The continued consolidation in the Canadian credit union (CU) system, which is resulting in the emergence of a small group of dominant players, will pose a threat to the long-term prospects of mid-size CUs, according to a recent report on the sector.

“The system is at a tipping point now,” says Loraine McIntosh, CU sector leader with Deloitte & Touche LLP in Toronto and co-author of the report, 21st Century Co-operative. “It’s a more competitive economic environment, and the demands on financial services organizations are much higher. Credit unions are finding that they need to invest and grow to a scale that will enable them to continue to survive and thrive.”

Mid-size CUs, which the report defines roughly as those with assets under administration (AUA) less than that of the largest 10 to 15 players but above $500 million in AUA, may find themselves with neither the heft to compete with the bigger CUs nor the capability to offer the kind of niche value proposition that smaller CUs can provide.

“Mid-sized players need to decide whether to move into that scaled-up world,” McIntosh says, “or to go niche and target whom they want to be in the market.”

Mid-sized CUs looking to achieve the scale that will allow them to compete effectively with the top-tier CUs, the report contends, will need either to merge with an existing large player or form formal partnerships with other mid-sized CUs. Those mid-sized firms looking to occupy a niche will need to identify either a particular group of clients they want to serve or a set of products or services on which they can focus.

Says the Deloitte report: “[Mid-sized CU players need to] have the courage to try not to be all things to all people, and [to] make conscious decisions not to offer non-competitive services.”

But CU sector insiders say that even though the report makes many valuable observations and recommendations about the future of the sector, they believe it overstates the severity of the situation facing mid-tier players.

“Like any industry, there is always an evolution,” says Don Rolfe, president and CEO of Central 1 Credit Union, the Vancouver-based CU central for CUs in British Columbia and Ontario. “Unless a dramatic event occurs that accelerates things, we tend to overestimate how fast things will change.”

Mid-tier players do have the size and scale to provide a broad array of services to clients while managing to keep to their core CU principles, says Dave Schurman, executive vice president and chief operating officer of Hamilton, Ont.-based FirstOntario Credit Union, which had $1.7 billion in AUA as of June 2012, making it the 18th-largest CU in Canada outside of Quebec.

“There is still so much opportunity in the Ontario credit union system,” says Schurman, who believes that clients are drawn to CUs’ innovative products, as well as to the competitive pricing and services in the CU system.

Consolidation has been a long-term and well-acknowledged trend in the CU sector. In recent years, CUs have been busy merging and forming partnerships in order to achieve cost efficiencies and to be able to offer more products and services to their member-owners. Greater competition from the big banks, the need to find ways to share the burden of increasing regulatory and compliance costs, and a movement to invest in technology also has contributed to this trend.

The biggest firms, the Deloitte report contends, are now large enough to bypass the CU centrals and other CU system providers in favour of sourcing services, such as wealth-management services, from non-CU system providers. Still, other big players in the CU sector may begin to produce services in-house and possibly provide these and related services on a white-label basis to other CUs, potentially putting themselves in competition with the centrals and other CU system providers.

CU centrals, which provide the CU system with funding and liquidity, clearing, advocacy and other services, will be under continuing pressure to merge among themselves, says the report, and to adapt their service offerings to a CU system in which small players need more support and big players increasingly will go their own way.

Rolfe agrees with the Deloitte report’s contention that large CUs may choose to source services outside of the CU system. However, he believes, the CUs, which collectively own the centrals, will tend to stay within the CU system when sourcing services – both in the longer-term interest of the entire system and because of the strong quality of the products and services provided by the centrals and other CU system providers.

“It is in everybody’s interest in the credit union system that the investment in the centrals is meeting the respective credit unions’ needs on a go-forward basis,” Rolfe says. “As long as you’re relevant, your pricing of products makes sense and you’re a first-quartile player in terms of performance, you will keep business.”

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