role during adversity as well. MDT focuses on disaster avoidance rather than disaster recovery; its disaster avoidance approach includes consistent, comprehensive testing in its two data centers to ensure optimal security of clients’ information is maintained. “We have evolved from replicating different disaster scenarios every few months to now every day.” In addition, MDT opened a new data center in Montana to host primary processing for its Western U.S. credit unions while strengthening processing redundancies and business continuity for its Eastern clients.

However, too many credit unions have limited crisis communication plans in place, Carter cautioned. “If a credit union has a disaster plan but lacks a clearly defined crisis communications plan across the organization, the former will likely be rendered far less effective because of the latter.”

The largest of financial institutions often brag about their ability to enjoy economies of scale that make them the elite choice for consumers, Carter noted. “That has always been an overstatement of reality and now, more than ever, is an assailable position for credit unions that have a partnership with a CUSO that has built its offerings to leverage today’s advanced technological tools.”

He added, “As the environment in which they operate becomes more and more competitive, making it necessary to focus more intensely on ways to offer members more value, it is vitally important that credit unions focus on being finserv organizations, not technology providers.”