The CUSO Solution

By Robert McGarvey | Friday, 30 June 2023 | Feature

Pick the odd man out that has no place in a discussion of where to get startup funding: angel investors, friends and family, venture capitalists, or a CUSO?

It’s a trick question because all four are good sources of capital for early-stage companies, but you probably pointed at CUSO because you hadn’t heard of it before.

Join the club: few startup entrepreneurs have a clue. But that is overlooking an important source of possible funding that may also deliver plenty of customers too.

The CUSO Difference

According to the National Credit Union Administration, the federal regulator of credit unions, in 2021 there were 1,012 CUSOs — credit union service organizations.  That means they specialize in services credit unions need. And get this: they had investments from credit unions totaling $4 billion as well as loans amounting to $1.1 billion in 2021.  The numbers definitely are up today.

Definitionally, a CUSO has investment money from a credit union, and NCUA requires that a majority of a CUSO’s revenues derive from credit union customers. The NCUA also specifies the kinds of business a CUSO can do, and the list is long: everything from a travel agency to check cashing and a real estate brokerage.

Study the list and all the permitted activities somehow relate to a credit union’s core mission: helping members manage their money.

That also means restaurants, clothing shops, tattoo parlors — all those activities fail to qualify.

Especially hot right now in CUSO activity are fintech — financial technology — startups that operate in just about everything from harnessing artificial intelligence (AI) to improve credit union performance to strengthened fraud detection capabilities.  Few credit unions have the scale to hire top tech talent, which means they have to look outside for the skills they need.  “It’s imperative for credit unions to partner with fintechs and often that will be in a CUSO,” said Brian Lauer, a lawyer and a leading expert on CUSOs.  

Lauer added, “Fintechs need to look at this and many are. I do calls two or three times a day with technologists who want to know more about CUSOs.”

A case in point: Prizeout, an innovative ad tech company that had raised $37.5 million in venture funding recently announced the formation of a CUSO involving nine large credit unions. Prizeout already had a presence in banks but Prizeout CEO David Metz said the company went the CUSO route because “the nine credit unions are all investors and they are all partners.  The partnership is important to us.”

“CUSOs open doors,” said Kirk Drake, a veteran of three CUSOs, including Ongoing Operations and Painted Hills. Ongoing Operations offers business continuity and disaster recovery, as well as other IT services to credit unions. It was bought by fintech Trellance in 2022. Meanwhile, Painted Hills provides a loan syndication platform for participating credit unions. “With the right credit unions in the right CUSO, there’s a bond for mutual success.”

That last is key: although a CUSO can bring investment capital into a business, just as important in many cases is that the investing credit unions often also plan to become significant customers of the CUSO — and certainly the credit unions that invested in the Prizeout CUSO see themselves that way.  “I am passionate about Prizeout,” said Darlene Johnson, executive vice president at one million-member strong Suncoast Credit Union in Florida, one of the CUSO investors. “It will help us bring in new members of the credit union.”

Exit Strategies

Paul Fiore, a veteran of both venture funding (he founded Digital Insight, the first breakout developer of online and mobile banking tools) and a CUSO (he founded CU Wallet, an innovative mobile payments tool), pointed out that there are advantages to each investment source.  One of the biggest differences is that CUSO money often is patient money — with no exit strategy in the plan — while venture capital typically is on a tight timeline, often seven years.  

Why the big difference? Short-term profits are not the primary motivation for credit unions. Credit union investors typically fund a CUSO because they want to have input into the company’s direction and operations and also because they hope to enjoy a share of operating profits, said Kirk Kordeleski, retired CEO of Bethpage Federal Credit on Long Island, one of the nation’s biggest credit unions which had a half dozen sizable CUSO investments in Kordeleski’s time at Bethpage.  

The CUSO downside? There are very few billion-dollar unicorns that have emerged from CUSOs.  There are home runs, definitely, but not an Uber or Facebook.

Even so, stressed Drake, many fintech creators are passionate about their idea — and will want to build the business long term. They are not in it for the fast exit, and so, for them, the longer maturation cycle that typically characterizes a CUSO just may be ideal.

Starting Your CUSO

How to start a CUSO? Lauer created a 12-minute slideshow that covers the basics.  

The key is creating a business plan that will appeal to credit unions that are not known as speculative investors.  Keep in mind a venture capitalist understands and accepts that perhaps half or more of his/her investments will fizzle out; their hope is that there is a unicorn in the mix that will cancel out the losses and throw off a gusher of profits.

CUSO investors — credit unions and other CUSOs — come into the investment with an expectation of making a profit but, importantly, of not losing money.  

But there are many credit unions that will listen to a CUSO pitch when they believe it may help improve the credit union's performance.  Fiore, for instance, said he had 37 investors in CU Wallet.

Finding them comes down to circulating in credit union circles — meetings of NACUSO, the National Association of Credit Union Service Organizations, are said to be an especially good hunting ground.  

Get to know credit unions and the C-suite executives who will approve a CUSO investment. That’s the key first step.

Word of advice: NCUA regulations set limits on how much capital a credit union can invest.  Theoretically, any size credit union could invest in a CUSO. But, practically speaking, it will mainly be credit unions larger than $250 million in assets. But the good news is that there are a few thousand credit unions, some in every state in the country.

Happy hunting!

About the Author

Robert McGarvey

Robert McGarvey, a veteran journalist who has long covered startups and small businesses, created and hosts the CU2.0 Podcast for credit union and fintech executives which is at 120 episodes and counting.