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March 2, 2016
Dear Central 1 Member,
Those of you who attended the Fall Peer/Contact Group meetings will have heard of Central 1’s plan to put out a
discussion paper on the future state of the credit union support system – centrals and other 2nd Tier cooperatives.
It is our pleasure to send you a copy of that discussion paper. We hope that it will serve as a good starting point
for engagement about what the desired future of the 2nd Tier should look like.
Our reasons for wanting to start this engagement are twofold. First of all, as we all know, the pressures on the
credit union business model have intensified in recent years. There is an emerging consensus that the status quo
is not sustainable – that we need to be prepared to do things differently if we are to maintain and enhance our
contributions to Canadians’ financial well-being. In this context, it makes sense to ask how the 2nd Tier should be
reconfigured and governed to maximize its contribution to credit union success.
The second reason is related to the first. There are currently a number of initiatives under way that are directed at
responding to the imperative for change in the 2nd Tier – for example, proposals to set up “Payco,” changes to
the system’s Group Clearer function, possible changes in the system’s wealth management platforms, to name
just some of what is currently in train. There is a reasonable likelihood that over the next one to two years we will
be coming to the members to ask for their approval for some changes in these areas. Accordingly, we thought it
important to open up a discussion to further members’ understanding of what is being proposed, and how it would
ideally take us to the desired future state for the 2nd Tier.
We have an opportunity as individual credit unions and as a system to begin shaping a future state for the 2nd
Tier designed to meet the needs of our organizations, and ultimately our members, going forward. This begins
with a coordinated, critical, thoughtful, and collective system discussion.
Over the coming weeks, we will be inviting you to participate in a series of events designed to provoke discussion
and build definitions around our expectations and support for a system discussion about the desired future state
for a 2nd Tier structure. This will assist us in defining our collective expectations, develop a greater understanding
of the potential gains and challenges, and provide direction in taking a more deliberate and coordinated approach
to decision-making.
We will also be holding a facilitated session to discuss all of this at our AGM on April 30.
Since its inception, the Canadian credit union system has grown and evolved in response to the changing needs
of Canadians and the changing regulatory and competitive landscapes. We are confident that the system’s
capacity for growth and adaptation remains in our DNA. We have an opportunity to shape our destiny, and I
encourage each of you to bring your voice and input to the discussion around our future state.
Rick Hoevenaars
Central 1 Credit Union
Don Wright
President & CEO
Central 1 Credit Union
Supporting Credit
Union Success:
A discussion of the future role and structure of centrals and
system partners
EXECUTIVE SUMMARY ................................................................................................................ 4
SYSTEM BIFURCATION................................................................................................................ 5
INDUSTRY CHANGE DRIVERS .................................................................................................... 7
Industry Integration ........................................................................................................ 7
Income Diversification ................................................................................................... 8
Competition ................................................................................................................... 9
Regulation ..................................................................................................................... 9
Technology .................................................................................................................. 10
Conclusion................................................................................................................... 11
THE SECOND TIER ..................................................................................................................... 11
Current State ............................................................................................................... 12
Learnings from the Past............................................................................................... 14
WHAT DO CREDIT UNIONS NEED? ........................................................................................... 15
Credit Union Success .................................................................................................. 15
Principles for Second Tier Redesign ............................................................................ 16
CONCEPTUAL OPTIONS ............................................................................................................ 17
Improved Status Quo ................................................................................................... 18
Consolidation of the Second Tier by Function.............................................................. 18
Full Consolidation and Integration of the Second Tier .................................................. 19
Federated Model ......................................................................................................... 20
First Tier Integration .................................................................................................... 20
DEVELOPING A VISION .............................................................................................................. 20
DISCUSSION QUESTIONS ......................................................................................................... 21
APPENDIX A – Comparative Ratios ............................................................................................. 22
10. APPENDIX B – Payments Ecosystem .......................................................................................... 23
Credit unions face pressure from a steady long-term decline in financial margin, an increasing regulatory burden,
rapid technology change, and socio-demographic trends. Membership growth is flat, as chartered banks are
becoming better at competing with the credit union value proposition. Although credit union service still
consistently trumps the banks, the banks have been outdoing credit unions for many years in terms of offering
integrated banking, payment and wealth management services – as evidenced by the significant disparity
between credit union and bank non-interest revenue. Credit unions have been making steady progress at
managing their costs, but have been far less successful in growing and diversifying their member relationships.
Regional centrals and system partners are in the difficult position of needing to offer increasingly complex and
also highly-integrated shared services to credit unions, who at the same time are no longer willing to rely solely on
cooperative goodwill when choosing their service providers. The credit union system is at risk of fragmentation
unless the second tier is able to maintain system volumes by providing responsive, integrated, value-based and
price-competitive services to credit unions of all shapes and sizes. Further pressures for change at the central
level have been added by federal and provincial regulatory changes.
Many structural changes have occurred in the second tier of the credit union system in recent years in response
to these challenges. The transformation of Credit Union Central of Canada (“CUCC”) into Canadian Credit Union
Association (“CCUA”) and the reconfiguration of mandate, service offerings and future ownership to meet credit
union needs is a confirmation that effective change is possible. Others have failed, and a number of additional
proposals are under active consideration. A common thread among these initiatives has been that they were for
the most part independent, and therefore lacked alignment with a common vision. This document encourages a
discussion about the desired future state for the second tier. In the absence of a long-term vision for desired
second tier functions, the existing structure will continue evolving incrementally and organically over time. There
would be benefit in the credit union system taking a more deliberate and coordinated approach to planning
system structure, as it would increase the likelihood that future initiatives and transactions will be aligned to create
the structure that is best able to meet credit union needs.
