How To Move To An In-House Business Model

SECU of Maryland’s move to bring its business lending operations in-house resulted in a return on investment in the range of 250 to 300 basis points.

In introducing a new loan product, some credit unions opt to outsource some or all facets of the business to a third-party, such as a credit union service organization (CUSO). And in many cases, CUSOs allow multiple credit unions to share costs and resources.

However, throughout any outsourcing relationship, credit unions must periodically weigh the pros and cons of outsourced versus in-house strategies. Such was the case at SECU of Maryland ($2.9B, Linthicum, MD). The nearly $3 billion institution partnered with a CUSO for its member business lending (MBL) program in 2005. The relationship was going well until two years ago, when a shift in participating credit unions left SECU as one of two equity partners in the CUSO.


SECU of Maryland
Data as of 09.30.15

  • HQ: Linthicum, MD
  • ASSETS: $2.9B
  • MEMBERS: 234,364
  • BRANCHES: 22
  • 12-MO SHARE GROWTH: 5.23%
  • 12-MO LOAN GROWTH: 13.41%
  • ROA: 0.58%

‘The CUSO had lost some of its scale, and as we began evaluating our program, we saw the opportunity for growth, recalls Kevin Kesecker, vice president and chief lending officer at SECU of Maryland. ‘On the heels of the financial crisis, we also recognized an opportunity to pluck some local talent from commercial banks to build out the personnel we needed. It seemed the time was right.

SECU spent a year staffing up and installing a new processing system as it transitioned its business lending in-house. The credit union celebrated one full year of in-house MBL operations in June 2015, and Kesecker says during that time the credit union has posted double-digit growth in its MBL portfolio and gained a return on investment of 250 to 300 basis points.

Breaking The Outsourcing Bond

Although the move from a CUSO-based to an in-house strategy might seem like a natural evolution for a growing line of business, the fact is, once an organization outsources a business process, nearly 70% will continue to outsource, even if it involves switching to a new vendor, according to Deloitte’s 2014 Global Outsourcing Survey Report. According to the Deloitte survey, only 25% of companies reported insourcing after terminating an outsourcing contract.

And why are organizations terminating contracts? Surprisingly, ‘cost was near the bottom of the list of grievances with third parties ‘ in fact, only 20% of respondents selected it. Companies were twice as likely to report issues such as a ‘reactive versus proactive approach, ‘poor service quality, ‘lack of innovation, and ‘unqualified resources.

Kesecker says the launch of SECU’s member business lending program predates his seven-year tenure at the credit union, but the decision to join the CUSO made sense at the time.

‘Member business lending is somewhat specialized and requires a certain background and expertise to effectively manage the program, Kesecker says. ‘It’s agood starting point for any credit union entering member business lending to look at CUSO partnerships or a larger credit union for outsourcing to help establish the foundation for the program.

Indeed, before launching a new program, credit unions should ensure they have four critical elements in place ‘ capital adequacy and planning; policies and procedures; staffing; and systems ‘ according to the NCUA report, ‘What Makes a Sound Member Business Lending Program?

When it comes to staffing, NCUA says credit unions should make sure employees have experience in the right loan and collateral types, and the MBL department should have ‘the appropriate mix between business development and loan underwriting personnel to ensure adequate controls between loan sales, underwriting, and administration.

Kesecker says the first step SECU took when evaluating whether to leave the CUSO was to hire an outside consultant who specialized in MBL programs to help build the business case for managing loans internally.

‘We went through an extensive cost analysis, which was part of our business case, Keseckersays. ‘I brought in an outside consultant who had been in the credit union industry, specifically member business lending, so I could get an independent third party to take a look at our cost structure and what our infrastructure would support.

We addressed the credit side first because we wanted to make sure we had the right people in place to evaluate loan requests.

Beef Up To Bring In

For any credit union getting into member business lending, Kesecker advises hiring enough internal expertise so the credit union can evaluate the credit risk for any loan it’s going to be a part of. This holds for credit unions outsourcing to a third party as well.

‘We always had someone who had business loan expertise, Kesecker says. ‘That established a foundation that made the transition [to an in-house program] much easier for us.

Even given its existing capabilities, SECU took a year to build the staff required to bring its business lending in-house, and it started that process with beefing up its internal credit expertise.

In the first quarter of 2014, SECU brought the evaluation of new credit risk in-house. By the end of the second quarter, the credit union had moved servicing newly originated business loans in-house. And by the end of the year, the credit union had transitioned all MBL processes.

‘We addressed the credit side first because we wanted to make sure we had the right people in place to evaluate loan requests when we moved it in-house, Kesecker says. ‘Once the credit had been evaluated, we had to prepare the loan documents, fund the loan and, of course, service the ongoing relationship. That was the last piece of the puzzle for us ‘ bringing that servicing in-house.

The move also required the credit union to implement a new commercial lending administration system, part of Fiserv’s DNA software.

‘The platform we were on had a commercial loan module we weren’t using because our CUSO did not operate on that platform, Kesecker says. ‘So we licensed that commercial module and then transitioned our portfolio in-house. Those loans are all now loaded and all the data rests on our core platform, so our members have the same real-time access to their loans on the business side as they do on the consumer side. It’s definitely a benefit for our members.

Take full advantage of the collaborative spirit of anyone in the credit union space.

Success Ahead

Nearly 18 months after moving new loan origination and servicing in-house, Kesecker says the program has surpassed the outsourced CUSO service.

For all SECU of MD | Data as of 09.30.15
Callahan Associates |

Source: Peer-to-Peer Analytics by Callahan Associates

‘To achieve certain targets in efficiency takes time, he says. ‘Are we there now? Yes. We’re probably even a little bit better than we were under the outsourcing relationship, but we’ve been working at this from the time we launched the plan 18 to 24 months ago. It takes time to get there, and you have to be willing to adapt along the way. As you move these functions in-house, you have to challenge some of the assumptions you made in your original business case.

But for SECU of Maryland, the results to date for challenging those assumptions have been positive.

‘Despite the transition of the past two years, we’ve got double-digit growth in our portfolio, Kesecker says. ‘We have had an increase in our ROI, and we’ve improved profitability. In fact it’s the most profitable lending product we have, and the quality has remained strong. By June 2015, the ROI for that business unit was in the 250- to 300-basis point range. When you look at ROI for the credit union industry as a whole, it tends to be in the 80-basis point range.

True to the nature of the cooperative industry, Kesecker says one of the most important aspects of the transition was the credit union’s ability to reach out to other credit unions that also insourced.

‘Take full advantage of the collaborative spirit of anyone in the credit union space, Kesecker advises. ‘Look for individuals who have done it and ask a lot of questions. That’s what we did.

Of course, that’s not the only wisdom Kesecker imparts.

‘Even with the best laid plans, always assume it will take longer and cost a little more, he says. ‘Remain persistent, stay focused, and expect some things might need to change along the way.

Looking ahead, Kesecker says he wouldn’t rule out outsourcing another piece of the credit union’s business, depending on the situation.

‘We look for how we can provide the best level of service to members, in the most efficient way we can that allows us to have a strong portfolio, he says. ‘The environment changes, the competition changes. If we get in a situation where we’re in a static environment, we’re going to get passed by pretty quickly.

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November 16, 2015

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