Part 1 of a two-part series on the future state of credit unions. Read Part 2, “Pushing the boundaries,” exclusively online.
Talk to credit union leaders and you’ll find they no longer believe in the Big Bang Theory.
No, not the TV show, or the cosmological concept developed by Belgian physicist Georges Lemaître, but the idea first discussed more than 25 years ago that provincial centrals should overnight clump together into a single national organization that could operate more efficiently, saving credit unions time and money.
A generation of credit union leaders have headed down that path and tried several times to create a Big Bang, only to find the route long, winding and eventually posted with a No Exit sign.
Now, following a different route but hoping to get to the same destination, the current leaders agree the credit union system is going through a period of unprecedented change: change that is welcome, that has been sought for decades, and is long overdue. It just won’t happen in one fell swoop.
The status quo is already starting to shift. This story looks at why the changes are happening now, how we got here and what the landscape may look like in a few months or years.
Making the case for consolidation
One of the efforts now under way is to rationalize and streamline work done by provincial centrals and other second-tier organizations that serve credit unions.
It’s not a new idea. About 25 years ago some credit union leaders looked at the duplication of efforts by eight provincial centrals and decided it was time to consolidate. That effort, led by Credit Union Central of Canada, was the National Services Initiative, which resulted in hundreds of pages of reports, hours and hours of meetings, and not much action.
“There is no question that the structure of the credit union support system needs to evolve,” says Martha Durdin, president and CEO of Canadian Credit Union Association (CCUA), which grew out of the Credit Union Central of Canada. “It was put in place in the 1960s when there were 3,000 credit unions. There are now 300 — many of them large — that don’t need the kind of services that are being provided by some centrals.”
CCUA’s goal is to be the national trade association, providing a range of services across the country. It’s currently in discussions with Central 1 Credit Union, SaskCentral, and others, on ways that it can consolidate and streamline services. It seems likely some steps will be taken in that direction by the end of this year.
Central 1 estimates that the duplicate management and governance structure of the current system costs credit unions about $15 million a year. Over the past year Central 1 has produced two discussion papers, held webinars, and many credit union meeting to discuss the idea that change is needed at the central, or second-tier, level.
Efforts to create a Big Bang a few years after the National Services project foundered at the time. Then, in 2005, Credit Union Central of British Columbia and Credit Union Central of Ontario joined forces to create Central 1 and publicly discussed plans to have further mergers and create a national central. But the 2008 financial crisis and regulators intervened to kill those ideas.
“We’re trying to encourage a national conversation” – Rick Hoevenaars
In 2010 Manitoba, Saskatchewan, and Alberta announced plans to form a Prairie central that would serve their provinces. That effort, too, ran aground on regulatory rocks, largely over the need to maintain individual provincial control of mandatory liquidity pools.
Centrals in New Brunswick, Nova Scotia, and Prince Edward Island came together as Atlantic Central in 2011. Three years later, Central 1, Credit Union Central of Saskatchewan (SaskCentral) and Concentra Financial Services announced plans to collaborate on a national wholesale financial services provider, but that was eventually put aside while the senior executives focused on making group clearer changes demanded by regulators.
Starting a system-wide conversation
Meanwhile, efforts continued to restructure Canadian Central and create CCUA as an unregulated trade association.
By 2015, SaskCentral’s annual report said its vision was for the organization to become “a nationally unified, internationally capable, cooperative financial network.”
Central 1’s board moved in the same direction, leading to its first report on the future state of the second tier, which was discussed last spring. It offered four possible futures and approaches to coordinating activities and saving money.
Credit unions asked Central 1 to take the lead and recommend which of the four approaches was best. That’s the task of its latest paper entitled If not not now, when? Supporting credit union success: Next steps in the future role and structure of central and system partners.
The goal of the new paper is to set out the ideal future arrangement and prompt a system-wide discussion that helps move the system to move from theory to implementation.
“We’re trying to encourage a national conversation,” says Rick Hoevenaars, chair of Central 1 and CFO of Libro Credit Union (101,000 members, $3.3 billion in assets). “We have talked to other centrals, CCUA, and are encouraging them to be part of the conversation. That’s all coming pretty quickly.”
The hope is that the paper offers a design the system can use as a roadmap while decisions are made about next steps. If a proposed move doesn’t ultimately lead ultimately toward that design, or results in future roadblocks, then the design needs to be re-evaluated.
“It’s a cliché, but there is a burning platform now, the competitive pressures on our members are requiring them to really pay attention to every nickel and dime, and they just no longer have the tolerance for excess cost and excess overhead at the central,” says Don Wright, president and CEO of Central 1.
“You can get decisions more quickly if you have basically one board of directors, one executive, one organization, than if you have to coordinate amongst a half a dozen or so.”
That’s why this is essentially the arrangement recommended by the second Central 1 paper. It suggests a national trade association, CCUA, and another national organization that would provide payments, settlements, and wholesale financial programs.
The paper says: “As we examined the organizational options through the lens of credit union needs, we became increasingly convinced that consolidation and integration of the second tier would be the best structural framework to provide the greatest cost savings while meeting the strategic and technological needs of credit unions and allowing ongoing close collaboration between business lines. We recognize that organizational change will involve tradeoffs, particularly between integration and focus and between cost savings and credit union control of programming.”
Offering services à la carte
What will this mean to credit unions?
“It should mean lower costs in terms of either what we charge for our services, or what we charge for dues,” Wright says. “It should mean more agility so we can actually make a decision to do something on a national basis without having to go through the endless committees and endless negotiation.”
“We are the original shared economy. We should appeal to younger Canadians who want to feel like they are having an impact on the world” – Martha Durdin
Graham Wetter, president and CEO of Alberta Central, agrees. grees. “In the credit union system we have tended to make every decision that’s an individual credit union’s decision to make, so we make sub-optimal decisions and it’s harming us financially and competitively. We’re not staying technologically current.”
One major change is that the future state is expected to provide most services à la carte, with credit unions only paying for services they find valuable. This financial discipline will drive a greater focus on meeting members’ needs.
Many leaders point to the CEO Payments Strategy Committee as an example of how the system should bring together credit unions and centrals on key problems.
“Payments matter; we’ve tried to make that case,” says Wetter. “It’s still a bit of the plumbing, so it’s not all that sexy, but it is our soft underbelly. If we’re not competitive in that space I think we are in high risk of losing the core business.”
“We have a huge opportunity to build an industry with a reputation that means something and has an impact on Canadians,” Durdin says. “We are the original shared economy. We should appeal to younger Canadians who want to feel like they are having an impact on the world. I think for us as an industry that’s the opportunity and we need to seize it.” ◊