This document does not recommend a particular structure for the second tier, but it does recommend that a vision
be developed through broad system discussion – a vision that will allow pursuit of concrete initiatives with clear
and compelling benefits. There are a large number of stakeholders that would need to be involved in such a
process, and the design challenges would undoubtedly be substantial. There would be much to be gained,
however, if credit unions had the support they need to offer integrated banking, payments, and wealth
management services to their members. The siloed approach of the current structure does not support the
integration credit unions require to improve their wallet share and non-margin income. It leaves efficiencies on
the table through duplicated executive management, corporate services, and technology platforms across the
second tier, and it leaves untapped the potential for data to be integrated for analytical and business intelligence
While this paper recommends the need to create a longer term vision, it does recognize that a tremendous
amount of work has been done on the many initiatives underway. The underlying assumption is that many, if not
all, of these initiatives can form part of a longer term vision and that they should be supported and, where possible,
enhanced to reflect any findings in this exercise. Finally, another underlying assumption is the value of many of
the identified principles from these other initiatives. A summary and distillation of these principles is as follows :
1. The credit unions will own and manage their respective retail strategies and the second tier
organization(s) will focus on a wholesale strategy in support of credit union needs;
2. The second tier must be financially viable and sustainable, but must focus on adding value to the credit
union system; and
For the purpose of this paper, the “first tier” of the credit union system is retail credit unions; the “second tier” includes the provincial
centrals and other central-owned organizations.
Ten principles are provided in the body of the report in the Principles for Second Tier Redesign section.
3. The second tier must be member-centric with a clear focus on its credit union members.
In their 2012 paper, The 21st Century Co-operative, Deloitte coined the term “system bifurcation” to describe what
they saw as the result of the evolution of two distinct groups of credit unions: a small group of large credit unions
with the scale and desire to act independently, and a shrinking but still sizeable community of niche players who
will increasingly need to rely on collaboration and cooperation to survive. This evolution occurred through
dramatic consolidation over the past four decades, as credit unions sought scale through amalgamations. In
1966, there were over 3,200 credit unions in Canada. Today there are fewer than 400.
Figure 1 – The Four Waves of Credit Union Evolution
Source: 21st Century Co-operative, Deloitte, 2012
The bifurcation described by Deloitte is evident when comparing the scale of large credit unions to the balance of
the various provincial systems. Figure 2 demonstrates that large credit unions (i.e., credit unions with assets over
$2 billion) represent approximately three-quarters of the systems in both British Columbia and Alberta, and
roughly half of the systems in Saskatchewan, Manitoba and Ontario. These 18 large credit unions now represent
60 per cent of the national system.
Deloitte noted that credit unions are increasingly developing in-house capabilities or sourcing from the open
market rather than relying on the collaborative shared services provided by centrals and other system partners.
Credit unions 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. Some credit unions may also desire a quicker pace for
system decision making, and a greater level of effectiveness and control than afforded by current governance
structures. When one considers the scale of just the top two or three credit unions in each province compared to
the balance of the provincial systems, it becomes apparent that the ability of centrals and system affiliates to costeffectively deliver services to the balance of the credit union system would be severely challenged if large credit
unions ever began opting out.
Figure 2 – Credit Union System Asset Concentration by Province (Q4 2014)
Although some credit unions are becoming very large in relation to their provincial systems, individually none has
the kind of scale of the major banks (Figure 3). In fact, the entire credit union system is still a fraction of the size
of any of the five major banks. This scale differential has implications both on the cost structure of the credit
union system, and even more so on its ability to generate revenue. In combination, these two factors result in
significantly lower efficiency for credit unions. While domestic banks have efficiency ratios that average about 57
per cent (i.e., each dollar of revenue costs 57 cents to produce), the credit union system’s efficiency ratio is closer
to 75 per cent (i.e., each dollar of revenue costs 75 cents to produce). On the cost side, credit union system
efficiency is constrained by the decentralized nature of the system, and the large number of branches that credit
unions have compared to the banks. On the revenue side, credit unions lack the diversified income streams that
banks have access to through integrated payments, wealth management, insurance, and securities business lines.
Figure 3 – Total Assets vs. Domestic Branches (2011)
Source: 21st Century Co-operative, Deloitte, 2012
The fact that there has been significant consolidation in the Canadian credit union system, and the forecast that
this consolidation will continue leads some to conclude that it is inevitable that in time there will only be a few,
very large, credit unions remaining in English Canada. The inevitability of this conclusion should be challenged.
A minimum economic scale at the individual credit union is important, but it is not the sole determinant of the
success of a credit union. At least as important is a credit union’s strategy, and in particular whether it provides a
compelling value proposition for a segment of the population that results in that segment choosing the credit union
as its primary financial institution. That compelling value proposition might entail exceptional levels of service, a
strong connection to supporting local prosperity, exceptionally low service costs, alignment with particular values,
a strong connection with specific ethnic communities, or a focus on a particular income segment, to list just some
of the relevant dimensions. The successful execution of such a strategy is not dependent on being a large credit
union. In fact, many of these are niche strategies that a large credit union could not execute.
Evidence that scale is not the sole determinant of credit union success is easy to demonstrate. While there are
multiple dimensions for measuring credit union success, perhaps the most generally relevant one is return on
assets (ROA). As an illustrative example, a regression analysis carried out by Central 1 on 2014 ROA for each
credit union in B.C. and Ontario found no statistically significant relationship between credit union total assets and
ROA. Nor was there a statistically significant relationship between total assets and asset growth rates. This
means that credit union scale alone (as measured by total assets) does not explain at a statistically significant
level any of the variation that can be found in credit union profitability levels or asset growth rates.
Consolidation at the individual credit union level is not, of course, the only way that credit unions can achieve
economies of scale. By aggregating volumes through second tier providers the credit union system is able to
achieve economies of scale in wholesale finance, payments and digital banking, wealth management, trade
services, and public and political advocacy. It is true that most of those volumes now come from a relatively small
number of large credit unions. But it should also be noted that the scope of the system is enhanced by smaller
credit unions that serve the niches the larger credit unions do not. And the “politics of scale” – the presence in
communities across the country and the connections to every MLA, MPP and MP in the country – are provided
disproportionately by smaller credit unions. There is therefore a reciprocal exchange in value between larger and
smaller credit unions that benefits the entire system, so long as the system stays together and the second tier is
able to provide good value to credit unions of all sizes.
The quest for scale has been the primary driver of credit union consolidation over the past few decades. Credit
unions pursuing increased scale believe it has become necessary for them, as industry integration allowed banks
to diversify, as competition increased, and as the pressures of regulatory compliance and technology change
grew. These trends are sure to continue, and are likely to accelerate in the years to come.
