DOWNEY, Calif.-Over the course of the last year, 12 California credit unions have worked together with a common goal of reducing certain technology costs. To that end, a deal has been reached with a data processing system provider that will save each credit union upwards of 20%.
"Some of the credit unions will join by the end of this year and others before the end of 2014," said Jon Hernandez who is president and CEO of three CUs, El Segundo-based Mattel FCU, the Torrace-based CalCom FCU, and the Downey-based City of Downey FCU. "The goal is for all 12 credit unions to eventually share back office work, but we want to hold off until we see how it (data processing) goes."
Hernandez is no stranger to the concept as the three credit unions he manages share certain operations including a chief technology officer. Originally, 24 credit unions were involved in the venture and 10 proposals were submitted by vendors and providers. Eventually, four proposals were shortlisted, but during that time half of the credit unions had a change of heart.
"These other credit unions, after review, decided to stay with what they were using, but for those of us that remained we had bargaining power so it was a win-win for the credit unions and the provider," said Hernandez.
Other Savings May Follow
Due to contractual agreements, Hernandez said the provider's name cannot yet be divulged, but a formal announcement is forthcoming. In data processing costs alone, his three credit unions will save 22%, and while it is difficult to determine, if a back office consolidation deal is reached, all credit unions could experience an additional 25% in savings. "There are some kinks to work out, but often the best deals take a long time to happen," said Hernandez. "The other CEOs I have been working with have been great; we are all very pleased with our progress." Technology and e-business consultant Sabeh Samaha, CEO of the Chino Hills-based Samaha Associates, noted that while he was not familiar Hernandez's deal, the concept of sharing services is not new. "This is an old practice, especially for small credit unions. Where they first figured this out was with compliance, as that is an easier service to share than some technologies."
While certain credit unions do share core systems, Samaha said for smaller credit unions such a shared concept is often the only way to survive.
"We used to work with a lot of credit unions in the $20-, $30- and $40-million asset class, but not so much anymore," he continued. "I applaud these credit unions for making the effort, but it is not unlike moving from a house with no roommates to a house with roommates-you have to take the good of the roommate and the bad, and the same goes for shared services and technologies."
Hernandez acknowledged that merging his approximate 12,000 members' data with roughly 54,700 other members' data will be a varied process. If there is an issue, however, a back door exit strategy has been included in the deal.
"There are two credit unions that are working together under the same contract; all other contracts are an individual contract with the data processing system provider."
The 12 credit unions have combined assets of $496 million.
While the consolidation of back office operations is a progressive initiative, it carries significant concerns. "For many small credit unions, it is not that they want to do this it is more so they have to do this in order to save money," said Samaha. "This is understandable. But what concerns me most is how the service model is compromised, and only time can tell."
Along with possible service issues, Samaha cautioned about the vulnerability of back office systems.
"Credit unions can't share member data so we have to be clear about what 'share' means. There is a lot in the back office-such as ACH transactions, accounting-so obviously one credit union can't have access to or process another credit union's data and that should be clear," he continued. "So there are limitations. Therefore, the only way credit unions can really share back office operations is to set up an independent entity to do it for them but that is dangerous, because they are likely to see a drop in service quality because it is no longer the credit union and their intimate knowledge running the operation."
Dealing With Security
Hernandez is also concerned with security but said since it is a direct line from the service bureau to the data system, there isn't an issue with this new platform. "When we do start working together with back office operations, and relationships with ancillary products are identified, we would obviously create a privacy agreement." He said.