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Apportioning the pie

A new report by the Credit Union Business Owner Strategy offers insightful strategies for boosting the system’s portion of the SME market.

Last year, a staff member at Westminster Savings Credit Union (66,250 members, $4.3 billion in assets) met with a businessperson who had just been turned down for financing by his chartered bank. After reviewing the man’s business plan, Westminster Savings, too, was unable to provide the requested financing. However, the credit union’s relationship manager patiently spent time with the man, showing him how to improve his operation. As a result, “I received a very nice email from the individual stating his appreciation for the considerable amount of time spent going over three years of financial statements — line by line,” says Mike Ng, the credit union’s director of commercial banking. Nobody at the businessman’s chartered bank was willing to reach out in the same way, says Ng. “And that,” he says, “highlights what we’re trying to do.”

Small and medium enterprises (SME) are a dynamic part of the credit union portfolio and one that has tripled since 1998, when the system held only about five percent of market share, says Dr. Marc-André Pigeon, director and strategic research fellow at the Centre for the Study of Co-operatives and assistant professor in the Johnson Shoyama Graduate School of Public Policy, University of Saskatchewan in Saskatoon. Credit unions’ share of the SME market is, perhaps surprisingly, greater than the system’s share of residential mortgages, where credit unions hold 8.8 percent of the market among deposit-taking institutions, according to the Canadian Credit Union Association (CCUA). “Relative to the residential lending,” says Pigeon, SME lending “is really good.” Credit unions are “really punching above their weight. It’s grown quite remarkably and they’ve taken space from the big banks,” he says, pointing to both RBC and TD Bank, both “many times bigger than the credit union system combined,” which notched up about 18 percent of the SME market.

Credit unions are “really punching above their weight.” – Marc-André Pigeon

As Pigeon points out, credit unions are noshing on a generous piece of the SME pie. However, a recently
released report from the Credit Union Business Owner Strategy, or CUBOS, based upon research gathered in late 2018 and early 2019, concludes that credit unions — currently holding about 15 percent of the SME market — can and should enjoy a much bigger slice of this market. Kim Andres, program manager for CUBOS, says that the study echoes CFIB’s findings: credit unions are tops when it comes to customer satisfaction. However, about 85 percent of the SME market simply isn’t utilizing credit union services. At the national level, credit unions’ SME share has remained generally static since 2006, when CUBOS’s member credit unions began regular assessments of the business landscape to determine best practices and strategies. The key question, of course, is why credit unions don’t have a bigger chunk, with the CUBOS study presenting some conclusions. Fundamentally, there is a misperception among the general SME populace about what credit unions are capable of offering, Andres says. “That’s the biggest stumbling block; it’s building awareness among the 85 percent of the population that doesn’t deal with credit unions,” says Andres. (The research was undertaken by public polling and market research company Insights West in Vancouver. It is the sixth that CUBOS has undertaken since 2006.)

Echoing this national trend, Ng says that Westminster Savings’ SME market share has remained “fairly flat” over the past several years. This is due in part to banks’ increasing efforts to service the SME market — more than they have in the past, Ng says. “It’s a very competitive marketplace out there. The big banks haven’t been known to really serve the small business market but they’ve been stepping up and paying more attention to it. I remember many years ago they kind of ignored this market because it’s just not as profitable,” he says.

Backbone of the economy

Among the SMEs that utilize credit unions, satisfaction is high. According to a 2016 report, Battle of the Banks, published by the Canadian Federation of Independent Business (CFIB), credit unions ranked No. 1 when it comes to serving businesses’ overall financial needs and upholding customer satisfaction, compared not only to the Big Five banks but Desjardins Group (seven million members, $300 billion in assets) and ATB Financial in Alberta. (An updated CFIB study is being released imminently.)

The SME sector in Canada is integral to the country’s growing economy. Small and medium businesses rev the economic engine, employing 90 percent of the Canadian work force, according to the Government of Canada’s “Key Small Business Statistics – January 2019.” Of the country’s 1.18 million employer businesses, 97.9 percent were small business while 1.9 percent were medium size. The CFIB, in a 2019 report titled, “Small Business is Everyone’s Business,” pointed out that small and medium businesses account for 52 percent of business-sector GDP in Canada, truly making them the “backbone of the economy.” Moreover, SMEs are the biggest job creators, creating 1.2 million net new jobs between of 2005 and 2015, the CFIB noted.