Industry Integration
Historically the Canadian financial services industry was regulated under a pillar system that saw chartered banks,
insurance companies, trust companies, and investment dealers regulated as separate financial institutions. Each
pillar carried out functions that were separate and distinct from the other pillars, and virtually no overlap was
permitted. By the late 1980s, however, significant amendments to the Bank Act enabled banks to own
subsidiaries in previously prohibited areas. Banks used their newfound powers to buy or establish trust
companies, insurance companies, investment dealers and mutual fund companies and to pursue aggressive and
integrated strategies to maximize consumer wallet share. Ownership rules for foreign banks were also relaxed,
and new monoline competitors began aggressively competing in the marketplace.
Monoline competitors are non-deposit-taking lenders who focus on one product category. Examples include MBNA and
Capital One in the credit card market, and Merix Financial in the residential mortgage market.
Income Diversification
The ability of the large banks to integrate their offerings improves their ability to cross-sell to their customer base
across business lines. Data analytics enabled them to determine consumer needs and preferences across
diverse product markets, and to meet those needs with coordinated product offerings. Their portfolio approach
also allows banks to be opportunistic in using loss leaders in certain businesses in order to maximize market
share in more profitable market segments. The outcome for the banks was a significant increase in non-margin
income, and consequently less reliance on financial margin.
Although the credit union system established a range of second tier affiliates and partnerships in an attempt to
provide a similar product breadth to the banks, the fragmented structure of the second tier constrains integration
and results in less success in diversifying revenue. Credit unions remain primarily focused on the savings and
loans business, and are heavily reliant on net interest margin as the source for profits and capital growth. As
evident from Figure 4, nearly half of the banks’ revenue comes from other income, while the credit union system
is much more reliant on financial margin.
Figure 4 – Comparison of Credit Union and Bank Income Sources
As a national system, credit unions generate other income of only 58 basis points (bps) of average assets; by way
of comparison, banks generate 145 bps of other income – which is 2.5 times more than credit unions. Of concern
is that the credit union system’s other income ratio has been steadily declining (76 bps in 2010 vs. 58 bps in
2014), as other income growth has not been keeping pace with asset growth.
Reliance on financial margin will be a challenging proposition for credit unions in the longer term. Financial
margins have been steadily decreasing for both banks and credit unions for decades due to increasing
competitive pressures. This trend is unlikely to reverse, even if interest rates rebound, as commoditization and
competition results in increasingly price-sensitive consumers. It is therefore important that credit unions diversify
their product and service offerings in order to broaden and deepen member relationships, and to supplement
margin income.
It is recognized, of course, that as cooperatives credit unions do not have the same profit orientation as banks.
They often intentionally use low service charge strategies both to provide a benefit to members and to
differentiate from the banks. The higher non-interest income that banks enjoy, however, is primarily the result of
successful business line diversity rather than aggressive service charge strategies. Major revenue sources for
the banks include mutual funds and securities commissions (46 bps of average assets), investment management
and custodial services (18 bps), insurance (10 bps), and credit/debit card fees (12 bps). Credit unions have
access to all of these services through system affiliates or third-party suppliers, however they lack penetration
among members as the services are typically provided through referral arrangements that are difficult to
seamlessly integrate. Credit union supplier arrangements also offer lower revenue streams for credit unions than
the integrated bank offerings provide for banks. For example, credit unions have to share with their processors
the interchange revenue on acquired debit card transactions, whereas integrated banks do not share interchange
with outside suppliers.
As previously mentioned, relaxed ownership rules for foreign banks resulted in new competitors entering the
market. Monoline competitors and mortgage brokers have created extreme price competition, and the prevalence
of online access extends the reach and accessibility of all of these competitors into all credit union markets, no
matter how remote. At the same time, banks have made significant improvements in their service delivery
capabilities and corporate social responsibility programs, which were areas of traditional credit union strength.
They are now competing directly with credit unions on those attributes in major markets. Recent regulatory
changes make the domestic consumer banking market more attractive to the banks, so this competition is
expected to intensify. In addition, as credit unions become larger and their geographies overlap, they are
competing with each other more than ever before. Desjardins has expanded westward in the insurance business,
the provision of financial products and services and most recently in direct banking through the recent rebranding
of Bank West and launch as Zag Bank. And, finally, the increasing offerings from Fintech companies is
increasingly putting control in the hands of consumers.
Credit unions have faced increasing regulatory and compliance requirements in many areas of their business for
many years. Examples of new requirements that have been implemented over the past decade include cost of
credit disclosure, privacy, anti-money laundering (AML) and terrorist financing, risk self-assessment requirements,
international financial reporting standards (IFRS), the Foreign Account Tax Compliance Act (FATCA), corporate
governance, and capital planning requirements (ICAAP). Credit unions generally recognize the various reasons
for increased regulation, however many have nevertheless struggled to keep pace with new compliance and
reporting requirements as they emerge. Compliance with new regulations almost always increases operating
costs, and often disproportionately for those credit unions without scale. Although compliance generally also
mitigates risk at some level, it almost never increases revenue. Regulatory compliance pressures will
undoubtedly continue in future.
In addition to the foregoing regulation trends, regulators are increasingly interested in payments activities. In fact,
payment systems are increasingly being considered systemically important and any future vision should reflect
this emerging trend. Related to the interest in payments activities are the changes arising from Bill C-43. As OSFI
supervision is withdrawn from the centrals in 2017, there will no longer be a common regulatory framework for the
second tier. This is particularly important in the context of a national, integrated payments system.
Another new and very material regulatory development that could have a profound impact on the credit union
system is the recent amendment of the Bank Act to allow credit unions to continue federally. Although no credit
union has used this option as yet, several have either signaled an interest or are evaluating the option. This issue
is important because it has the potential to be very disruptive to credit union system scale. Federal credit unions
would not be required to be members of a provincial central, and any significant change to the member base
could have a material impact on the economics of centrals and affiliates—and consequently on the credit unions
that continue to rely on second tier for support. Federal credit unions also have the potential to alter the
competitive landscape, as they would not be constrained by current provincial boundaries. Of note, however, is
that federal credit unions would still realize value from remaining in the system and contributing to and benefitting
from the scale that can be achieved by the system as a whole.
Fintech as an industry driver is covered more thoroughly in the Technology section below.
