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Driving Consolidation

There is a strong business case for collectivizing Canada's provincial centrals and CUSOs, such an endeavour won't be easy, however, with a multitude of regions and players involved in the complex decision making.

After four years of effort by top credit union executives, discussions are still under way to find a consensus that would merge payment operations across the country.

The drive to create a consolidated national payments company, has demonstrated the complexity of the system, and highlighted the care needed to manage risks as we move forward.  

According to a report, National Payments Strategy: A way forward for credit unions, published last October by the CEO Payments Strategy Committee, Payco can offer services so much more efficiently it will save credit unions $6 million annually and be able to chase up to $130 million in profits from credit, debit and prepaid cards, as well as many more millions for nationalizing ATMs.

Really, the benefits to credit unions are so amazing just for simplifying one function, you’d be crazy not to collectivize the whole shebang, wouldn’t you?

Don Wright, CEO of Central 1 Credit Union thinks so. He’s eager to consolidate the entire second tier, which includes all the provincial centrals plus the credit union service organizations (CUSOs) that handle tasks like investments, clearing and settlements for the benefit of the first-tier member credit unions. For Wright, the way Payco was created demonstrates not only a path forward but also why it’s so hard for the system to give consolidation its wholehearted embrace.

The creation of Payco was an exercise in patience and perseverance, Wright says. “Basically a day every month for four years about 20 CEOs from across the country and an equivalent number of other staff would fly to Calgary. You’d spend a day and move the ball a little further down the field and then go back to your day job. That’s a very slow way to make decisions, particularly given how quickly things are changing in this day and age.”

“You’d spend a day and move the ball a little further down the field and then go back to your day job. That’s a very slow way to make decisions, particularly given how quickly things are changing in this day and age.” – Don Wright

Wright hopes Payco’s success encourages the system to pick up the pace on amalgamating the system’s second-tier business functions. “This year will be a watershed year whether there is a political will to begin the process or not,” says Wright. “If, for whatever reason, we don’t take significant steps this year, people will say, ‘We tried. It was too tough. We’ll wait until the next generation of leaders is willing to take another crack at it.’ ”

Are the potential benefits enough for one unanimous push from more than 300 credit unions across Canada? And what’s the rush?

David Finnie, chief risk officer at Central 1, believes the system needs to act quickly to have a hope of remaining competitive. “The world is moving at a fast pace. If we don’t keep up, if we don’t provide the value the credit union system needs, then the second tier will end up outsourced. There are already competitors offering service.”

Central 1 estimates that the second tier has $15 million per year of excess overhead. That means credit unions are paying more than they could be for supportive services. If one wholesale financial entity could deliver services more cheaply than separate provincials, the savings could be passed immediately to each credit union’s bottom line.

Even so, nobody likes being hustled down the aisle, no matter how shiny the ring. The strategy report noted that, previous attempts at combining centrals and functions have fallen apart. In the 1990s, all three Prairie centrals discussed a merger. At other times, Central 1 has negotiated hooking up with SaskCentral and Alberta Central. These non-starters demonstrate how precarious a good deal can be.

It’s not a race

Rob Paterson, CEO of Alterna Savings and Credit Union (143,000 members, $3.1 billion in assets), cautions against rushing stakeholders to agreement. With such a massive change proposed, people will need more time to understand and to put aside worries about disruption and regional representation. Bringing every single credit union along should be top priority and should take as long as it takes, Paterson says.

Also in Ontario, Stephen Bolton, CEO of Libro Credit Union (103,000 members, $3.1 billion in assets), agrees so long as discussion leads to action. “Let’s not keep having these conversations five years from now. Let’s move forward and stub our toe and continue.”

Most players agree there’s no need to transform overnight. Along with Payco, the Canadian Credit Union Association (CCUA) is already integrating some functions nationally. Compliance, government relations and marketing functions are moving from Central 1 and SaskCentral to the shared trade association. CCUA can now champion the credit union advantage across national channels, offering more collective bang for the same dollars, says Paterson. As well, it makes sense to lobby government armed with information from all provinces. After all, says Megan McIver, Ontario government relations, Central 1, regulators talk across borders. We should too, she adds.

Pleasing big and small

If a consolidated second tier lowers expenses, a small credit union could find itself on more even footing with the national bank across the street. It might be able to offer more competitive rates, a slicker digital interface and more attractive account features to keep its members from shopping around. But what about larger credit unions? They already have scale. What’s the draw for them?

Remember that “large” is relative, says Wright. “Vancity has $21 billion in assets. That sounds like a lot but the Royal Bank has a trillion. If any of us are going to compete effectively with the big banks, we have to find economies of scale by keeping together.”

