What to Consider When Forming a CUSO


CUSOs are formed for all sorts of reasons. They can provide avenues for innovation and creativity that would not typically occur within the confines of a credit union. They can provide a revenue stream for credit unions that would normally not be available. They can reduce service
costs incurred within the traditional credit union. Some may do all three. Generally, these outcomes are the result of collaboration and the cooperative spirit that is inherent in the credit union industry. CUSOs can enable credit unions to “punch above their weight” to more effectively provide additional member services for a cost they could not otherwise afford.

So what kinds of CUSOs might your credit union form and what should you consider before jumping in?

Reasons to form a CUSO

Credit unions form CUSOs to solve a problem and/or take advantage of an opportunity to strengthen the credit union to better serve members.

1. Legal Necessity to Provide the Services

A CUSO is still needed to legally provide some services. For example, if a credit union desires to provide non-depository trust services or to be engaged as an active mortgage broker, these services require powers that credit unions do not have and therefore the services must be through a CUSO.

2. Advantages of Scale

With scale there are more resources. Fixed costs can be spread over a larger market. You can afford to hire a more talented staff. Vendors give you better deals. Credit unions that do not want to merge out of existence to obtain scale turn to CUSOs and collaboration as the alternative.

3. Capital and Innovation Acquisition

Credit unions grow capital slowly, a share deposit at a time. CUSOs serve as aggregators of capital. CUSOs can also attract capital from outside credit unions. Many CUSOs have non-credit union co-owners. These non-owners usually bring their cash capital and their talent capital to CUSOs.

4. Equity Growth

As a credit union’s investment in a CUSO grows or falls, it is reflected on the credit union’s books. The credit union should be prepared to absorb some losses as losses are typical in the early stages of a business plan. Credit unions with growing capital accounts translates to increases in assets on the credit union’s books. The early credit union owners in a CUSO can also benefit through the sale of its shares or units to new credit union owners. While not common, several CUSOs have been sold outright which created profits to the credit union owners.

5. Capturing Entrepreneurial Spirit

Credit unions need more entrepreneurism and innovation. Some CUSOs attract folks with those qualities who appreciate the mission of credit unions. While credit unions have highly talented and motivated people, slow growing credit unions often lose many of those people to organizations with more growth potential.

6. Increased Markets

A minority portion of the CUSO’s business can be with non-members and non-credit unions. Through a CUSO, the potential market of a credit union is increased. Some business lending CUSOs and mortgage lending CUSOs have been formed to obtain loans from outside the credit union’s membership.

7. Limit Liabilities

As a separate legal entity, CUSOs can isolate risk away from the credit union. For example, if a credit union is foreclosing on a loan with environmental issues, the credit union can assign the loan to a CUSO to hold until the foreclosed property can be liquidated.

8. Meeting the Challenges of the Marketplace

The competition and the potential competition of FinTech, Amazon, consolidating financial institutions, historically low net interest margins, and increasing regulatory burden creates huge challenges to the traditional credit union cooperative model. CUSOs are an extension of the cooperative model and a unique structure through which credit unions can aggregate resources to meet the competitive challenges posed by the financial services marketplace without a massive consolidation of credit unions.

Key questions to consider

We’ve covered some of the advantages of forming a CUSO; now let’s look at some of the questions you will have to ask yourself. What is the goal of the CUSO (what problem is the CUSO created to solve)? Do you have partners that are aligned with that goal? Do the partners have the resources and the same resolve to accomplish the shared goal?

Do we have a realistic business plan? How do we structure the business model to accomplish the goal (the owners, management and financial terms) Who are the people to execute the business plan? What are the legal rules and regulations impacting a CUSO?

Suggestions for getting started

It cannot be overstated the importance of proper planning required when forming a CUSO. The level of planning and detail upfront can often head off potential areas of concern down the road from both a business a staff perspective. Here is a list of various components for consideration for anyone looking to form a CUSO:

1. Set goals, then plan, plan, plan…

From a credit union perspective, what are the goals? Are you looking to reduce operating expenses? Maybe the goal is to grow capital or increase expertise and technology assets.

From a CUSO perspective, identify what products and services you are looking to provide. Is the goal making income or saving expenses for investors?

2. Identify opportunities:

  • Members’/participants’ financial needs
  • Credit union operational needs (that could be best solved via a CUSO)
  • Market advantages expected (to either credit union or membership)
  • Available resources
  • Vendor and partnership proposals (leveraging vendors better by forming a CUSO)
  • Market study to help identify

3. Create and follow a business plan:

When it comes to creating the business plan, it should address a few questions:

  • Who is going to develop or carry out the plan?
  • How is plan going to be carried out?
  • How much money will it take?
  • How much time will it take to start the CUSO?
  • How much time will it take for CUSO to be self-supportive?
  • Who is going to monitor the plan?
  • Who or how to measure ongoing success?
  • What are the potential costs for things such as audit or compliance, technology, human capital and potential costs related to intellectual property?

4. Maximize Liability Protection:

  • Organizing the business structure
    • Corporations vs. limited partnership limited liability company
    • Ensure the CUSO is adequately capitalized
    • Attorney’s opinion limiting the credit union’s exposure
    • An organizational structure in place to govern the CUSO
    • CUSO board, officers and employee issues (policies, benefit plans, )
    • Insurance and bonding coverage

There are a lot of reasons to form a CUSO and a lot of ways a CUSO can serve your and other credit unions. The question to ask is where does my credit union need help right now?


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