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Survival of the smallest

Canada’s diminutive credit unions share strategies

Canada’s credit union movement has undergone remarkable changes in the last 60 years, changes that likely would astound the founders of the handful of credit unions that struggled into being in the era of the Great Depression.

Could they have contemplated that their memberships in some cases would total several hundred thousand each, or that a credit union’s assets could enter the stratosphere of several billion dollars?

There is also, depending on one’s point of view, an ominous side to that evolution: the number of credit unions has dropped dramatically from 3,200 in 1966 to fewer than 400 today. Of those, some 18 large credit unions account for more than 60 per cent of the national system, raising concern about what would happen if those same institutions opted out of the many collaborative and cooperative networks they support today.

It is the latter trend that has many wondering whether there is a future for smaller credit unions, those serving a few thousand members from a single location with just an ATM or two in their community.

Some staunchly claim that mergers and amalgamations have led to credit unions becoming miniature versions of Canada’s big banks, betraying their original principles by putting profits before people. Yet others maintain that further consolidation is not only inevitable but desirable because it gives credit unions both large and small the ability to continue to survive in a globalized world doing the good things to which the banks merely pay lip service.

Focus on community economic development

Michel Boudreau, general manager of St. Joseph’s Credit Union in Petit-de-Grat, a picturesque Acadian settlement just off Cape Breton in Nova Scotia, is proud of his credit union’s history.

After you listen to him speak for a couple of minutes, you readily understand why.

With just 2,800 members and about $60 million in assets under administration, St. Joseph’s is tiny by comparison to most credit unions in Canada. Yet it has been punching well above its weight, delivering value to both its members and the region since it was first formed by a group of fishermen and the Catholic Church in 1936.

[T]he bigger credit unions don’t have any better rates than I do. They don’t serve their members any better than I do. They don’t offer any services that I don’t. They’re just bigger. – Paul Hallas

“We pay a patronage refund or a member rewards program,” he says. “The more business you do with us, the more rewards you get. Over the years, we have given back about $2.5 million to our members, or about $135,000, a year.”

He notes that when the town’s largest employer, Richmond Fisheries, closed its doors in the mid- 1990s putting 500 employees out of work, the credit union felt pretty helpless.

“We didn’t know what to do but it was decided by management at the time that instead of closing our purse strings we should do something positive. So we decided that every year we would put in 10 per cent of our profits into a community economic development fund.” Since then, St. Joseph’s has distributed hundreds of thousands of dollars for everything from kick-starting a fitness centre to funding the annual Easter egg hunt for kids.

Through the trying times, St. Joseph’s has faithfully kept its costs down relative to other credit unions, says Boudreau, adding, “it helps that we have only 16 staff in one building and two ATMs.”

Tap into high-tech innovations

What also helps is sharing in credit union programs like INTERAC Flash, the tap-and-pay system, mobile and online banking apps, and other high-tech innovations made possible through collaboration with other Atlantic Canada institutions.

It’s been a few years since St. Joseph’s was approached by another credit union seeking a merger, says Boudreau, though he wonders if it’s just a matter of time. “We’ve done very well. But sometimes you have to wonder how long a $60 million financial institution can compete [on its own].

With the largest percentage of small credit unions in the country, Atlantic Canada institutions like St. Joseph have successfully collaborated, but the continuing evolution of the system could change that, say some analysts.

A 2012 study by Deloitte called The 21st Century Co-operative noted that larger credit unions now are developing in-house technical capabilities or sourcing high-tech innovations in the open market. And, it says that those same institutions “are becoming increasingly reluctant to fund common activities if there is a perception that they are not receiving good and fair value for what they pay.”

The study warns that the ability of central credit unions and system affiliates to cost-effectively deliver services would be “severely challenged if large credit unions ever began opting out.”

A deep commitment to staff

For eight years, Paul Hallas has served as CEO of Ganaraska Financial Credit Union, headquartered in the southern Ontario town of Port Hope and serving Cobourg and Peterborough. He sees merger and amalgamation as anything but inevitable but admits remaining independent is not easy.

“When I moved here [from Hamilton] and opened up the books and I realized maybe I made a mistake,” he says. “This credit union had a lot of problems and I inherited a hornet’s nest to the point that we actually lost all of our retained earnings.

Banking is a scale business and we have to find a ways to leverage scale but you are not going to be able to do that on your own – Mike Leonard

“I was actually hired to ensure this credit union could stay and survive on its own and not have to be absorbed by another credit union.”

Fortunately, the crisis passed, with Ganaraska going on to double its assets to some $130 million while its membership remained stable at 5,000. The reason? A strong staff team, who are paid higher than average wages and benefits, and an unceasing commitment to community engagement, says Hallas.

Ganaraska is the region’s largest contributor to United Way. It routinely runs backpack programs to provide kids with school supplies. It staffs food kitchens at Christmas and even pays staff to “volunteer” 16 hours a year to various social programs.

“We assumed an HR model from WestJet, which through training, coaching, and mentoring meant we focused all of our attention on our staff and not on our members,” he says. “We make sure our staff have the proper education, knowledge, experience, and expertise to serve our members. Our members are happy, our staff are happy.”

Ultimately success comes down to service, he says, because “In the smaller towns, people want to come to a branch and deal with a branch.”

Hallas says, ideally, he would like Ganaraska to be about double its current size so that it could better serve its region.