There’s another important reason for large credit unions to cooperate with small: politics of scale. “Smaller credit unions tend to have stronger relationships with their local MPs, MLAs and mayors,” says Wright. “They provide the system with a lobbying power we wouldn’t have if we only had larger credit unions concentrated in the big cities.”

One commonly mentioned concern is regional influence. Could a national financial services entity understand the specific needs of a Nova Scotia credit union as well as Atlantic Central? Will it respond as quickly to issues that arise there? And will the opinion of this single credit union sway the national entity’s decisions, when it has so many other credit unions to consider?

Member credit unions, explains Paterson, are used to having significant control over their provincial central and expect a fast response to regional issues. “When [the centrals] go national you obviously have less control,” he says. “Getting comfortable with giving up some direct authority to be just one of many around the table is a definite obstacle.”

“Smaller credit unions tend to have stronger relationships with their local MPs, MLAs and mayors. They provide the system with a lobbying power we wouldn’t have if we only had larger credit unions concentrated in the big cities.” – Don Wright

A stronger collective voice could compensate for weakening regional influence. As well, digital advancements mean regional concerns are now national. In Canada, all five big banks have adopted the new Apple Pay service nationwide, allowing their customers to pay with iPhones instead of physical cards. A cool new bank service is as much a threat to a Chilliwack credit union as one in Thunder Bay.

New look

The final shape of the second tier will probably consist of two main organizations: a trade association (CCUA) and a wholesale financial services institution. The latter would provide all the services currently provided by centrals, with the exception of mandatory liquidity pools (MLPs). MLPs are likely to remain with the pared-down provincial centrals, to assure regulators a crisis in one province won’t bring down the whole consolidated system.

How payments, wealth management, settlements and other business functions might integrate under
the latter’s umbrella is still undecided. One solution, according to Finnie, is consolidation and integration — bringing all centrals and credit union service organizations (CUSOs) under one leadership team. Another is consolidation and separation, or functional consolidation. This means that each business function (payments, settlement, investment, etc.) would have its own governance team, while managing needs for the whole system rather than just a region.

Both structures are possible, says Finnie. From a risk perspective, however, he favours the former. Having one leadership team oversee objectives and risks for all functions avoids the chance that the objectives of different sections conflict. For example, he explains, payments could decide on a path of extreme growth, while group clearing decides to reduce risk. Since growth inherently brings more risk, the departments would compromise each other’s goals.

Keith Nixon, CEO of SaskCentral, says one of the conditions would be the preservation of Saskatchewan credit unions’ influence and capital in their own financial service providers, Credit Union Payment Services (CUPS, a paper and electronic payments processor) and Concentra, a federal retail association that manages SaskCentral’s wholesale business lines. Both are now part of Payco. Just as valuations allowed SaskCentral to feel comfortable consolidating its interests into Payco, other credit unions and centrals will negotiate appropriate terms for their businesses interests as well.

Working relationship

Equally important to the architecture is the relationship between credit unions and the re-imagined second tier. Wright believes that membership should be voluntary, unlike the current mandatory relationship between most credit unions and their centrals (Ontario is the exception). Credit unions will be able to opt in or out of speficic products and service, he says, instead of having to buy a full package deal.

But with this freedom to shop around, credit unions may sometimes choose a service offered by an outside provider. If too many credit unions go this route, the advantages of scale are lost. “The second tier will be under a lot of pressure to be cost-competitive,” says Wright. But, he adds, that pressure is necessary for the second tier to stay relevant. It will necessarily step up its offering to keep its customer credit unions.

Wright is optimistic about the second tier’s chances of keeping credit unions onside. “An organization focused on the credit union sector can do that better than those that treat credit unions as a sideline,” he insists.


So how quickly can many teams become one? Answers vary. Some are anxious to get going, while some plan to hold back longer. Practically, Finnie believes consolidation will take several years, even with everyone in agreement. “We have three centrals that have expressed interest in combining: Atlantic, SaskCentral and Central 1. You can only really do one at a time. If we could get one agreement done by the middle of this year, the transaction would happen the second half of the year. Bringing it all together would probably take anywhere from a year to three years.”

When all is done, how will credit unions judge the success of a consolidated second tier? “If we do end up in this world where membership is voluntary and where the vast majority of credit unions across the country choose to belong to this streamlined second tier, then that shows there
is a compelling value proposition worth participating in,” Wright says. ◊

 * Edit May 29: article has been updated as discussions are still under way.