Corporate Credit Unions and the 8-Track

This was originally written and posted for the CU Times. Here is the article in its entirety:

Corporate credit unions are quite the unpopular kid at prom these days. With fresh allegations of fraud from senior executives at some corporates, dismal investment portfolios, and lackluster capital positions, corporates are riding a wave of negative publicity. With massive changes to their business model on the horizon and the threat of further regulation, corporates face the same dilemma that the 8-track cassette tape faced:  obsolescence.

Unlike 8-track, the popular audio cassette technology from the 1960s and 1970s, the corporate credit union system has not been short lived. However, forces are changing the marketplace, arguably making corporate credit unions much less relevant. In its January 2009 ANPR, the NCUA suggests making changes to nearly every key component of a corporate credit union’s business model including payment systems, liquidity management, field of membership, investment authority, and capital structure.

Progressive corporates have seen the writing on the wall and have launched new internal programs in preparation for the NCUA’s upcoming systemic alterations.  CU Business Group represents a great example of this concept. A CUSO owned by eight corporate credit unions, CUBG provides mainly business services related items such as loan origination, servicing, and SBA lending. The CUSO model has been quite appealing to corporates lately as a way to branch out and diversify some of their services and revenue.  Many corporates are beginning to get into the CUSO game such as Southeast and Georgia Central with Member Business Solutions and Missouri Corporate and the Missouri Credit Union Association with their CUSO, Heartland Business Services.

The CUSO structure provides a solution not only for corporates, but also for natural person credit unions looking to overcome some of the current issues with corporates. Nearly all services offered by a corporate credit union to its member credit unions are being offered through CUSOs. For example, Palmetto Cooperative Services of South Carolina offers item processing, statement processing, and printing and mailing services. Originally started as a League Service Corporation, Palmetto now boasts more than 400 clients across twenty states.

Investments have been a source of much anguish from the corporates, but many alternatives are provided through CUSOs as well. CUSOs such as MaPS Advisory Services offer complete replacements for portfolio management.  When asked why a credit union would choose a CUSO over a corporate for investment options, Kevin Cole, CFO of MaPS Credit Union and Manager of Client Relations for MaPS Advisory Services, had this to say: “MAS can provide credit unions with an alternative to investing funds in corporate certificates that does not require uninsured membership capital.  Rather than credit unions investing in corporate certificates and corporates investing in mortgage backed securities and other bonds, credit unions can directly own the securities with MAS managing the portfolio to a written investment policy statement developed specifically for the credit union.”

Card and ACH processing is another mainstay of corporate credit unions, but again, many options are available to credit unions of all sizes. PSCU, The Members group, and CO-OP are just a few of the CUSO card processors out there today.  PSCU has over 600 credit union owners and CO-OP has one of the largest ATM networks in the nation.

As practically every operating aspect of a corporate credit union is available from other providers, natural person credit unions will begin to look elsewhere for products and solutions. In today’s economy, credit unions are avoiding risk at all costs, and that includes any potential issues that may arise from utilizing a corporate credit union. Such risks might include changes related from mergers and acquisitions, key employee turn-over, or further capital calls.

While the more modern cassette tape replaced the 8-track in the 1980s, the outdated standard still had a leg up on the competition in sound quality. That advantage was very short lived and within a few years of being introduced, the cassette tape killed 8-track. Corporate credit unions are currently at the same turning point as the 8-track.  CUSO’s and other providers can deliver the exact same services and products to natural person credit unions that a corporate credit union can deliver. While corporates do maintain some slim advantages, they will be quick to deteriorate as the NCUA hands down new regulations in the future.

CUSOs represent a unique opportunity for the credit union industry. Corporate credit unions can capitalize on that opportunity by creating new CUSOs to deliver their existing products in a different format or by adding new business lines. These new business lines could contribute significantly to the bottom line of the corporate, helping to diversify revenue and decrease reliance on products with embedded risk.  Natural person credit unions can also leverage CUSOs to collaborate on new joint ventures to better serve themselves and other credit unions.

Time and time again, new technologies over take old. New businesses enter a market and crush existing competitors. The companies, and business models, that survive have a major skill at their disposal: their ability to confront change. The corporate credit union model is being challenged and if corporates are going to survive, they need to confront that fact and embrace all the tools available to them to ensure that they do not become the credit union equivalent of the 8-track.