CUSOs can provide more than just additional services to credit unions and their members. Well-run CUSOs can be engines of income for their owners. Credit unions successfully investing in multiple CUSOs tend to have higher performance ratios than their peers. In this era where credit unions are increasingly dependent on non-interest income, reliance on CUSO returns has steadily increased. Over the past decade, the pressure on CUSOs to generate financial returns for credit union owners has accelerated.
In order to increase revenues, CUSOs may look to mergers and acquisitions (M&A) as a method to increase income. M&A activity is the process by which one company acquires the ownership of all associated assets and liabilities of another entity. M&A can be a successful strategy to increase returns, but one fraught with risk. When considering M&A as a strategy, what should be the driving force for these CUSO M&A transactions?
Avoid the temptation to invest for profit only
All CUSOs should resist the urge to invest in any company strictly for financial returns. This motivation for financial benefit alone is prohibited in the NCUA Rules and Regulations, and for good reason. In particular, the long-term success rate of new ventures is quite low and especially true of Financial Technology (FinTech) firms.
These investments should not be avoided entirely, but the motivation needs to be other than purely for short-term material financial gains. Instead, consider and document the motivations discussed below. Returns evolve from equity investments that follow three primary rationales.
Access to a product or service that otherwise cannot be delivered
The first reason for a CUSO to consider an equity investment in another firm is access to a product or service that cannot be created or delivered by themselves. Or at least access to a product or service that cannot be delivered in a reasonable timeframe. This opportunity usually occurs when the product is very new and not yet in mainstream delivery channels.
Many FinTech products fit this criterion. Equity investment will often be required for a CUSO to offer these new fintech solutions to their credit union owners and members.
Access to preferential pricing
The second reason for this investment is access to preferential pricing. Access to preferred pricing is one of the most common reasons for a CUSO to invest in an entity. CUSOs often provide “owner pricing” that is less than non-owner pricing and makes the investment worthwhile. In particular, the CUSO should evaluate whether the volume purchased will be material.
Access to a new market
The final primary reason for a CUSO to take an equity position in another entity is access to a new market. If the new entity serves a market that is outside the current reach of the CUSO and—this is critical—would be a compatible market for the CUSO to sell into, then the investment can be justified. The CUSO should analyze and develop a plan for growth while reviewing the investment opportunity.
It’s not all about income
Success with the above strategies tends to be essential for the financial returns to follow. However, these strategies can also lead to success even if the returns are not reflected on the income statement of the new CUSO. The value can be demonstrated through new product offerings, better pricing, and/or new market development. These are all signs of success even if the financial returns of the new entity take time to materialize.
