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A Brief Overview of Credit Union Service Organizations

Credit union service organizations (CUSOs) apply to organizations owned at least in part by one or more credit unions and primarily provide products and services to credit unions or members of credit unions. According to Credit Union Times, credit unions established and designed CUSOs to improve their owners’ access to “best-in-class products and services at competitive prices.” CUSOs exhibit extreme influence due to their collaborative buying power.

When credit unions partner with organizations outside the credit union sector, it often results in CUSOs delivering innovative services and solving important problems. For example, the Member Gateways CUSO partnered with American Express to create a service that sweeps member investment accounts and pays overnight fund rates.

The legal definition of a CUSO can differ considerably from state to state. Although federal credit unions and most state-chartered credit unions require no minimum credit union ownership percentages, some states stipulate that credit unions must hold more than 50 percent of ownership in any CUSO.

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How CUSOs Generate Additional Income for Credit Unions

A credit union service organization (CUSO) is an entity (limited liability company, corporation, or limited partnership) owned entirely or partially by credit unions, and offers permitted operational and financial services primarily to credit unions or credit union members. CUSOs can be owned entirely by a group of credit unions, entirely by a single credit union, or partly by non-credit unions and credit unions. To be designated a CUSO, an organization must have at least one credit union as its owner.

Credit unions profit from CUSOs because they enable them to expand services and enhance efficiencies through economies of scale. In an increasingly competitive financial industry, CUSOs help to maintain credit unions' sustainability by providing credit unions with a competitive advantage. Because CUSOs are not subject to the same restrictions as credit unions, they can provide credit unions with access to a broader range of goods and services.

Financial institutions, like credit unions, used to thrive by earning more interest on loans than they paid out in interest to their depositors. However, this advantage is no longer sufficient in the modern economy. The price of fundamental financial services, such as technology, specialist employees, and compliance, have increased operational expenditures for credit unions in the ever-expanding financial sector. Credit unions have had to adapt in order to survive, and one way they've done so is by using CUSOs to create other revenue streams. Credit unions can use CUSOs to earn both non-interest and interest income.

Fees charged for products and services generate non-interest revenue. Credit unions have a long history of serving their communities by offering low-cost financial products and services to their members. As a result, they typically are not interested in charging fees to earn significant non-interest income. Instead, they rely on CUSOs to offer access to financial services that would otherwise be unavailable to members.

Insurance is a good example. A credit union can set up its own insurance agency by forming a CUSO. Through the CUSO, members can purchase casualty, property, auto, homeowners, and umbrella insurance policies. The CUSO is paid the standard commission on insurance products sold through an insurance carrier, and the commissions are included in the insurance premiums.

The model of CUSO-oriented interest income is similar to the traditional modality but differs in the area of flexibility. Consumer loans, such as vehicle loans and unsecured signature loans for personal needs, were typically issued by credit unions. Credit unions can now expand their ability to provide additional loans by participating in CUSOs.

A credit union that has traditionally issued vehicle loans, for example, can team up with a CUSO that has more access to auto dealerships. By joining an auto lending CUSO, the credit union may now increase its vehicle loan volume. The dealer initiates and makes the loan under this approach, and the credit union subsequently purchases it from them. However, in order to do so, the credit union must have a connection with the dealer, which is established through the CUSO.

Credit unions can also use CUSOs to extend their lending into the business and commercial loan sector. To book business loans, CUSOs provide the skills credit unions require in commercial loan underwriting, processing, and key servicing. This creates new options for credit unions to earn money on commercial loans that they previously did not have.

An organization known as Member Business Financial Services (MBFS) LLC in eastern Pennsylvania is an example of a business lending CUSO. MBFS was founded by seven credit unions. None of the credit unions had been able to provide business loans to their members on their own. As a result, they formed a CUSO and engaged a specialist team to underwrite, originate, and service business loans. Over time, MBFS joined with another CUSO in western Pennsylvania that was doing the same thing, and the two companies grew together to serve credit unions across the state.