Technology developments in recent years have resulted in systems that are faster, cheaper and better able to
meet the needs of financial institutions and their customers. The evolution of payments technology in particular
has attracted many new entrants into the industry, increasing the competitive pressure financial institutions face.
Payment cards are no longer the preserve of financial institutions and credit card networks. Prepaid cards are
widely offered by merchants and other issuers. PayPal is disintermediating customer, merchant and financial
institution relationships, and companies like Square allow small businesses that otherwise could not establish an
acquirer relationship to accept credit cards at low cost. Major innovations in mobile and other payment offerings
are emerging not only from traditional players, but also from technology giants such as Google, Microsoft and
Financial technology companies (“Fintechs”) may also soon have a disruptive impact on other aspects of the
financial services industry. In the wealth management space virtual advice is being provided though online tools
and algorithms (“robo advisors”) that very effectively target lower- to middle-income market segments. Retail
banking, which is the traditional focus of credit unions, has the potential to be disrupted by technology-enabled
developments such as peer-to-peer lending, and small business lending could be disrupted by the emergence of
crowd funding.
Banking services are already primarily delivered through digital channels rather than bricks and mortar.
According to a recent survey the majority of Canadians (55 per cent) view the Internet as their main means of
banking, and that trend is increasing among all age groups. A surprisingly large group (23 per cent) does not
think they will be carrying cash in 10 years, and over half of the population (54 per cent) anticipates no longer
using cheques. Canada is behind many other countries in this regard. In much of Europe the use of cash is
rapidly declining, and it is foreseeable that cash may be phased out altogether. Denmark has already announced
that it will allow some retailers to refuse cash payments in 2016. Credit unions will need to be able to respond to
the challenges this presents and the second tier will need to provide the necessary support and capabilities to
enable that response.
Credit unions will need innovative, tailored technology solutions to compete in this new environment. The ability
for credit unions to remain viable in the long term is contingent on their ability to leverage technology to provide a
compelling and competitive member experience. Due to the significant investment required, technology change
will likely continue to be difficult for most credit unions to manage independently. Technology collaboration in the
credit union system most often takes the form of use of services provided by centrals and technology-oriented
central subsidiaries. This type of collaboration is likely to become even more imperative in the future.
In this new environment, data analytics will be increasingly important. Banks are already able to mine data across
market segments to develop customer insights and offer consumers solutions that not only meet but anticipate
their needs. Credit unions would benefit immensely from the insights that could be available through the
aggregation of data across institutions and business lines. A centralized service provider with advanced data
analytics competencies and a strong analytic platform could provide credit unions with greater insights into
opportunities, challenges and threats to optimize business strategies and decision making processes. In the
current credit union environment, however, leveraging data to its full potential would be very challenging due to
disaggregation of system service providers and a relatively low percentage of members that use their credit union
as their primary financial institution. The potential value of amalgamated data and analytics capability is much
greater than the value of the data held independently, and this potential capability should not be underestimated.
How Canadians Bank, Abacus Data, 2014, Canadian Bankers Association
Figure 5 - Digital Disruptors
The trends that have led to credit union consolidation and a bifurcated credit union system will continue, and it is
expected that the bifurcation described by Deloitte will become more pronounced over time. Credit unions seek
scale to manage costs, to develop new revenue sources, and also to respond to the competitive threats they face.
While scale can be achieved through formal amalgamations, it can also be achieved through the collective action
of the credit union system. Even the largest credit unions believe they will benefit from additional operational
scale, as evidenced by the high priority that many of them have been placing on collaborative initiatives over the
past number of years. For example, large credit unions are effectively collaborating through the Large Credit
Union Conference (LCUC) and are also the driving force behind the progress being made by the CEO Payments
Strategy Committee.
The need to preserve and leverage the limited scale the credit union system does have is critically important. Yet
regional centrals and system partners are in the difficult position of needing to offer increasingly complex and also
highly-integrated shared services to credit unions who are no longer willing to rely solely on cooperative goodwill
when choosing their service providers. The credit union system is at risk of fragmentation unless the second tier
is able to maintain system volumes by providing responsive, integrated, value-based and price-competitive
services to credit unions of all shapes and sizes.
Strategic cooperation among credit unions remains very important. It provides operational scale that is beneficial
to credit unions of all sizes. Cooperation has historically occurred primarily through shared services organizations
owned by the credit union system. Some would say, however, that the second tier as it is currently structured and
governed is no longer effective at meeting the needs of all credit unions. Most would agree that these challenges
will become more pronounced in the coming years.
Many structural changes have occurred in recent years, and others have been attempted but have not been
implemented. Still others are under active consideration. Although these structural changes were all conceived
with the intent of benefitting credit unions, past proposals have not necessarily been aligned around a consistent
longer-term vision. A longer-term vision would improve the coherence of future structure changes.
Current State
The structure of the credit union system is complex. Credit unions own and control the provincial centrals, which
in turn own and control most of the other support organizations, although sometimes a significant ownership
share is controlled by Desjardins or Cooperators. The siloed structure lacks integration, which can result in
misalignment of strategy. The structure is also inefficient, as dozens of boards and management teams oversee
various aspects of the credit union shared services support structure.
Figure 6 – Credit Union System Structure
Change has been underway in the second tier of the credit union system for many years now. Following is a
summary of some of the structural changes that have occurred over the past decade:
Central consolidation started with the formation of Central 1 in 2008, and more recently with the formation
of Atlantic Central. Other various merger discussions among provincial centrals have not been
successful—but clearly there has been appetite among credit unions for consolidation at the central level.
In 2006 CUETS, the credit card joint venture owned by the centrals in Alberta and Saskatchewan, was
sold to MBNA (and subsequently by MBNA to TD Bank).
Central 1 and the Cooperators bought CUMIS in 2009. Prior to then it had been more broadly held by the
provincial centrals and the US-based CUNA Mutual.
The Credential Group was restructured and Northwest Ethical Investments was formed through a
partnership between the provincial centrals and Desjardins, which combined Northwest Funds
(Desjardins) and Ethical Funds (formerly part of The Credential Group).
Cooperative Trust Company of Canada was continued in 2005 as a federal retail association (Concentra)
and SaskCentral transferred its wholesale finance business lines into Concentra.
