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Pushing the boundaries

What boundaries do credit unions need to push in order to remain relevant?

Part 2 of a two-part series on the future state of credit unions. Read Part 1, “A new frontier,” exclusively online.

One of the changes that is impacting thinking about the future of centrals is the move by several credit unions to go federal. Innovation Credit Union in Saskatchewan (50,000 members, $2.1 billion in assets) is looking to become a federally regulated credit union by 2020 to serve members no matter where they live.

Innovation says its regional marketplace has geographic boundaries that limit growth. To ensure its long-term success and sustainability, it needs to expand while protecting its credit union values and cooperative principles, the credit union says.

The expansion will be largely digital in nature; Innovation will not open branches across Canada. But being a federally regulated credit union will mean being able to actively promote products and services outside of Saskatchewan.

Coast Capital Savings in B.C. (532,000 members, $13.7 billion in assets) is taking a similar route. President and CEO Don Coulter says the credit union sees benefits for members who operate in different provinces.

Ontario. Canada.

“A lot of our business members are getting bigger and more successful and want to expand out of one province. They want to be able to do business in different provinces,” Coulter says. “Our vision is that we see banking becoming more and more digital. Once you have digital capabilities it is only natural to offer those to people outside of your normal trade area.”

Unlike Innovation, Coulter says that while Coast Capital’s national approach will be digital only in the beginning, it expects to open a handful of branches in a few years to raise its profile in key markets and eventually look at mergers with like-minded credit unions in other provinces.

“Five to seven years from now I see there being multiple federal credit unions that are strong and growing and have their strategy,” Coulter says. “I think that one of the wonderful things about the credit union system is that there are so many credit unions and such diversity, we have a real tapestry of different types of credit unions, so you have some very regional credit unions, medium sized and larger ones too.”

Coulter says Coast Capital wants to remain a credit union and a strong member of Central 1.

Becoming Banks

Meridian (277,000 members, $11.1 billion in assets), Ontario’s largest credit union, also has national ambitions, but it’s taking a different path with plans to open a national bank that will provide digital service to customers across the country. The bank will be owned by the credit union and follow the cooperative principles, Meridian says.

Meanwhile, Concentra, headquartered in Saskatoon, is also seeking a national banking licence so it can strengthen its role as a provider of wholesale financial products to credit unions. Concentra is currently the only organization governed by the Cooperative Credit Associations Act and finds that costly, restrictive, and confusing to potential customers and investors.

“The needs of credit unions are different than they were back in 2005 when Concentra was formed,” says Ken Kosolofski, president and CEO of Concentra. “The credit unions are much more mature, they’re looking for other opportunities for business, they’re looking at different structures. Becoming a bank will increase the market recognition of our company by people in the financial markets and some of our strategic partners.

“We will still be a cooperative financial institution, we’re still going to have cooperative values as core tenets in our ownership and governance structure, and really, this is just a way to continue to facilitate the business on behalf of the credit unions. That’s the bottom line.”

Kosolofski says Concentra’s change is “a reflection of credit unions growing and becoming more sophisticated” and an indication of how much the environment has shifted in just the last decade, which highlights the need to change a second-tier system that has been in place for more than 50 years.

Stepping into securitisation

He says one of Concentra’s successes last year was helping some credit unions get into the securitization market. “We have a large mortgage portfolio so credit unions can purchase from us or sell us a pool of mortgages if they don’t want to be involved directly in securitization. This is a change in activities for credit unions and new wholesale products. It’s a new sandbox they play in and they have to have it because other FIs do.”

All these moves illustrate why change is being pursued by provincial centrals.

“The needs of credit unions are different than they were back in 2005…” – Ken Kosolofski

Graham Wetter of Alberta Central says the current “provincial model is just not efficient and not at the scale that will meet the need of credit unions now, or into the future.”

But he adds that’s “From an Alberta Central perspective, I’m not sure we’re of the mind that there is a national trade and single national wholesale model. Our view is more that there is probably room for other types of entities that are national in scale.”

He points to Celero, which provides banking system and other IT services to credit unions, as an example of an organization that has grown to national scale by focusing on meeting the needs of credit unions.

