CUSO efficacy

When a credit union creates a credit union service organization (CUSO), that financial institution has more fully set about to fulfill the purpose of a member-owned financial services option. Most of us recall how credit unions came into existence. We know the history of the banking system in such countries as Great Britain, Ireland, Germany, and Europe as a whole during the mid-1800s. It had become very difficult for owners of taverns, shopkeepers, craftsmen, farmers, and others to obtain needed loans. From that dilemma came the creation and establishment of credit unions. It was a grass roots common bond in which the people determined that they needed to find a way to provide for their own financing. As Plato said, “Necessity is the mother of invention.”

CUSOs can and do help small businesses and, in so doing, also assist in the growth and profitability of the parent company–the members’ credit union. Understandably, many purists experience cognitive dissonance about the not-for-profit and for-profit philosophical positions, but the addition of a CUSO brings it all full-circle, that is, credit unions can more fully participate in serving people regarding their financial needs. Simple guidelines are listed below for the establishment and development of a CUSO.

Conduct internal and external research to determine the need for a CUSO.
Before any serious consideration is given to developing and implementing such a venture, the board and management need to be assured that it will ultimately provide products and services in which the credit union is prohibited. Yet, it will contribute to the bottom line of the credit union within a 3-5 year period–sooner is preferable. Focus groups can be conducted along with conducting external research within the competitive environment to determine the viability of a CUSO.

Determine which products/services the CUSO will provide versus the CU.
It is important that the products and services provided by the credit union and the CUSO be clearly identified and distinguished. Duplication must be avoided because efficiencies will be compromised. Membership confusion must not occur in the marketplace. If this is improperly handled, both organizations will work at cross-purposes, which run contrary to the establishment of a new venture.

The CU board should adequately fund the CUSO (at least $1 million plus initially).
One of the leading causes of business failure is undercapitalization. It is not unusual for a credit union to expend $2-3 million on a new branch facility; yet, when it comes to funding a CUSO there is often reticence with regard to investing a million dollars on a new, intrapreneurial venture. A successful CUSO can add millions to the bottom line of a credit union.

The CU board should create a CUSO board comprised of inside and outside directors.
Along with all the other responsibilities of a credit union board is the charge to fashion the credit union service organization board. This board can be comprised of a combination of credit union board members, management personnel, and outside directors. In most cases credit union board members are unpaid volunteers working with a nonprofit organization (credit union). The main reason outside directors is important is because of the for-profit nature of the business. Outside directors should provide specific skills and knowledge which will enhance the performance of the CUSO. It is rather typical for the total membership of the board to be about seven members. Of those seven, it is recommended that at least three be outside directors. The total number will depend upon the specific needs and expectations for optimum CUSO performance.

Compensate outside directors based on meetings attended.
Since, in most cases, volunteer credit union directors cannot be compensated for their work, this is not the case in the for-profit world, and that is where from which most of the outside directors will come. The objective is to attract high quality directors who will bring what is needed to the table. Initially, based upon meetings attended, a nominal amount $500-1,000 is suggested. Though this is a minimal sum in the for-profit world, it is reasonable. The average bank director receives more than $200,000 per year plus perks.

Hire a fulltime CEO–avoid using a part-time CEO.
The temptation is to use one of the credit union executives to initially head up the CUSO, while performing the duties of their current position, but that should be avoided. It is an unfair expectation to assume that a credit union employee can do two jobs for the price of one. Running a business part-time will result in part-time performance, and that should not be the objective of a credit union service organization.

Give CEO autonomy to hire necessary staff.
Any CEO worth his/her salt should be allowed to select the team. After all, if the credit union is willing to trust this person with a new business, it is only reasonable that the CEO should be in charge of the hiring and knows who to bring aboard and what skills are needed. If the person is able to surround themselves with those in whom he/she has confidence, the likelihood of success increases.

CEO should attend all CU board meetings and report CUSO activities.
CU Board members and executive management need to be fully informed regarding CUSO activities. After all, the CU board shall have made a significant investment of the members’ money, and the CU board has a fiduciary responsibility to ensure that an appropriate return is occurring. Besides, this is a team effort, and the CUSO CEO needs to make sure that they are not working in a duplicative manner.

CUSO CEO should participate in CU management team meetings.
Once again, this is a team effort, and all parties should stay informed about the strategic direction of each entity.

CEO should participate in all CU strategic planning sessions.
All one has to do is ask the question, “How can the credit union and CUSO integrate strategic initiatives unless information is shared?”

Expect CUSO to become profitable within 3-5 years.
This is a normal range of time for the profitability of any new business. In the case of a CUSO, an intrapreneurial venture,this timeline can usually be improved because of the resources available to it through the credit union/parent company.

CUSO board should, in writing, clearly state CEO expectations.
The board should reach mutually agreed upon goals with the CEO. The board should provide specific guidance on what is expected on a daily basis.

Board should meet at least on a quarterly basis or more often if needed.
Initially, the board should meet on an as needed basis, but after the business has matured, usually a quarterly meeting is all that is necessary.

CUSO CEO should be a voting member of the board.
This can be controversial, because most credit union CEOs are not voting members of their boards, but in the case of a CEO, who is expected to provide strategic direction for the business, this is strongly suggested.

CUSO board should assess the CEO’s performance at least twice per year.
To ensure that the strategic direction is being followed, the board should have an informal meeting after six-months and a formal assessment at the end of the year. The formal assessment should result in providing incentives, if warranted, and salary decisions as well as “stretch goals” for the coming year.

Hopefully, the above guidelines will prove beneficial to boards of directors and managements who already have or are considering the creation of a credit union service organization (CUSO).

Wendell Fountain

Wendell Fountain

Dr. Wendell V. Fountain has been President/Principal Consultant of Fountain & Associates Business & Management Consultants since 1984. Wendell is a credit union strategist, speaker, and author. He has ... Web: Details