Credit Unions in Canada: Design Principles for Greater Co-operation

Murray Fulton, Brett Fairbairn, Dionne Pohler

The credit union system in Canada is at a crossroads. The following quotations from Central 1’s October 2016 report If not now, when? illustrate the challenges nicely:

Canada’s Credit Union system is approaching a tipping point. 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 of new financial technology entrants.… We have an ageing membership base, and we lag behind the banks in selling secondary services to our members. We lack the capacity for data analytics that would help us understand and more effectively meet our customers’ needs. We face a complex and ever-changing regulatory environment.…

The second tier network has also fallen behind the times. The structure of provincial or regional centrals is a relic of the pre-digital era, and is too expensive to maintain over the long term.… A fragmented system is structurally incapable of providing or implementing the technological innovations that Credit Unions need to compete effectively with banks, and does not have the transaction volume to make its services affordable to Credit Unions (p. 6).

To date, the first-tier, or local, credit unions have responded to these developments through mergers and consolidation, which has resulted in an increasing bifurcation of the system into large and small credit unions. Credit unions have also developed a range of marketing and branding strategies — some are opting to adopt a low-cost delivery strategy and to compete directly with the chartered banks, while others are attempting to differentiate themselves by positioning their organizations as values based, with a particular focus on the local economy.

These changes are also affecting the second tier of the credit union system — the network of centrals and system partners across Canada that provide services to the first-tier credit unions. Over the last ten years, there have been a number of restructurings, including the formation of Central 1 (the central for credit unions in British Columbia and Ontario) and the transformation of Credit Union Central of Canada into the Canadian Credit Union Association (CCUA), a national trade organization.

As Central 1 notes in its report, there is a recognition that the second tier will continue to change. The key question is, will the centrals carry on the process of piece-meal reorganization that has been underway, or will the current system be replaced by a new consolidated organizational structure?

A new report by the Centre for the Study of Co-operatives examines the above questions. The report begins by pointing out that, in attempting to create a new consolidated organizational structure, Canadian credit unions face a trade-off between efficiency and autonomy. In fact, the consolidation of the credit union system is ultimately a problem of governance — i.e., determining who has the power and authority to make decisions in this new organization.

The report concludes that unless a governance structure is found that fosters shared norms and values in addition to economic benefits, it is unlikely that the credit union system will be able to overcome free-riding behaviour, foster trust and legitimacy, and adapt and respond to a rapidly changing and uncertain environment. All these challenges must be met if the credit union system is to achieve the efficiencies required to operate in Canada’s highly competitive financial industry.

The report identifies six design principles such as a clear delineation of who is in and who is out, shared power and control, and a well-defined mechanism for resolving disagreements that can contribute to the good governance of a new national organization. These principles have proven valuable in achieving co-operation in a range of other settings, two examples of which are discussed in the report.

The design principles are particularly relevant because the organizational changes required in the credit union system oblige all the players to make a leap of faith and give up a measure of autonomy. To make the leap, they must believe that it will eventually pay off. This belief is built on a foundation of trust — trust that the other players will not free ride, that they will not sabotage the process for their own benefit, and that they will remain committed for long enough that the process begins to pay dividends. In the highly volatile environment in which the credit unions currently find themselves, this foundation of trust is particularly difficult to build and sustain.

Yet, it is precisely this highly volatile environment that makes change necessary. The political, economic, and social changes outlined at the beginning of this post highlight the need for credit unions to make significant alterations in their structure. But they need a process that will allow these changes to take place in a manner that is deemed fair to the participants. The design principles discussed in the Centre’s new report provide for this process. Credit unions may not have many other options if they wish to ensure the survival of the system.

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Murray Fulton

Brett Fairbairn

Dionne Pohler