If Not Now, When?

Murray Fulton and Dionne Pohler


Dionne Pohler

Murray Fulton

The question posed above is the entirely appropriate title of an October 2016 report by Central 1 on possible futures for the centrals in the Canadian credit union system (read the report here). As the report indicates, low margins, increasing competition, rapid technological change, increasingly diverse expectations for member services, and new and often unfavourable regulatory environments make it clear that the status quo is unsustainable and change is required at the second-tier level.

The problem facing Canadian credit unions is one that is familiar in other sectors. A good example is the electrical power industry, where changes in technology and customer demands require a major overhaul of the system so that distributed power generation can be supported while ensuring the cost savings associated with the close co-ordination of all the players — power users, power generators, and power distributors. Yet change is difficult, since it will leave some groups with stranded assets, a lack of influence, and/or significant investments that may be difficult to recoup. The trust and legitimacy that sustain current relationships will have to be recreated, a process that is costly and subject to substantial risk, particularly if a common vision of the future cannot be developed and embraced.

It is not surprising that the issues described above are the same ones facing the credit union system. Our research at the Centre for the Study of Co-operatives reveals three main challenges to the development of any sustainable governance system:

  • articulating a long-term vision
  • designing an architecture that secures the co-ordination and co-operation of sufficient players to achieve cost savings and information benefits
  • developing a governance framework that is perceived to be legitimate by the various players

The Central 1 report does an excellent job of portraying the importance of these three elements and nicely outlines their significance in the future system options identified in the study (there is a useful graphic illustration of these options on page 12 of the report).

  • A Status Quo Plus option that would continue the streamlining process currently underway in the second tier.
  • A Consolidate and Separate approach that would replace the current second tier with a series of national-scope, functionally defined entities that would service specific business areas.
  • A Consolidate and Integrate model that would replace the current second tier with a single, integrated organization with either divisions or subsidiaries to house business line programming while maintaining continuity between programs.
  • A Consolidate and Federate option that would integrate the first and second tier in a federated organization that would provide a full range of uniform services to credit unions, which credit unions would then provide to their members.

The report is correct in stressing the importance of information exchange and co-ordination costs in these options, and it rightly emphasizes the lack of credit union support for some of the alternatives.

The report, of course, is silent about the precise ownership and control structures that would address the three sustainable governance issues. As the expression goes, “the devil is in the details.” The details matter because they determine how authority and influence are allocated across the various players, and how the benefits and costs are distributed. From the vantage point of our research, working out the details requires that appropriate compensation be provided to the players who are stuck with costs, who need to make large investments, and/or who lose authority. Moving some functions to technical forums where they can be decided on less political terms will also be necessary.

All of these strategies carry potential costs, of course. To minimize these costs and to ensure the best chances for success, those designing the new system must rely on a mix of both extrinsic and intrinsic incentives — e.g., prices, rules, and responsibilities of system membership, along with the creation of a system identity. Without a system identity, the extrinsic incentives will likely not be up to the task of creating a second tier that is lean and low cost, offers exceptional issue responsiveness, and the strategic capacity to look into the future.* This is particularly the case since the credit unions also wish to maintain or enhance their control over the strategic direction of second tier programming and keep pace with disruptive technology and regulatory changes. While these requirements represent a tall order, they are necessary if the credit union system is to survive.

* Words in italics are direct quotations from the report.

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