Australian & Canadian CUs
Their recent challenges and innovative solutions can help U.S. CUs overcome similar obstacles.
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
CUs Down Under
Australia’s 104 credit unions are profitable and well-capitalized. They’ve held onto the bulk of their market share despite aggressive competition from the four major retail banks that dominate Australia. Much of their success is due to collaboration, as evidenced by the recent launch of a national television advertising and awareness campaign.
Australian credit unions were well-capitalized long before the recession hit. And when the economic crisis did hit, the Australian economy dipped into recession only briefly. The banking system remained stable due in large part to a stringent regulatory regime. Australian credit unions are regulated to the same standards as retail banks, and they saw only a brief period of downward pressure on profitability during the recession.
It’s the current state of competitive environment, however, that is testing the potential of the mutual sector, which includes credit unions and building societies.
The market share and power of Australia’s four major banks is so large and concentrated that policy makers are now advocating a competitive shake-up, and Australian credit unions are widely accepted as the viable alternative.
Confidence in the Australian mutual sector stems in part from the fact that credit unions hold an average capital ratio in excess of 16%, well above retail banks’ 11% average. A credit union in Australia is backed by the federal government’s AU$1 million retail deposit guarantee, just like the banks.
Credit union governance structures are the same as banks. Credit unions must have a minimum of five directors with an independent, nonexecutive chairperson. Directors must have a sufficient breadth of expertise, and they can be recruited externally. Directors also can be paid, but there are limits on end-of-service payment amounts.
Unlike U.S. credit unions, Australian credit unions do not have tax-free status—they’re taxed the same as banks, having lost their tax-exempt status in 1992. Many in the industry have been able to see the silver lining in the loss of their tax-exempt status, saying it focused the industry on becoming more efficient.
Overall, observers say Australian mutuals are well-positioned to ride the first of what should be many waves of pro-competition government reforms.
Branching and member engagement
There isn’t a single product offered by an Australian bank that a credit union does not or cannot offer. Following a recent agreement between the fourth largest retail Australian bank and a majority of credit unions, the consortium now operates the second largest ATM network in the country—known as rediATM—which is a merger of around 100 institutions’ ATM networks under a single brand.
The mutual sector, however, is not without its challenges, and how it deals with them will determine the extent of its gains from financial reforms.
The lack of branch presence, for example, remains a concern for many consumers. Australian credit union leaders look to their U.S. counterparts for lessons in adopting the concept of shared branching—seemingly an ideal fit with the expanded rediATM network.
Another challenge has to do with declining member engagement—once the hallmark of mutuals. There’s growing consensus within the industry that the larger, for-profit institutions are eroding the cooperatives’ service difference by investing vast amounts of money into community engagement strategies. Banks compete heavily on price, and are pumping significant resources into customer service and retention strategies.
Putting price and service aside, there are two other factors essential to credit union growth—innovation and staying true to core values. By collaborating, Australian credit unions are looking for new opportunities to engage with members in ways that retail banks could never hope to achieve.
Finding innovative ways to connect with members through core business aspects—such as new product development, service innovation, and community development—will go a long way toward maintaining the mutual difference.
To this end, Australian credit unions are leaders in the fields of green loans and special-purpose savings products. They’re beginning to offer virtual identity checks for new accounts, and they’re radically re-designing their branch networks.
Some credit unions, committed to social responsibility in their communities, are partnering with local government councils to offer low- or no-interest loans for essential household items in disadvantaged communities. The council provides the loan capital to the credit union, which in turn delivers the product. These programs have been shown to reduce crime, and delinquency rates on these loans are as low as 2.2%.
Along with their progress and optimism, Australian and Canadian credit unions continue to watch their U.S. colleagues closely. Just as we draw lessons from their experiences, they also look to developments in the U.S. to spark innovation. The U.S.—with the largest credit union sector in the world—remains vital to the future of a now-global movement.
Art Chamberlain is media relations manager for Central 1 Credit Union, Toronto, Canada.
Michael Muckian is director of marketing and communications for World Council of Credit Unions.
Daniel Newlan is senior adviser, policy and public affairs, for Abacus Australian Mutuals, which represents credit unions and building societies in Australia.
World Council of Credit Unions, the global trade association and development agency for CUs.