The prairie centrals, Concentra and CUETS amalgamated their information technology departments into
a joint venture to form Celero Solutions, which provides banking system and other IT services to credit
unions and the owner organizations.
Everlink was formed by Celero Solutions and a US switching provider with the intent of offering a national
ATM/POS switching solution for credit unions.
CCUA - Credit Union Central of Canada (CUCC) has been transformed into a national trade association
as the newly-formed Canadian Credit Union Association, which followed the 2011 assignment of CUCC’s
financial institution functions related to clearing and settlement to Central 1. Going forward, there will be
opportunities to consolidate and rationalize trade association activities currently performed by provincial
and regional centrals into CCUA.
A number of other initiatives are currently under consideration. These proposals make sense in that they create
efficiencies where possible and respond to regulatory requirements where necessary. In considering a long-term
vision, the credit union system should recognize that these initiatives are going in the right direction and can form
the foundation for a broader, more powerful future vision. The initiatives are all at different stages, and therefore
have varying degrees of momentum:
PayCo – The CEO Payments Strategy Committee has been working on a strategy to ensure that credit
unions are able to increase their competitiveness and sustainability by leveraging payments as a strategic
enabler of growth. It is expected that one of the outcomes of that committee’s work will be some form of
interprovincial consolidation of payment operations and technology functions in a credit union-owned
payment organization.
SettleCo – In response to the Bill C43 changes, the provincial regulators conducted a liquidity and
payments review which identified concerns with the current group clearing structure. A working group of
central resources developed a recommendation for an alternative clearing and settlement structure that
will address the concern of provincial regulators around interprovincial liquidity contagion, while at the
same time aligning with CEO Payments Strategy Committee work and preserving the ability of credit
unions to aggregate clearing volumes and operate efficiently. The working group has recommended a
range of enhancements to the current group clearing structure in the short term, and also recommended
the establishment of a federally-regulated financial institution to act as the national clearing and
settlement agent for the credit union system in the longer term. The short-term enhancements are
currently being put in place by Central 1 as the Group Clearer for the credit union system.
WealthCo – Discussions have occurred with respect to consolidation or restructuring among some of the
credit union system’s wealth management affiliates and suppliers.
Wholesale Finance Co – Central 1 and Concentra initiated discussions around the consolidation of
wholesale financial services for credit unions. These discussions were placed on hold as Central 1
needed to focus its immediate attention on responding to provincial regulators’ concerns about the group
clearing structure.
Clearly, structural change and the consolidation of credit union support services in the second tier is not new, and
will continue. In fact, there are a number of change drivers that increase the pressure for future structural change:
PayCo and SettleCo – The establishment of PayCo and SettleCo are important strategic initiatives for the
credit union system. The initiatives have considerable momentum, and if they are implemented a very
large part of existing central operations (namely the payment, clearing and settlement functions) would be
transferred into these entities. Business cases are being developed to assess the cost savings from such
functional consolidations, however, this would result in significant overhead costs being stranded in the
centrals, and would require the centrals to re-evaluate their business models and overhead structures. A
further consideration is the possible reduction in the multiple and repeated engagement and decision
making forums and entities necessary to arrive at any common single system decision for payments
Liquidity Mandates – In recent years there has been discussion among some regulators and within the
system about one of the fundamental purposes of centrals – liquidity pooling. The benefits and risks of
liquidity pooling have been questioned in some provinces as a number of credit unions approach or
surpass their centrals in size. Liquidity pooling can offer significant benefits to credit unions when a large
number of small credit unions pool liquidity investments in a central pool that is much larger than any of
the individual participants, as historically was the case. When individual credit unions contribute a very
large portion of a liquidity pool, however, there are two consequences: firstly, the benefits of pooling are
diminished, as the pool is less able to effectively and completely support the liquidity needs of the largest
members in a crisis scenario; and secondly, the largest members begin to represent a systemic risk to the
balance of the pool, as their disproportionate size has the potential to drain the entire liquidity pool if the
largest credit unions were ever to become affected by a crisis event. Liquidity pooling was historically the
core mandate of centrals. Furthermore, any consolidation of centrals must take into account the fact that
provincial regulators are not comfortable with commingling liquidity pools across provinces. This could be
addressed through managing the liquidity pools on a segregated “in-trust” model.
Federal credit unions – As noted in the previous section, the potential for credit unions to continue
federally could have consequences for all aspects of the system. Federal charters may accelerate the
pace of credit union consolidation, and if a federal credit union were to discontinue its membership in a
central or its use of certain services, it could have a substantial impact on that central’s remaining
Bill C-43 – In early 2014 the Government of Canada made a move to clarify the federal regulatory regime
for credit unions. These plans were effected through Bill C-43, which included the repeal of Part XVI of
the Cooperative Credit Association Act (CCAA), a consequence of which is that OSFI will cease its
supervision of provincial credit union centrals by January 2017. The impacts to the centrals are varied.
However, on the whole these changes will be significant when considering the increasingly linked nature
of payments, and the entire financial sector. In addition, it is possible that counterparties with whom all of
the centrals transact – and particularly the banks with respect to settlement activity – gained significant
comfort from OSFI’s high standards of oversight, and there is a risk that Bill C-43 could be used a pretext
by counterparties to either limit their exposure to the credit union system, or provide less favourable
business terms. While change has been underway at the second tier for many years, the coming into
force of this section of Bill C-43 will increase the pressure for it to evolve more rapidly.
These factors increase the need for the credit union system to be adaptable, as the current structures may not be
well suited for the future.
Learnings from the Past
Among the initiatives listed in the previous section, there are some lessons to be learned for the credit union
system. Other proposed transactions were never implemented, but they are also useful in providing lessons on
how the system should (or should not) approach structural change.
Centrals have at times been criticized by their constituent credit unions for acquiring or divesting subsidiaries with
less than the expected level of system consultation. Notwithstanding confidentiality requirements when
transactions are proposed, and the fact that constituent central boards approve the transactions, credit union
executives and boards do not like to be surprised when transactions are announced. Ideally they want input into
the strategic merits of proposed transactions, and want to understand the potential impacts on credit union
operations. The sale of CUETS by SaskCentral and Alberta Central, and the acquisition of a minority interest in
CUMIS by Central 1 are examples of transactions that may have not met some credit unions’ expectations
regarding consultation.
