CUSOs Offer Economies Of Scale To Keep Smaller CUs Relevant

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Thomas Miller has watched as the number of credit unions in Michigan has shrunk to 395 as of the end of 2005, down from 1,150 in 1966.

Aiming not to become one of those that disappears, the CEO of Affinity Group Credit Union in Pontiac said he recognized smaller CUs needed to change the way they operate to remain competitive. And that's what AGCU has sought to do.

"Only the biggest credit unions are able to maintain ROA. We asked: 'How are we going to be relevant to our members?' We knew we needed to collaborate to get the benefits of scale because we were missing the things we couldn't do because of our size. For example, we didn't have enough branch offices or a dealer direct program."

The solution, Miller told attendees of an educational session at the recent National Association of CUSOs (NACUSO) conference here, was to establish a series of CU-owned companies that allow smaller credit unions to pool resources.

Miller was one of three speakers at a session titled: "Maintaining Your Individual Credit Union Identity in a Merger Crazy World." He was joined by Tom Reed, CEO of Encore Electronic Services Cooperative, and Jim Alton, benefits consultant for the Lockton Companies of Colorado.

Rethinking Traditions

Miller was the founder and remains vice chairman of Mortgage Center LLC in Michigan. Mortgage Center originates and services mortgages for 64 CUs, with a portfolio of nearly $1 billion.

Miller also helped found one of the first shared ATM networks for credit unions, and he was one of the organizers of CU Partner Solutions, a CUSO whose goal is to use the aggregate size of mid-sized CUs to lower costs and improve growth and member service opportunities.

"The traditional alternative is to merge with a larger credit union or linger," he said. "Through collaboration, 10 credit unions with $25 million each in assets can experience many of the benefits of scale larger competitors enjoy."

CU Partner Solutions, which was founded April 11 following a year of planning, uses aggregation to create operating and purchasing efficiencies, Miller continued. Initial cost-cutting targets include health insurance, data processing, and marketing and promotions.

"We have to stop running our business; we need to start building our business," he declared. "We need to quit waiting for opportunity to knock. We used to show up in the morning, turn on the lights and wait for members to walk in. We can't do that any more."

Instead, Miller said CUs must target businesses directly ("There's a whole retail sector out there").

For example, Affinity Group CU began working with a Harley-Davidson dealer in Milwaukee, and now takes motorcycle loan applications online on a co-branded website.

The keys, he said, are collaboration, aggregation and solidarity.

"Credit unions have to be willing to give up some autonomy to survive," he asserted. "I'm a mid-sized credit union, but I'm not going to be a statistic. There are no boundaries to what we're trying to do. And the time to act is today, not when the credit union is on life support."

Ahead of its Time

Reed, who noted the Encore Cooperative was founded in 1982 by the Maryland/D.C. Credit Union League as a way of offering ATM and debit cards, recalled, "We were a CUSO before CUSOs were fashionable."

Encore currently has 124 owner CUs in 14 states. Reed said it offers just four core products because "We didn't want to become all things to all people."

The ATM/debit card program remains in operation more than 20 years later, though it no longer is a reseller of services. Reed said it is a merchandising cooperative that obtains better prices for the participating credit unions.

The other three products are merchant services, credit card services and shared branching facilitation in the Baltimore/D.C. area.

Credit unions participate on different levels and are not mandated to use all of Encore's products and services, he explained.

"Cooperation comes in many forms: people helping people, credit unions helping credit unions and CUSOs helping CUSOs," he said. "Cooperation is the answer to how credit unions can maintain their identity, and it is one of my favorite topics."

The Encore Cooperative has signed a letter of intent to merge with the CO-OP ATM Network, though Encore will stay around as an entity, Reed said.

Health Care Model 'Unsustainable'

Alton, who described Lockton Companies as the largest privately held insurance brokerage and consulting firm in the U.S., said his job as a conference speaker was to "scare" the attendees.

He said the current health care model is "unsustainable," because if things do not change, health care costs will be 17% of GDP by 2010.

"Traditionally, employers have been paternalistic in the way they handle employee benefits," Alton said. "This has led to an insulated consumer. People can guess the prices of cars and airline tickets, but they cannot guess surgical procedure costs within $10,000 to $15,000."

Lockton, through the power of large numbers, has pre-negotiated contracts with the largest insurance carriers, he continued.

Alton urged credit union CEOs and CFOs to engage in a "strategic direction" of benefits. He said CUs must develop a three- to five-year strategy.

"Don't wait for a revolution, start an evolution," he advised. "But don't wait for things to blow up."

Alton said CUs should develop a strategy to educate and communicate with employees to allow them to understand the insurance situation.

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