In preparation for its annual strategic planning process, the multi-credit union-owned operational services CUSO, Xtend, analyzed the available CUSO investment dollars represented in its 104 owner credit unions as authorized by federal and state regulation. Using 2023 Q1 5300 data, as a network, Xtend has an owner group including credit unions from as small as $50 M to $1 B+, with an average-sized owner of approximately $180M. The average owner-capital ratio is 11.0%.
The strategic question being asked concerns the ability of the Xtend credit union network to support the capital investment necessary to support future strategic objectives required to meet the technology, service, and product objectives that meet and exceed the collaborative operational solutions required by the owner credit unions. Can the CUSO continue to be the preferred outsourced solution provider of expertise and operational tools required by its owners to operate at disruptive prices and service levels, regardless of their asset size?
Using the Federal CUSO investment authority, 1 % of paid-in and unimpaired capital and surplus, the total authorized regulatory investment limit for those credit unions is in excess of $182M dollars. Reducing that amount by current total CUSO investments of those same credit unions collectively leaves over $115 M remaining for additional CUSO investment opportunities. This same networked group of credit unions has an average capital ratio of 11%, which indicates that the deployment of greater portions of the authorized regulatory investment dollars would have a minimum impact on the well-capitalized positions of owners.
Interestingly, Xtend has the unique advantage that of its 104 owners, 32 are Michigan state-chartered credit unions. Those credit unions, under the very advantageous and comprehensive Michigan Credit Union Act, have the authority to invest up to 6% of assets. Taken as a separate group those 32 credit unions have the current capacity to make additional or new CUSO investments in excess of $520M. Combined with their CUSO partners bound by the Federal investment authority and a handful of Ohio state-chartered owners who have the authority to make CUSO investments up to 10% of their total net worth, the Xtend credit union owner network has underutilized investment authority approaching $200M. That’s a lot of opportunity for collaborative innovation.
Our study indicates that this collaborative business strategy can continue to grow and expand without having to reach beyond the current owner network. Xtend can certainly provide its owner credit unions with the newest technologies to support future call center services, future AI solutions, and other shared operational solutions, far beyond the individual capabilities of all but the very largest of this nation’s credit unions.
As importantly, taken as being statistically representative of the entire credit union community this analysis tells us that credit unions are greatly underutilizing their regulatory and statutory authority to build and expand current CUSO businesses and research, identify, and develop new collaborative business models. If you are one of those who think that there is already a vibrant and growing CUSO business environment, we would suggest that it is still just a fraction of what it could be.
Reimagining the strategic deployment of credit union capital
Having access to just 10% or 20% of that $200M of authorized investment capital would ensure the CUSO would be able to provide shared operational solutions with technological expertise and economic scale that could never be matched by their individual credit unions. This network investment capacity would give Xtend credit unions, especially those in the small and medium-sized asset ranges, access to affordable products and operational solutions that allow them to be viewed by their members as the market equivalent of any and all financial competitors.
One of the age-old criticisms of credit unions has been the inefficient deployment of capital. The strategic opportunity to leverage new owner investment in a proven strategic collaborative partner is both possible and timely. Instead of viewing their capital as a mere safety barrier to traditional risk, credit unions need to look at capital as the strategic key to growth, expansion, and new operating models. Credit unions today should be leveraging their capital in collective and collaborative strategies that will reduce the pressure to merge and build product and service solutions that will not be reliant on the asset size of your brand.
Credit union capital is generational in nature. It has been built by those who have come before us in this unique cooperative business model. It has been left to us to ensure that the financial principles we believe in not only continue for future generations but grow and prosper to new and even higher levels. Our collective capital capacity is key to that future. Let us mobilize that capacity in new strategies that are more than just an unimaginative response to regulatory and deposit insurance fears. Let’s make sure that we’re making our capital work for the benefit of our members/owners of both today and tomorrow.