Murray Fulton, Brett Fairbairn, Dionne Pohler

Canadian credit unions are facing significant challenges as they attempt to reorganize to meet a rapidly changing economic, technological, demographic, and organizational environment. These problems have been well documented and can be found in reports by credit union organizations such as Central 1’s If now now, when? and in academic commentaries such as our recent blog post, “Credit Unions in Canada: Design Principles for Greater Co-operation.”

The challenges facing Canadian credit unions are not new. Here is what Jim Duggleby, editor of the Credit Union Way, said in a November 1987 editorial about the credit union system in Canada:

Individual credit unions may respond well to their local markets. But they have patched together a structure that prevents them from being a major national force in shaping both the market and the regulatory environment.

The point is that credit unions are faced with a decision. They have a right to be proud of what they have achieved in Canada. But today the competition is big, competent, and fast. It is dictating the environment in which credit unions operate. Credit unions might choose to be content with filling in the gaps. But if they want to continue to work towards becoming a major force in the financial market place, they have to invest money, manpower and commitment now.

Most importantly, they have to start speaking with one voice. They have to start competing with the banks, the trust companies, the financial conglomerates — not with each other.… As things stand, credit unions are too small and too fragmented to pose much of a threat to anybody. If that isn’t corrected soon, their ability to help somebody might also be impaired.

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And lest you think the problem is only thirty years old, consider the following excerpt from Credit Union Dynamics by Kent Francis, published in 1968.

With almost frightening speed, in the past two decades, the credit union movement has been splitting into two kinds of credit unions — the statics and the dynamics. The states of growth show a rapid flow of financial strength, expressed in volume of service rendered, toward one end of the credit union spectrum.

In short, a relative few of the credit unions are doing most of the growing. Millions of assets are piling up on the books of a small percentage of the credit unions.

This is not to say that it is only the big credit union that is dynamic. On the contrary, hundreds of credit unions with smaller potential numbers are doing a tremendous job of reaching towards saturation of service.

But the fact remains that, in any one province, a few credit unions aggressively strive towards maximum performance; the rest float, their growth an illusion created by the growth of the economy in which they operate.

Interdependence is the basic law of life for the credit union movement.

Today multiple pressures surround credit unions. The pressure of competition becomes more and more intense. Legislative attacks have to be beaten off.

Such is the nature of the free, competitive economy in which we live.

The fact that both of these quotes are as applicable today as when they were written thirty and fifty years ago might suggest that credit unions will never become major players in Canada’s financial system. The banks are simply too large and powerful, something that has not changed in decades and is unlikely to change in the future.

There is, however, another interpretation. The problem facing Canadian credit unions may actually be deeply structural and lie within the credit unions themselves. The first paragraph of Duggleby’s quote highlights the key problem — “Individual credit unions may respond well to their local markets. But they have patched together a structure that prevents them from being a major national force in shaping both the market and the regulatory environment.” The same problem identified by Francis — too much focus on individual credit union autonomy and not enough on their interdependent nature — is at the heart of the challenges facing credit unions today.

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Evidence for this interpretation can be found in a comparative analysis with the Co-operative Retailing System (CRS). The CRS — made of up almost two hundred local retail co-ops across western Canada and their wholesaler, Federated Co-operatives Limited (FCL) — also struggles with increasing competition and environmental volatility. Unlike the credit unions, however, the local retail co-ops have recognized their interdependence and developed a cohesiveness that allows them to work with each other through FCL to address their ongoing challenges.

Fulton, Fairbairn, and Pohler also arrive at this second interpretation in their recent report, Credit Unions in Canada: Design Principles for Greater Co-operation, where they argue that the relatively independent entities making up the system must give up some of their autonomy in order to achieve the efficiency required to survive and thrive in the financial services sector.

Giving up this autonomy is difficult — indeed, it is the difficulty in doing so that has resulted in the system being locked into the straight jacket that Duggleby and Francis highlight. As Fulton, Fairbairn, and Pohler note:

The consolidation of the credit union system is ultimately a problem of governance. Unless a governance structure is found that fosters shared norms and values in addition to economic benefits, it is unlikely that credit unions as a 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.

A change to the system’s underlying governance and structure is as necessary today as it was half a century ago. Canada’s credit unions need to find a way to work together to survive, which can only happen if they are able to build the trust and legitimacy necessary to redesign how they interact with each other and make decisions at the system level. Doing so first requires credit unions to recognize their fundamental interdependencies. Credit unions that think they can make it on their own do so not only at their own peril, but at the peril of the system as a whole.

Murray Fulton, Brett Fairbairn, and Dionne Pohler are fellows at the Centre for the Study of Co-operatives

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