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Go Big

Increasingly, credit unions are opting for federal status to build reach and better serve customers. But the process is proving challenging and raises the question - is bigger really going to be better?

Robert Moreau has a busy year ahead. The new CEO of Uni Financial Cooperation (155,000 members, $3.8 billion in assets) is spearheading a move away from the credit union’s Fédération des Caisses Populaires Acadiennes identity. Key will be ensuring buy-in among New Brunswickers for the financial services cooperative’s new logo, brand and name, which members knew up until last year as Caisses populaires acadiennes.

Implementing these initiatives, which Moreau inherited from the previous administration when he took over the top job this past December, should be straightforward for the seasoned executive. More daunting will be another task on his plate: managing Uni’s status as the first Canadian credit union to obtain a federal charter, a milestone that the company announced in July of last year. “It’s a big advantage,” says Moreau. “We compete directly with the big Canadian banks. Being regulated at the federal level enables us to do so on a level playing field.” Advantages accruing to Uni because of its new status include reduced capital requirements, more flexibility in managing existing reserves and the ability to operate outside its New Brunswick home base.

Uni’s federal status is also expected to increase consumer confidence about its stability. “Being regulated by the Office of the Superintendent of Financial Institutions (OSFI), which is widely regarded as the world’s top regulatory body, adds a lot to our credibility,” says Moreau. “We are already seeing increased business within New Brunswick and among our small business clients who do work outside the province and can now count on us extending [interprovincial] services to them.”

Other Credit Unions Gearing Up

Uni isn’t the only Canadian credit union seeking to expand operations outside its home province. Inspired by relaxed federal legislation, other sector players, including Coast Capital Savings Credit Union (540,000 members, $15 billion in assets), Meridian Credit Union (250,000 members, $14 billion in assets), among others, are all considering the move.

“Many wanted to continue banking with us if they moved outside the province. Others had friends and family in the rest of Canada that wanted to deal with us.” – John Groves

The benefits that credit unions expect from going national vary, says John Groves, vice-president, public affairs and communications, at Coast Capital. “It started with our members,” says Groves. “Many wanted to continue banking with us if they moved outside the province. Others had friends and family in the rest of Canada that wanted to deal with us.”

However the benefits extend far beyond that. “A stronger, larger credit union is better equipped to serve members,” says Groves, citing increased diversification, risk management and the ability to compete more effectively as key drivers. “Growth will also enable us to offer better mobile, online banking and other services and to be better positioned to keep prices down.”

This past December, Coast Capital members voted overwhelmingly to pursue the national option. How- ever, that is just the rst step in a long regulatory approval process. That said, according to Groves, the company will use the time to simultaneously develop an online platform that will enable it to service customers across the country, which it can then roll out when the time is right.

According to Marc-André Pigeon, director, financial sector policy, at the Canadian Credit Union Association, the recent moves by Coast Capital and Uni are the culmination of years of lobbying. “Credit unions have been advocating for the right to service their members across the country for almost a decade,” says Pigeon. “We are only recently seeing tangible results.”

Federal legislation that provided a framework to enable federal credit unions was introduced as early as 2010. However, accompanying regulations only came out in 2012. Figuring out how best to operate in the new environment took credit unions some time. Many were hobbled by the daunting application process. Others now appear to be increasingly ready to act. “It’s an important step for the credit union movement but also for the competitive postures of individual players,” says Pigeon. “Most important, members will also benefit, through access to better services.”

Kim Andres of Andres Consulting, which provides an array of services to key industry players, agrees. “Banking today is based on scale,” Andres says. “If credit unions want to roll with the times, many will need to get bigger.” Andres cites niche players such as credit unions that service ethnic groups, specific professions, trades or employees in a specific company, as good examples of the types of structures that could benefit from credit unions increasing their scale.

Andres’s views are widely shared. A working paper released by Central 1 Credit Union this past October, titled Supporting Credit Union Success: Next steps in the future role and structure of centrals and system partners, articulated similar reasons for national expansion. The report identified key challenges facing the industry. The paper stated: “As the small player in the national financial services sector, credit unions are being consistently outpaced by the scale and marketing strength of the major banks. The credit union system is struggling to keep up with the digital offerings of banks and new financial technology entrants. We have an ageing member base and we lag behind the banks in selling secondary services to our members.”

Legislative Hoops Slow the Process

While getting bigger is a clear priority for many credit unions, the process isn’t easy, says Pigeon. Earlier this year, the Canadian Credit Union Association published a paper titled The Federal Credit Union Option – Progression of the Case, which outlined the considerable legislative hoops facing credit unions that are considering federal continuance.

These include obtaining approval from the local provincial regulator, publishing extensive notice and disclosure requirements, obtaining approval of two-thirds of members and the complex OSFI application process. For example, credit unions will have to make changes to address different deposit insurance regulations in effect at the federal level and in some provinces. Funding facilities will also have to be set up to mitigate the potential for deposit flight during the transition period. Credit unions that operate in jurisdictions that have different rules governing insurance retailing with also have to align with new federal statutes. Judging from Uni’s experience, those latter steps alone are estimated to take at least 18 months.

However, not all credit unions are following the same path. A spokesperson at Meridian, Ontario’s largest credit union, confirmed that executives are pursuing a different road by forming a banking subsidiary that will operate nationally.

“Credit unions have been advocating for the right to service their members across the country for almost a decade.” – Marc-André Pigeon

The challenges facing individual members are also having an effect on the industry as a whole. “We have to work better together,” says Don Wright, CEO of Central 1 Credit Union, which provides liquidity management, payments procession and trade association representation for British Columbia and Ontario credit unions. “If credit unions are going national, it’s important that centrals also develop a national platform that can provide them the services they need.”

Central 1’s October report, the result of an extensive national consultation process, outlined four structural options that would enable the country’s centrals to work together to reduce costs, manage duplication and enable a more effective use of capital. These include a Status Quo Plus option that would continue streamlining efforts related to existing shared services. One such goal, the national consolidation of the payments function into a Payco online payment system, is complete. The report also suggests more ambitious options. These would replace existing centrals with a new structure that provides consolidated services directly to credit unions.

The pace at which this would occur remains unclear. The evolution would likely take place gradually, with centrals joining over time. “Don’t forget that we are
a cooperative system and the decision process works differently than it does in a for-pro t company,” says Wright. “We build consensus rst and then move on to subsequent steps.”

Desjardins Group’s Banking Subsidiary

One credit union that does not intend to alter its regulatory strategy in response to the new environment is Desjardins Group (seven million members, $260.7 billion in assets). According to a spokesperson, the organization operates under Quebec legislation and does not intend to change that. Instead, Desjardins, like Meridian, will do business outside its domestic base, through a banking subsidiary. To help accomplish this, Desjardins recently launched Zag Bank, a mobile platform that emerged from Desjardins’ acquisition of Western Financial Group in 2011.

Desjardins has also opted to diversify its business by building distribution partnerships with other credit unions and centrals. For example, Desjardins provides IT services to Uni as well as the Association des Caisses Populaires de l’Ontario in northern Ontario. Desjardins also plans to grow through investments in financial services subsidiaries that operate outside Quebec. These include State Farm, one of Canada’s top three property and casualty insurers and through its stake in Qtrade, a wealth management services provider.

With the trend toward sector growth and consolidation seemingly unstoppable, the big question now is whether bigger credit unions will increasingly resemble big banks. Moreau thinks not. “We are committed to remaining true to our roots,” says Moreau. “We started in business to serve our members and will continue to do so. Otherwise what is the point?” ◊