This piece is based off of a roundtable discussion at the CU 2.0 Brainstorm Event in July 2021. It is not intended to be comprehensive—rather, it will provide a cursory introduction to trends and questions surrounding credit union service organizations (CUSOs).
Credit union service organizations, or CUSOs, are organizations owned wholly or in part by credit unions. They provide technological, operational, and other financial services primarily to credit unions and their members.
After decades of relative obscurity, CUSOs are rising in prominence today. There are a few major industry trends that contribute to this ongoing growth. We explore some of those trends—and accompanying questions—below.
Panelists included credit union executives, CUSO legal experts, and CUSO executives. Join the next Brainstorm Event here: https://cu-2.com/brainstorm-event/
Changes in CUSO Structure
“CUSOs are the only real way for credit unions to invest in financial technology,” says Brian Lauer, the leading legal expert for credit union service organizations. Other vendor partnerships (like fintechs) don’t offer the same long-term opportunities. And internal development is unrealistic for the vast majority of credit unions.
Lauer notes an “inflection point” for credit union service organizations in the last decade or so. With increased exposure to fintechs, entrepreneurs, and investors, CUSOs are narrowing their focus considerably.
Barb Lowman, President of CUNA Strategic Services, agrees. She says that “CUSOs are much more intricate and complex than they used to be,” noting that “the strategic value of CUSOs has increased in helping solve the problems that credit unions face daily.”
Credit union service organizations have increased in sophistication while narrowing in scope.
What Changes Are Next for CUSOs?
All panelists agree that the trend above will continue. In fact, all predicted a further narrowing of focus.
That’s worth exploring more.
For a long time, the only well-known CUSOs were the largest ones. Think CO-OP Financial Services, PSCU, and the like. These groups provide a wide variety of services to credit unions. Those that offer fewer services typically handled major, business-critical things like payments or insurance.
Newer CUSOs usually specialize. They solve a single, small issue or group of issues. Almost all new CUSOs will follow this trend.
Additionally, all panelists discussed the move toward creating easier integrations with existing credit union technology. Especially small and mid-sized credit unions don’t have the bandwidth to integrate new solutions that don’t play well with others.
Finally, credit unions will tend to choose CUSO partners strategically. Priority will go to partners that reduce organizational complexity, reduce overhead, and help them connect with members.
Should CUSOs Be Regulated?
This has been a contentious question in credit union service organization circles. However, panelists and attendees all agreed:
CUSOs do not need to be regulated by the NCUA.
Yes, there are ways that CUSOs touch the underlying credit union business, and those touches warrant regulatory scrutiny, says Lauer. But CUSOs themselves don’t need the same regulatory burden that credit unions have.
If you regulate credit unions well, you don’t need to regulate their technology partners, too.
However, that doesn’t give CUSOs a free pass. In fact, successful CUSOs may find that leaning into the regulatory environment is a key to success. Most credit unions have less than $200m in assets and must do all vendor due diligence and management themselves.
Consequently, CUSOs that meet credit union regulatory needs—and provide standardized reporting and other compliance needs—will find much faster adoption among smaller institutions.
CUSO Funding and Ownership
There are two credit union service organization trends that the panelists want to see more of.
First, the introduction of outside funding. These days, CUSOs have more access to capital than ever before. In addition to investments from larger credit unions, smaller ones are chipping in as well.
Additionally, fintechs, VCs, and other investors are showing up for CUSOs. The best part about the investors that CUSOs attract is that they’re in it for the credit union mission. They provide advisors and other resources in addition to capital, and they truly want to see CUSOs succeed—and not just for a return on their investment.
Second, CUSOs are more likely to find multiple credit union owners instead of just a single one. Traditionally, this has not always been the case. When forging partnerships in CUSOs, many smaller and mid-size credit unions have worried that larger credit unions are actually shopping for merger partners.
However, credit unions are incredibly collaborative, and CUSOs are one of the best ways to spark that collaboration. And because credit unions serve communities, investing in CUSOs becomes more than a way to simply invest in technology—it’s also a way to invest in their communities.
More About CUSOs
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