A less-discussed type of financial entity, the credit union service organization (CUSO), has emerged as an unlikely – but significant – player in the industry's CU Ledger blockchain initiative.
In fact, to say that the involvement of CUSOs in broader credit union collaborations on blockchain has been a surprise wouldn't shock may long-time industry observers.
Part of the trend is is simply pure business. With the number of credit unions in the US declining by about 250 institutions per year, this means CUSOs are competing for a ever-smaller piece of the pie.
But the advent of distributed ledger technology has brought several CUSOs together with more than 50 credit unions on the CU Ledger initiative, a development whose significance isn't lost on industry veterans.
Robert Hackney, president of Card Services for Credit Unions (CSCU), an organization with around 2,000 credit union members, notes that these steps represent a "first" for his group and many of its peers.
Hackney told CoinDesk:
"It's not that there's bad blood or we'd let competition get in the way, but I think it's the first time there's [a technology] that really facilitates a collaborative effort."
CUSOs are entities owned by federally chartered and insured credit unions that focus on a core competency, such as payment card processing services or business loan originations. Because credit unions tend to be smaller in size, CUSOs serve as a way for a group of these institutions to pool their resources to provide better, cheaper and new services to their members.
So while credit unions themselves don't shy away from collaboration, CUSOs haven't seen a reason to work together.
While blockchains have been lauded for their combination of cryptography, time-stamped accounting and data management, for permissioned ledgers to really see their full potential, Hackney acknowledges that competing entities will need to drop some old customs.
"It's technology that we all may be able to use. That's why we're working together," Hackney said.
The involvement of CUSOs in the industry is also a sign of its shift from possible applications for retail payments to the edges of financial systems. The CU Ledger initiative, for example, is focusing on utilizing smart contracts and finding a solution for user-centric digital identity.
With it's user-focused mentality, self-sovereign identity fits well into the credit union's narrative.
Developing "user-centric identity could solve a lot of problems in banking," said Dean Young, senior vice president of industry engagement at Payment Services for Credit Unions (PSCU), another CUSO that's a part of the CU Ledger project.
The main problem? Fraud.
"Imagine a world where … there's 100% certainty that someone making a transaction is who they are," said Young.
A sleeker identity system could also be helpful as it relates to the decreasing number of credit unions. Many times, credit unions merge or get acquired by other credit unions because it allows them to scale while also making revenue within a cumbersome regulatory environment, said Hackney.
Because of that, "it's not uncommon for a credit union to have its credit portfolio with us (CSCU) and its debit portfolio with PSCU," he said. "So if there are ways to authenticate through different portfolios and different providers that would be very beneficial in this environment."
In that view, the credit unions and their service providers stand to potentially benefit by using the technology. But what about the members themselves?
According to Young, the answer lies in the portability of a single digital ID, which could eliminate the need for managing hundreds of username and password pairs.
That, and the ability to exert far greater control over that information.
That kind of individual control is one of the reasons the credit union industry decided to build it's own ledger system, working on an identity proof of concept with Evernym, a startup based in Salt Lake City.
"The ability for the credit union movement to create a ledger and control its own destiny is more appealing than some avenues we looked at," Young said.
The traditional banking industry's more competitive nature might be one reason no commercial blockchain product has launched in the financial services space as of yet. But the Cu Ledger group is working on a short timeline for implementation.
The CU Ledger effort plans on having a proof-of-concept up and running by the first quarter or early second quarter of next year, according to Young.
The effort is fueled by fees paid by those taking part in the project. To be a part of CU Ledger, the founders asked for a minimum investment of $10,000 per participant. But since that could be a challenge for some smaller credit unions, the terms were flexible, said Young.
"Collaboration is foundational in this industry, Young said. "This is not just a PSCU commercial solution. We don't believe in a 'build it and they will come' philosophy but more of a philosophy of 'build it together and then they're already here.'"
The presence of CUSOs such as CSCU and PSCU, along with credit union participants and their members, should jumpstart adoption when the time comes. Since the two CUSOs work with more than half of all credit unions in the US, the kind of integration needed largely exists as-is.
Pieces of a puzzle image via Shutterstock