Credit unions expect that acquisitions and divestitures of central subsidiaries will be aligned to their strategic longterm needs. Within a few years of the sale of CUETS, different parts of the credit union system began evaluating
how to take greater control over their credit card portfolios, either through directly issuing cards or by buying back
their card portfolios and switching from CUETS to some other service provider. A new cooperatively-owned
service provider (Collabria) has recently entered the market in an attempt to rebuild some aspects of the capacity
of the former CUETS. Given these developments, one might question the extent to which the longer-term
strategic interests of credit unions were balanced with other factors when the decision to sell CUETS was made –
even though there well may have been other good and valid reasons for the transaction at the time. Credit union
consultation, as discussed in the previous paragraph, would go a long way to ensuring that the strategic interests
of credit unions are adequately considered.
The credit union system has experienced structural change that has resulted in volume fragmentation. Credit
unions would generally agree that volume aggregation is a strategic principle that benefits the system. Yet
somehow credit union switching volumes became fractured between two service providers (Threshold and
Everlink) as the national switching contract was migrated from CUCC and CGI a decade ago. Similarly, wealth
management volumes were fractured between Credential and QTrade. While there would likely be different
perspectives on the politics that led to the evolution of those situations, the important lesson to be learned is that
system volume aggregation can be fragile. Care needs to be taken to ensure that solutions are balanced to meet
the needs of all parties so that volumes continue to be aggregated for the benefit of all.
Finally, it is worth remembering that although many transactions were successfully implemented, many other
proposals failed. Examples include the “National Services Entity” discussions of the late 1990s, an attempt by the
prairies centrals to merge, and two attempts by Central 1 to merge, once with SaskCentral and also with Alberta
Central. This experience may be one of the drivers of the current focus on functional (business line) mergers in
place of entity mergers. These failures are all reminders that structural change in the credit union system is not
easy, and the more complex the transaction, the more challenging it is to gain the broad support required for
success. On the other hand, there is opportunity to drive success through careful planning, open and broad
consultation and the commitment to listen to all stakeholders.
As outlined in the previous sections, many structural changes have occurred in recent years, others have failed,
and there are a number of other changes under active consideration. A common thread in many of these
initiatives has been that they were for the most part independent, and therefore lacked alignment. The credit
union system lacks a coherent and explicit longer-term vision of what credit unions need in order to be successful.
Given the premise that the purpose of the second tier is credit union success, consideration should be given to
what support credit unions will need from the second tier in order to maximize their future success.
Credit Union Success
As a context for that discussion, it must be noted that credit unions do not measure their success only in financial
terms. As cooperatives, credit unions do not have the same profit orientation as banks. Their primary motivation
is to serve members, help members achieve financial success, and support their communities—as is so often
explicitly reflected in credit union vision statements. Profitability is important in order to build capital to support
growth, to fund dividend distributions to members, and to fund community investment initiatives. But credit unions
see profits as a means to these ends rather than an end in itself. So in considering what supports credit unions
need from their shared services organization(s), the discussion must be broader than just increasing credit union
profitability, and needs to also include supporting credit unions in delivering on their objective of member
Future credit unions success will be dependent on effectively adapting to socio-demographic trends. Canada has
become increasingly urbanized, and younger demographics place a high value on geographic mobility and
technology. There is also a growing level of community, social and environmental awareness among consumers,
as evidenced by increasing community volunteerism and the success of car-share and other values-based
Credit unions inherently should be well-positioned to answer these socio-demographic trends, but have been
challenged in attracting new members. The average age of credit union members is high compared to the banks
and the overall Canadian population, and highlights a need to attract a younger demographic. The credit union
system has not seen strong member growth since the 1970s , which raises the question of how well the credit
See Figure 1 on page 4.
union value proposition that supported the historic growth of the system is resonating with and successfully
transferring across generations.
The strategic challenge for credit unions will be to find a way to remain personal, authentic and relevant in an
industry that is being urbanized, commoditized and digitized. Credit unions will need to manage member
lifecycles, grow their member base, and build retention levels through integrated programs that build wallet share
across business lines, while at the same time rigorously managing costs. Credit unions have a strength with
respect to in-branch delivery, and many made the strategic choice to maintain a large number of branches to
serve remote or underserved communities. Decreased member visits to branches, however, reduces the
opportunity for credit unions to interact with their members face-to-face, and increases the need to replicate a
differentiated member experience through digital channels. Some credit unions have adjusted by building
branches with smaller footprints, and a greater focus on advice rather than transactional services. Technology
has become table stakes for transactional services.
Principles for Second Tier Redesign
From a credit union perspective, following are ten principles that would likely be most important as an evaluation
of the current and future second tier structure is considered:
1) Member Centric – An overarching and paramount concern of credit unions is the wellbeing of their
members. Credit unions want the second tier to support them in growing their member base, serving
members, helping members achieve financial success, and supporting their communities through the
provision of appropriate wholesale and payments capabilities.
2) Effective Governance – Credit unions want effective governance control of the second tier to ensure
timely decision making, transparency, and appropriate focus on credit union needs. The current practice
of holding affiliates as subsidiary investments of provincial centrals results in credit unions being one step
removed from the governance of those organizations. The current structure is prone to slow decision
making, and also reduces alignment of decision making and responsiveness to credit union needs.
Credit unions will want direct oversight of their second tier support organization(s) in order to maintain de
facto control, and may want a controlling interest in any venture that is not wholly credit union owned.
Effective governance will be a critical requirement to ensure that centrals and affiliates are decisive and
coordinated in an era of disruptive change.
3) Revenue Diversification – Credit unions need to decrease their reliance on financial margin by increasing
revenue from other sources, which will improve earnings stability and help build capital. Diversification of
credit union revenue will require more effective strategies to develop payments, wealth management and
insurance market potential—and greater ability to effectively integrate those services with core credit
union offerings. Improved functionality could be possible though better coordination at the second tier
and a consolidated infrastructure platform.
4) Complementarity – Credit unions expect to own the relationships with their retail and commercial
members, and expect that the second tier will focus exclusively on wholesale activities that support credit
unions. Credit unions want a structure that preempts competition for their members’ business from credit
union-owned shared services organizations.