“That’s the biggest stumbling block; it’s building awareness among the 85 percent of the population that doesn’t deal with credit unions.” – Kim Andres

Rooted in the same rich, deep soil of community, SME and credit unions are an ideal fit. And indeed the CUBOS study, encompassing interviews and field studies with established businesses and focus groups, found that credit unions are ideal partners, fulfilling four main “guiding principles” that the study defines as “ease, good value, relationship and personalization.” One business member quoted in the CUBOS report pointed out credit unions’ positive attributes: friendly staff, ability to make decisions quickly and access to a decision maker who can react quickly. Such knowledgeable business insight and comprehensive support are complements to the powerful element of community commitment. The CUBOS study also found that business relationships are further solidified by lower fees and better rates, in addition to individualized service and the all-important access to decision makers.

Ng says that individualized service, as well as spending time with business members, makes competitive rate pricing “a little less important” as “we can’t always offer the lowest price.” Certainly there are owners who will simply look for the lowest prices being offered, especially on commoditized products, he says. Yet, “if you really show you care and you’re giving good advice, then the pendulum swings in your direction.”

The breadth and depth of the SME relationship has deepened to encompassing operations, moving far beyond the simple securing of commercial mortgages, which dominated credit union/SME relations a decade or so ago. Ng, for example, points to cash management, which is continuously seeing technological innovation, making businesses more automated and simpler to operate. Westminster Savings, Ng adds, is keeping abreast of such advances, ensuring ease of operations by offering such things as remote cheque deposit, invoicing online and a wider array of more convenient options to transfer funds and make payments. “It’s definitely going to be increasingly important going forward,” says Ng, whose credit union business members are involved in many areas, including the trades, service, retail and wholesale, with a large proportion serving British Columbia’s dynamic construction, housing and real estate sectors.

Disincentives for SME

The CUBOS study determined that there were several disincentives preventing those from outside the system selecting credit unions as the financial institution of choice to support a business. There was the misperception that staff lack competencies or skills, that a credit union’s technology may be limited, or that it is risk averse. The latter, says Andres, is the “most important insight that came out of the research,” pointing to such comments from the public as, “entrepreneurs and business owners tend to take risks, that is how they generate a return, which credit unions don’t seem interested in doing.” Ng, however, says that that Westminster Savings isn’t affected by any misperceptions that the credit union is risk averse. “I see the opposite, actually. We find a lot of people come to us after they’ve been declined by banks.” Andres adds that SME owners rightly expect that a financial institution honour their vision for their business and nurture a relationship that is based upon partnership, or “seeing how we can grow together” — growth often necessitating some risk-taking.

“The big banks haven’t been known to really serve the small business market but they’ve been stepping up and paying more attention to it.” – Mike Ng

Risk, of course, must be managed and credit unions may need to look at managing it in non-traditional ways. This is because, with today’s narrower margins, compared to the past, there is less ability to absorb risk the same way banks can, says Andres. The one advantage that credit unions have is a close connection to their community, knowing such minutiae as whether a locale can sustain another coffee shop or whether it needs another hotel, Andres says.

Pigeon says that credit unions can boost their ability to handle risk by partnering with the many government supported loan guarantee programs, such as Canada Small Business Financing Program, the Canadian Agricultural Loans Act, Canada’s Regional Development Agencies, among others. “Credit
unions don’t use those to the fullest,” Pigeon says. “That might be an opportunity to take on more risk but still manage risk.”

A slightly controversial finding in the CUBOS study is that credit unions might consider tweaking that aspect of their venerable brand that showcases and celebrates being “different” from banks. Branding is one of the more subtle and sophisticated aspects of marketing and Andres says that, for credit unions,
it’s not necessarily bolstered by highlighting the differences between them and banks. By itself, being “different” isn’t a significant motivator — “personal relevance” resonates more deeply with existing and potential SME owners. For example, technological capabilities and products could be linked to personal relevance and service, the study suggests. Stellar service and products as well as expertise could also be amalgamated into branding initiatives. Yes, credit unions need to compete on pricing as well as the depth and breadth of the product lines and offerings. But what elevates this value proposition, says Andres, is the quality of service that is offered, as well as knowing that “when you bank with a credit union, there are community benefits and a social good that comes with that.”

Pigeon points out that current credit union brand is strong in some regions, being deeply rooted in the nation’s history, especially the West, which long endured the “feeling of alienation from Toronto and Montreal-based banks that were completely uncomprehending of Western Canada.” The connection to community and the trust this engenders among members, particularly business owners, says Pigeon, can be a powerful thing, with the credit union message being, “We’ve got your back, we’re there for you, we’re going to work with you through thick and thin.” ◊