“But growing for the sake of growing doesn’t make sense to me. You grow and profit so that you can supply better rates and better service to your members. Yet, the bigger credit unions don’t have any better rates than I do. They don’t serve their members any better than I do. They don’t offer any services that I don’t. They’re just bigger.”

Connected to the community

At Bridgewater, a 90-kilometre drive south of Halifax, Corey Rogers is general manager of LaHave River Credit Union. Similar to St. Joseph’s, LaHave has a single location that serves about 2,300 members and has about $35 million in assets under administration.

Rogers says his credit union has succeeded without amalgamations or mergers.arrowup

“We very much pride ourselves on our connection with our community. In the past we have won awards for it. Our town of Bridgewater has won a volunteer award, the Nova Scotia provincial volunteer award, and the Prime Minister’s volunteer award for small business.

“I think more and more people are looking to see how their financial institution is connected to them and their community and that they are not just a number when they walk in the door. They are a name, they are part of us, and we are part of them.”

Rogers says he can see how mergers, if done correctly for the right reasons, could work but not simply for the purpose of getting bigger. “In our case we have found a little niche here. We’re growing and financially strong, and we don’t see a need to merge.”

Ultimately, merger and amalgamation depends on the membership. “What is the will of the membership? That’s how credit union democracy works.”

Find ways to leverage resources

Mike Leonard, CEO of Atlantic Central and League Savings and Mortgage Company, says consolidation is not necessarily inevitable but leveraging common resources among credit unions is essential, which is Atlantic Central’s role, working with 43 credit unions representing $5 billion in assets.

“I think that is one of the things you have to recognize early on is that we need scale. Banking is a scale business and we have to find a ways to leverage scale but you are not going to be able to do that on your own,” Leonard says from Halifax.

“Even the largest credit unions in Canada are looking for ways to collaborate.”

He has seen lots of examples where mergers have provided value to members of various credit unions, but collaboration and cooperation can also achieve much, as is the case among Nova Scotia credit unions.

Make more on margins

Kelly McGiffin is a 40-year veteran of the credit union sector both in British Columbia and Ontario. Now as CEO of FirstOntario Credit Union with 107,000 members, $4 billion in assets under administration, and 30 branches around the Golden Horseshoe of southern Ontario, he doesn’t mince words: not only is consolidation inevitable but it is also desirable.

It all comes down to margins, he says, that gap between the interest rate credit unions pay to depositors and the rate they charge borrowers for mortgages and loans.

“In my opinion, it is [inevitable]. I ran small credit unions, so I understand the challenges. The historic business model for credit unions has changed dramatically in the last few years.

“Margins are slimmer than ever before. When I started back in the 1970s, margins were double digit in the range of 12 to 15 per cent. Now, credit unions that have to be competitive are operating on margins under two per cent.

[W]e have found a little niche here. We’re growing and financially strong and we don’t see a need to merge – Corey Rogers

Add to that the fact that smaller credit unions often currently rely on older members and their abiding loyalty, he says.

“If you think about that for a future state, eventually those members are going to exit and who are they going to be replaced by? By younger families, hopefully, but younger families that are cognizant of every dollar.”

Unlike some others who see mergers as a death knell for the credit union movement, McGiffin sees consolidation as a means of strengthening it. Large credit unions can actually change their models to reduce reliance on margins to less than 50 per cent of income, he says, with wealth management, insurance, and even foreign investment making up the remaining income need.

Remain relevant

In British Columbia, big credit unions are a fact of life: Coast Capital Savings Credit Union and Vancouver City Savings Credit Union together account for more than one million members and almost $50 billion in assets under administration.

Despite living in their shadow, Sunshine Coast Credit Union CEO Shelley McDade sees smaller credit unions like hers as not only a permanent fixture in Canada’s financial landscape but as institutions that “have a right to survive.”

“I think we would rue the day when we didn’t have credit unions speckled across Canada,” she says from her credit union’s head office in Gibson’s Landing, a 40-minute ferry ride from Vancouver.

“I think they play a role in all communities but particularly in small communities where there are many that don’t have any banking services at all.”

arrowWith about 16,000 members and $480 million in assets under administration and three branches, her credit union would be a fine addition to a large credit union’s portfolio.

“If a credit union is in the merging mode, they will make lots of offers, and in my time we have had a few,” says McDade, who has been CEO since 2010. “But our board is fairly resolute with the performance numbers we’ve had, and the feedback we are getting from our communities and members is that there is really no need for us to merge as long as we can remain relevant on the product and service side and we keep pulling down good numbers.”

Those good numbers include growth of between seven and 10 per cent on the asset side, between 65 and 70 per cent for operating income and capital growth of 17 or 18 per cent, she says.

“One of the strategies we have in our organization is that we try to focus on what we are good at. And what we are good at is dealing with the members and connecting to the community.

“We are not [information technology] specialists, and we should not invest in that because we are never going the best the best at it,” she says, adding the credit union has completely outsourced that function and plans to do so with others.

Sunshine Coast collaborates with eight other credit unions on functions such as human resources, risk management, and wealth management, says McDade, clearing the way for it to give back to the community in special areas, such as financial literacy for Grade 12 students.

To survive, credit unions are going to have to take a hard look at retooling, being nimble and reconsidering how they do business in future, she says.

As history shows, the forces of the economy shape the future. Equally important, however, is the enduring strength of the founding principles of credit unions, the goals, and beliefs of people like Michel Boudreau’s members. They came together years ago under the banner of St. Joseph, the patron saint of both workers and Canada, to serve one purpose: the common good of the community, no matter what its size. ◊