5) Financial Return – Like credit unions, second tier support organizations should be profitable, but not profit
driven. There should be transparency regarding financial performance, and any profits not required for
reinvestment in the development of services for member credit unions should be distributed back to credit
unions through dividends that transparently reflect the patronage of credit unions by business line. Credit
unions also want to ensure that the returns they receive from investments in subsidiaries are
proportionate to their capital investments in, and risk exposures to, those organizations.
6) Efficiency – Credit unions are less efficient than the banks. They expect the second tier to maximize its
own efficiency to reduce the costs that credit unions ultimately bear. Consolidation among shared
services organizations should reduce duplicated governance and management structures and translate
into greater efficiency and lower credit union costs. While reducing shared services costs will not by itself
resolve the credit union efficiency challenge, credit unions expect the second tier to do its part in
supporting productive, efficient and sustainable credit union operations. While consolidation could be one
driver of efficiency, it is also important that national scale be maintained, and that credit union volumes do
not become too fractured.
7) Customized Support – Credit unions want second-tier infrastructure that recognizes the differing needs of
large and small credit unions which require different levels of support. Credit unions differ in terms of the
markets they serve (i.e., urban, rural, and bond of association), which also has an impact on their support
needs. Credit unions of all shapes and sizes need to believe that they receive good and fair value for the
fees that they pay to their support organizations.
8) Payments and Technology Support – The ability for credit unions to remain viable in the long term is
contingent on their ability to leverage technology to provide a compelling and competitive member
experience. Due to the significant investment required, technological change will be difficult for credit
unions to manage independently, and they will need to collaborate effectively through the second tier to
remain competitive. The complexity of the payments ecosystem in particular (see Appendix B) provides
many opportunities to better aggregate credit union volumes. As Fintechs will increasingly have a
disruptive impact in the payments space and other parts of the financial services industry, credit unions
will potentially want a way to participate as a group in taking an ownership stake in some yet-to-bedetermined Fintech opportunities.
9) Data Analytics Capabilities – The ability to effectively leverage vast stores of data is increasingly a source
of advantage in this information age. Advanced data analytics enable financial institutions to gain
customer insights across business lines to anticipate customer needs and provide timely, tailored
offerings. The ability of large banks to integrate customer relationship data across business lines is a
strength that credit unions have not been able to match due to the siloed approach that the system uses
to support credit unions in the areas of banking, payments, technology and wealth management. Credit
unions would benefit immensely from the business insights that could be achieved through the
aggregation of data across these silos if it also came with the capability to employ sophisticated data
analytics. An integrated second tier with diversified sources of information could create a data
infrastructure to provide credit unions with greater insights into business opportunities, challenges, and
threats, and to optimize business strategies and decision making processes accordingly. A centralized
service provider with advanced data analytics competencies and a strong analytic platform could provide
credit unions with regulatory compliance reporting, and regulatory and competitive benchmarking services.
The value of amalgamated data and analytics capability is much greater than the value of the data held
independently, and this potential capability should not be underestimated.
10) Balanced Partnerships – Credit unions welcome opportunities to collaborate, and value mutuallybeneficial partnerships that support service delivery to their members. Desjardins, for example, has
indicated a strong interest in collaborating and seems prepared to make significant investments in the
English-speaking credit union system. At the same time, Desjardins could represent a very real
competitive threat if their intention is, or becomes, expansion of their retail banking business in Western
Canada. Credit unions will want to remain open to beneficial partnership opportunities from organizations
such as Desjardins, while at the same time protecting their interests against competitive threats. As
noted in the effective governance section above, credit unions may want to maintain an equal or
controlling interest in any formal partnerships.
Discussion and validation (or refinement) of these principles through broad credit union input will be a valuable
first step in determining the structural changes that will best support long-term credit union success.
As noted earlier, the second tier function must be designed to meet credit union needs. However, there is a range
of conceptual approaches that the credit union system could adopt to determine a system structure. These
approaches to structure vary in the extent to which they would facilitate integration across business lines, and
also in their complexity and achievability. They also take as given that all current second tier operations and
functions will be maintained and that may not reflect the vision that is developed by the credit union system. The
chosen conceptual option will need to be adapted as necessary to meet the vision as it is developed.
The following possible approaches implicitly assume that the CCUA repositioning is both appropriate and
successful. CCUA and its purpose, particularly its advocacy role, is best served through maintenance of
independence from many of the second tier operations that will be subject to regulatory oversight.
Improved Status Quo
The structure of the second tier has evolved organically over time in response to various pressures of the day.
Credit unions may decide that the current structure is sufficient to meet their needs, or that agreement on more
substantive change is not politically feasible. In any event, in the absence of agreement on a longer-term vision,
the system will continue to evolve incrementally as circumstances warrant. A number of initiatives are currently
underway, and various entities or parts of the system may identify other critical changes that should be a priority.
Over time, additional consolidation among the centrals and other shared services is likely to take place.
Relying on an incremental approach to allow the credit union system structure to evolve organically is the default
option, and of course the easiest. It fails, however, to proactively address the competitive pressures that have led
to the bifurcation of the system or the change drivers that predict a more pressing need to reconsider system
Consolidation of the Second Tier by Function
One possible conceptual structure for the second tier would be one where centrals and other shared services
organizations are restructured along functional lines to create a set of national credit union-owned support
organizations by business line, as pictured in Figure 7.
Figure 7 – Consolidation by Function
Some elements of this structure are already under development. Projects contemplating the formation of PayCo
and SettleCo are underway, and early discussions have occurred regarding the potential formation of FinCo
(Concentra and Central 1 wholesale finance functions). Also, the Central 1 2014 Green Paper had suggested
consolidation of system wealth management companies into Wealthco. Although there is some momentum, full
realization of this structure will not be easy to achieve. Provincial regulators may require, for example, that
liquidity continue to be pooled and managed provincially, and the complex linkages between liquidity, payments
and settlement would need to be resolved to the satisfaction of all stakeholders.
The benefits of a consolidated-by-function structure would be that it would provide credit unions with direct
ownership over a reduced number of shared services organizations. The number of independent boards would
be reduced from approximately 30 to six (excluding CCUA), and these boards would be directly controlled by
credit unions rather than through intermediaries. The structure in theory should be more efficient than the current
state, as it involves some consolidation among a number of organizations and would reduce to some extent the
duplication of management, corporate offices and technology infrastructure.
