Canada’s credit union system, an important provider of banking products and services to millions of ordinary Canadians, is undergoing steady but significant change as the industry consolidates and positions itself better to compete with the big banks.

Across the country, credit unions are merging, becoming larger in an effort to provide a wider array of services at lower costs. And through the national and provincial credit union centrals, the industry’s representative bodies, credit unions are lobbying governments for expanded rights and to loosen the regulations that keep them bound in their home provinces.

Credits unions are also quietly preparing to play a key role in filling in gaps in the provision of banking services, should the federal government allow mergers among the country’s Big Six banks.

Despite these moves, however, the credit union centrals, and the co-operatives they represent, say they are committed to remaining true to their core principles of serving their member-owners and the communities to which they belong.

“We offer a different way of banking and a different relationship with our customers,” says Art Chamberlain, spokesman for the Toronto-based Credit Union Central of Canada.

If the credit union system wants to grow, it will have to differentiate itself from the banks by sticking close to its core principles, says John Chamard, director of the masters of management program for co-operatives and credit unions at the Sobey School of Business at St. Mary’s University in Halifax.

“Credit unions can’t take the banks on in pricing, but they can in things such as services and attachment to the community,” Chamard says. “If the credit unions end up working just like the banks, why bother?”

Howard Bogach, CEO of Credit Union Central of Ontario, agrees: “The one thing you can be sure of is Canada doesn’t need any more large banks.”

There’s no question of the health of the credit union system in Canada. At yearend 2005, the total combined assets of Canadian credit unions and caisse populaires affiliated with Credit Union Central of Canada was $87 billion, up 10.8% from 2004.

(The caisse populaire system in Quebec, dominated by Desjardins Group, with assets totalling $118 billion, is not affiliated with Credit Union Central of Canada.)

Although no real threat to the Big Six, which had combined assets of almost $2 trillion at the end of April 2006, the credit unions offer Canadians, especially those in the western provinces, an alternative to the Toronto-based banks.

And credit unions have often been leaders in innovation, being the first financial institutions in the country to introduce services such as debit cards in the 1980s, personal computer-driven home banking in the 1990s and cheque imaging in the 2000s.

But over the past decade, and especially the past five years, the credit union system has undergone a great deal of consolidation, going from 708 credit unions to 526, an average of 34 fewer each year. At the end of 2005, the 10 largest credit unions controlled 37% of the system’s assets, with the two largest by far being Vancity Credit Union with $10.2 billion in assets and Coast Capital Savings Credit Union with $8.2 billion, both based in British Columbia.

“Most people in the industry expect the consolidation to continue at this rate for the foreseeable future,” Chamberlain says.

Many forces are behind the trend toward consolidation, say industry leaders, but chief among them are the needs to offer a greater variety of services and to find ways to achieve economies of scale.

If consumers find they can’t get products and services at their credit unions, they will flee to the banks — no matter how much goodwill their credit union has built up with them.

With all this consolidation, will there be a hollowing out of the middle in the industry, with just large and tiny credit unions left? Industry observers won’t speculate, but most feel there is room still for small players.

“It doesn’t mean the extinction of the small credit unions,” says Rowland Kelly, the interim CEO of Credit Union Central of B.C. “Where they’ve established a niche in a community, small credit unions have been quite successful.”

Meanwhile, the larger credit unions, through the centrals, have been the most vocal in advocating for increased powers from the provincial governments and the feds for the credit union system.

@page_break@One of the issues is expanded rights to own insurance subsidiaries and sell insurance in their branches, something the big banks also have been seeking.

Regulations limiting insurance-related rights for credit unions differ from province to province. In B.C., for example, credit unions are allowed to sell insurance through offices adjacent to branches, while Ontario credit unions are not. The national central body supports its provincial counterparts in advocating for expanded powers.

A second key issue for the credit union system is the power to expand to neighbouring provinces. As they are provincially regulated, credit unions have always been limited to the provinces in which they are registered.

Now some credit unions, especially the biggest ones, want the power to expand into other provinces, hoping eventually to continue to merge and become larger.

“We’re very much in favour of doing what we can for interprovincial operation of credit unions,” Kelly says. “People are mobile and they want to be able to access funds in different provinces. This is driven by the consumer.”

However, some credit unions seem to be less enthusiastic about interprovincial expansion, saying it all depends on how the provincial regulations are harmonized.

“Eventually, we’ll see interprovincial expansion, but we need to do some work to level the playing field,” Bogach says. “The devil is in the details.”

“We would have to see all the details,” says Sid Bildfell, CEO of Credit Union Central of Saskatchewan. “Our view is one of harmonization of the regulatory environment.”

Saskatchewan boasts the greatest percentage of credit union usage in the country, with 560,000 credit union members in a province of approximately 1 million.

Finally, the credit unions are preparing themselves for the day the federal government gives the green light for mergers among the Big Six banks. The trend toward consolidation is a key part of this preparation — but just one part.

Another is to have a co-ordinated strategy so that the feds will see credit unions as a viable component of an overall plan to make sure financial services are available to all Canadians.

“We are working together to ensure we are ready to consider purchasing any bank branches that might become available because of mergers,” Chamberlain says.

If bank mergers were permitted, credit unions could find themselves with an opportunity to expand further into small and medium-sized enterprise commercial lending.

“That segment is most at risk in the case of a merger,” says Ron Giammarino, the director of the Phillips Hager & North Centre for Financial Research at the Sauder School of Business at the University of British Columbia in Vancouver.

“Credit unions are interested in this segment, and the consolidation of credit unions has given them the scale,” he adds. “But the concern is whether they have the expertise.”

According to the national central, credit unions represent the second-largest provider to the SME segment in Canada, with Royal Bank of Canada being the biggest provider.

Kelly says the consensus among credit unions across the country is that, although they’re willing to leave the big corporate deals to the big banks, they feel well qualified to deal with the SME loans of $5 million or less. He says commercial lending represents about 22% of the credit unions’ combined balance sheet in B.C.

Despite the aspirations to become bigger, more influential players in the Canadian banking picture, the credit union system is committed to remaining grounded. Key to this is making sure that the connections with the community stay strong.

“We’re careful of maintaining the governance structures,” Bildfell says. “We have community advisory groups independent of the board.

“Our credit unions make sure their commitment to community is real, not just something that’s in the brochure.” IE