The ever-present threat of taxation, a growing regulatory burden, higher board expectations, and legislation affecting interchange fees—the list of challenges facing U.S. credit unions gets longer every day.
There are lessons to learn, however, from credit union movements beyond our borders. In terms of many of the critical issues U.S. credit unions now face, Australian and Canadian credit unions have “been there, done that”—and survived.
Credit unions in both countries have been taxed for decades, and yet they’ve learned to prosper. In Australia, credit unions have launched their first national marketing campaign, designed to increase public awareness and bolster credit union growth.
In Canada, regulators have embarked on a campaign to reduce competitive restraints by establishing national charters for institutions wanting to reach beyond provincial boundaries.
It’s true that both countries fared better than the U.S. during the recent global financial crisis. But financial institutions in those countries still operate within stringent regulatory environments that participants say—with the benefit of hindsight—have actually improved operational safety and soundness.
Australian credit unions have survived the regulation of interchange fees, and Canadian credit unions participate with retailers and consumer groups in a voluntary code of conduct designed to protect consumers from excessive interchange fees.
One of the reasons Canadian credit unions have survived the turmoil of the Great Recession is because they have carefully managed lending risk, says Don Rolfe, president/CEO of Central 1 Credit Union, Vancouver, British Columbia—the largest central credit union in Canada.
“Credit union CEOs and boards, encouraged by the regulatory environment, made prudent decisions,” Rolfe says.
Generally, Canadian credit unions are regulated provincially. Some centrals and other credit unions, however, are regulated by the federal Office of the Superintendent of Financial Institutions. The banking system is dominated by six major national banks. For the most part, these large banks also escaped the global economic turmoil, and Canada’s federal regulatory regime was given much of the credit.
Mortgage interest is not tax deductible in Canada, and the housing sector never saw the extreme bubble that grew in many U.S. markets. Conservative lending practices also helped restrain housing prices.
Canadian housing prices have largely recovered from the decline that occurred during the recession, and foreclosures haven’t been a major problem. While mortgage loans are an important revenue source for credit unions, delinquencies and foreclosures weren’t as serious as they were in the U.S., Rolfe says.
Strong governance was another factor that helped Canadian credit unions weather the recession. Management and boards are required to report on the risk factors they face, which means risk is carefully managed in Canadian credit unions, Rolfe notes.
Some provinces require credit union directors to take training courses to ensure they’re familiar with new developments in their credit unions and in the broader financial services industry. Many directors receive compensation for attending board meetings, and at some larger credit unions they receive a fixed amount per year in addition to a per diem allowance.
Compared to the U.S., there are fewer Canadian credit unions, and they tend to be larger. Among the 900-plus credit unions or caisses populaires across Canada, the 10 largest institutions hold 43% of the system’s assets.
As in the U.S., the number of Canadian credit unions has been in a steady decline as smaller credit unions merge to survive. The number of credit unions is expected to continue to decline. Most Canadian credit unions are community-based; only a few retain the employer-based charters that were common a few decades ago.
There is also merger activity at the provincial level among central credit unions. In 2008, the provincial centrals for Ontario and British Columbia merged to create Central 1 Credit Union. In January, the centrals in Nova Scotia, New Brunswick, and Prince Edward Island joined forces as Atlantic Central.
Lobbying and taxation
After several years of lobbying by credit unions, the federal government has decided to permit federally regulated national credit unions. This will let credit unions serve members wherever they live in Canada, making it easier to reach a mobile population.
A federal credit union will be regulated under the same rules that govern banks, not the provincial rules that credit unions now follow. Some provinces, however, have rules that are preferential to credit unions, so observers do not expect all credit unions to routinely embrace the federal option.
Encouraged by their success with the federal initiative, Canadian credit unions are placing a greater emphasis on lobbying provincial and federal politicians—a practice not common in the past—although their efforts are not as robust as in the U.S.
Unlike the U.S., Canadian credit unions do not expend a lot of lobbying effort on the taxation issue, because they already pay business income taxes, although at a lower rate than large banks.
Canadian credit unions have paid federal income taxes since 1971, when negotiations led to an agreement that they’d pay the lower rate small businesses pay, not the corporate rate paid by major banks.
Since then, income taxes have been viewed as another line item in operating expenses, not as a major hindrance.
Service and interchange fees
Canadian credit unions consistently outscore banks in customer service and in service to small businesses. They provide about 20% of the small-business loans under $500,000. Federally—and in some provinces—credit unions are lobbying governments for legislation that will make it even easier for them to serve business members.
In some provinces, credit unions work together on advertising programs that highlight the benefits of cooperative financial institutions and promote all credit unions as an attractive alternative to large banks. Those campaigns now include online and social media elements aimed at attracting younger members.
One example is the Be Remarkable campaign (beremarkable.com) in British Columbia. This program educates young adults about credit unions and shows how credit unions can help them achieve their dreams. The campaign recently made use of a Facebook page, where users could help decide which charities in their area received part of a $100,000 fund.
The credit union system uses an online banking platform developed by Central 1 that has consistently offered new services and innovations ahead of major bank competitors. It recently unveiled mobile applications that permit transactions and money transfers between consumers via smartphones.
Interchange fees haven’t been a major issue for Canadian credit unions, partly because most credit unions don’t hold Visa or MasterCard licenses.
The issue of interchange fees was raised by retailers and consumer groups. And, under threat of mandatory regulations, the industry agreed to a voluntary code of conduct designed to protect consumers from rising fees.
The Canadian debit card market has been dominated by a single nonprofit organization whose members include banks, credit unions, merchants, and payment-system providers. This domination, however, is being challenged as Visa and MasterCard move into the market with new debit programs.
Next: CUs Down Under