“There is merit in business models where people really specialize and focus on things that they are very good at,” Wetter says. “Maybe one of the problems that centrals have encountered is that we multitask a bit too much.”

Wetter feels the current support for change is driven by financial need. “Lack of earnings is the real reason we need to get serious about a national scale solution. I think in the past these were interesting options, or debates, but they’re not just options any more they are essential.

“I hate to sound negative, but I think we’re still very much in a reactive mode. We are reacting to a very tough operating environment and economic environment. We haven’t been proactive enough. That’s one of the things we want to get out of PayCo: let’s get an organization built that thinks proactively, thinks in terms of innovation, gets in front of trends, and isn’t trying to constantly catch up.”

Observation Binoculars

Coulter of Coast Capital agrees it is “important for credit unions to be progressive and at the forefront of what innovation is, and what changes are coming. We often spend a lot of time looking at risks, which is important — we are in the business of risk intermediation — but one of the biggest risks is the risk of not doing enough and not being relevant in the future.”

Keith Nixon, CEO of SaskCentral, says that the changing environment has driven his organization’s support for a national approach.

In the 1960s Saskatchewan had 300 credit unions and now has 46. “We could be looking at 20 credit unions in Saskatchewan at end of the next 10 years,” Nixon says. “The system has transformed and the infrastructure supporting it needs to transform as well.”

“Maybe we can continue to consider functional mergers along the way that will eventually draw us in the same direction” – Keith Nixon

As an example, Wetter mentions the difficulty centrals currently have offering consulting services to a dwindling number of members. “You can’t make business case for consulting services in Alberta since we’re down to just 22 credit unions. You can’t have a viable consulting model with that few credit unions.”

After failing at previous attempts at full mergers, SaskCentral came to “the idea that if we’re not able to merge entirely as an entity to an entity, maybe we can continue to consider functional mergers along the way that will eventually draw us in the same direction,” Nixon says.

“There isn’t anybody who wouldn’t say that national transformation isn’t necessary. I think the issue is that there are still, in some cases, unique requirements, whether that be unique provincial strategies or unique provincial regulatory requirements that will take more time. In some cases credit unions are quite happy with the arrangements they have and are looking for a compelling reason to change.”

In the east, there’s an example of what the national future might look like. Mike Leonard, president and CEO of Atlantic Central, says that since it was created by merging the provincial centrals it has “been able to provide enhanced services and coordinated strategy for credit unions in four provinces and that wouldn’t have been possible under the previous multi-central model.”

“Our board has publicly endorsed having a single national central and we established a vision for the second tier of the system about three years ago. We believe there should be a single national central and a single national wholesale financial services entity.”

railroad tracks

Leonard says “the perception that credit unions are pushing people to engage is not right. I think it’s a partnership and we’re moving forward together.”

He also feels the “national payments committee is the blueprint that we should be using for national initiatives going forward because it is key credit unions and centrals together at the same table working together — and that’s the process that’s going to really drive change.

“There is less of centrals assuming they know what credit unions need and more of an engaged discussion.”

Rick Hoevenaars says for second-tier organizations “the trick is to be able to work with credit unions to understand their needs, to help them leverage that, to leverage the economies of scale that may exist, and to be nimble enough and quick enough to react quickly, because these things change so fast.”

He feels there is great potential for credit unions, especially in Ontario where the system’s profile and market share are low.

“Our values, the cooperative or credit union values, really resonate with people today, particularly the youth. A lot of them are anti big, monster banks. They value companies that are local and companies that contribute to their community that they can communicate with a get response from — and that’s us.

“The problem is that not enough of them know about us yet,” he says. “We have to keep developing and be innovative and find ways for credit unions to be really cool and be financial institutions for the future. Because I really do think that our value proposition really does resonate with people today.”

The irony is that all those years planning and pushing for a Big Bang, credit union leaders had the science backwards. In the Big Bang an explosion sent matter flying to the nether regions. What the leaders really needed was a neutron star that could draw the disparate pieces of the system together into a single unit. It seems the current financial pressure is creating that gravitational pull. ◊