The shortcomings of the structure are that it would not drive integration of services across product lines. Credit
unions need to offer integrated banking, payments, and wealth management services to members in order to
better serve members, to grow and to improve wallet share and non-margin income. This structure preserves a
siloed approach that would not support optimal integration or strategic alignment, as it would be more difficult to
achieve a coherent and aligned strategy among the independent organizations if they were managed and directed
by separate boards and management groups. It also leaves efficiencies on the table by not fully consolidating
executive management, corporate services and technology across the second tier, and it limits the extent to which
data, the modern era’s gold, can be integrated for analytical purposes.
Full Consolidation and Integration of the Second Tier
The credit union system could conceptually achieve a much greater level of integration and efficiency by
consolidating all of the shared services organizations under one corporate structure, as pictured in Figure 8. This
could be achieved by establishing a credit union-owned company with one board of directors, executive team and
corporate services infrastructure, which could operate the various business lines as separate divisions.
WealthCo, depending on how it evolves, may only be partly owned by the English speaking credit union system,
in which case it would require its own board of directors, but could potentially use the same corporate office and
Figure 8 – Full Consolidation and Integration
This structure would enable easier, more effective, and more integrated governance by credit unions. It would
improve integration of services across product lines, and could better help credit unions in providing their
members with cohesive banking, payments, and wealth management services. It would improve coherence and
alignment of strategy, as the various business lines would be directed by a common board and be accountable to
one executive group. This structure maximizes potential efficiencies by fully consolidating executive management,
corporate services and technology platforms across the second tier. It also maximizes the extent to which data
could be integrated across the system for analytical purposes.
The obvious drawback of this structure is that it would be much more challenging to put in place. As a large,
integrated organization, it would also have less focus than separate organizations. This structure could also raise
concerns among regulators, due to the comingling of commercial operations with liquidity and settlement
functions, and those concerns would need to be resolved. Currently, all indicators point to Provincial regulators
requiring that liquidity continue to be pooled and managed provincially. Development of segregated, or “in trust”,
structures may accommodate this need.
While Figure 8 describes one consolidated company structure with common governance and management, a
hybrid between this and the previous option could be a holding company structure, with each of the business lines
held as a separate wholly-owned subsidiary of the credit union-owned holding company. These subsidiaries
could share a common board with the holding company to ensure strategic alignment, and could also share
corporate offices and management. This structure would still have the benefit of strategic alignment and
efficiency. It could also address potential regulatory concerns with comingling mandatory liquidity and other
commercial activity, and would enable non-regulated services to be housed in non-regulated corporate structures.
Federated Model
Desjardins has achieved remarkable success in the Quebec market by using a federated model that produces a
very high level of integration throughout the back office, which also spills over into the front office. Desjardins’
model takes integration to a higher level by using a top-down approach to impose consistency of product, process
and even brand, leaving individual credit unions (caisses) to focus exclusively on member service delivery
This structural option clearly illustrates the market success that can be achieved by cooperative financial
institutions when they effectively integrate their service offerings. The Desjardins model involves second tier
operations more directly in the retail operations of the caisses and this would need to be considered in the
evaluation of this option.
First Tier Integration
As bifurcation in the Canadian credit union system continues and credit unions keep amalgamating into larger
organizations, one must wonder: where will it end? Other countries that have seen successive waves of
consolidation in their cooperative financial sectors have produced a range of different end states. The
Netherlands provides an example of the most integration, where virtually all cooperatives merged into one
organization that internalized all of the required core competencies previously found in the second tier. Other
European countries such as Germany and France have seen somewhat less integration, whereas Australia has to
date seen significant consolidation in the first tier, but separate support organizations, predominantly focused on
payments and technology, remain.
These examples serve as a good reminder that structural transformation is more likely to be an ongoing journey
than a destination. In fact, the term “end state” is likely not appropriate in the above descriptions, as change is an
enduring certainty.
Each of the foregoing structures have both pros and cons and each requires further analysis within the context of
credit union needs and ongoing financial sector challenges and opportunities.
In the absence of a long-term vision for the desired second tier structure, the existing structure will continue
evolving incrementally and organically over time. There would be benefit in the credit union system taking a more
deliberate and coordinated approach to planning system structure. Developing a vision for the future functionality
and structure of the system would increase the likelihood that future initiatives and transactions will be aligned to
create the structure that is best able to meet credit union needs.
There are a large number of stakeholders that would need to be involved in such a process, and the design
challenges would undoubtedly be substantial. The most important stakeholders, however, are credit unions.
Credit unions would need to believe that there are better ways to provide effective governance over their second
tier shared services than the current disjointed approach, and that an effective governance model can be
developed to meet their needs.
It is recommended that this is a discussion that the credit union system should have now. It is also
recommended that the credit union system not lose the momentum already underway in the current initiatives.
The following questions are provided as a means of initiating the recommended discussion:
1) Would credit unions agree that the sole purpose of centrals and affiliates should be to support credit
union success? To what extent are centrals and affiliates collectively delivering on that mandate today?
2) What are the biggest challenges with the current structure of the second tier of the credit union system?
All things being equal, are these challenges likely to get better or worse over time?
3) What are the most significant needs that credit unions have of their centrals and other support
organizations to be successful in the future? To what extent will future needs differ from current needs?
4) How important is it to discuss and attempt to define a vision for future structure of the second tier of the
credit union system?
5) What are the risks of allowing the structure to simply evolve over time?
6) What would be the biggest obstacles to designing a future structure?
7) How should credit unions, centrals, affiliates, partners (e.g., Desjardins, Cooperators) and other
stakeholders (e.g., regulators) be engaged in discussing the future structure of the second tier of the
credit union system?
8) What principles should guide the design of a future state structure?
9) What are the success criteria for a second tier structure?
10) Are any of the described conceptual long term structures for the second tier undesirable, unrealistic or
9. APPENDIX A – Comparative Ratios
Financial Margin (% of Avg Assets)
Other Income (% of Avg Assets)
Operating Expenses (% of Avg Assets)
Source: Credit Union/Caisse Populaire Information Survey, Credit Union Central of Canada
10. APPENDIX B – Payments Ecosystem
Source: Central 1 Credit Union