Canadian Credit Unions Are Taxable AND Successful
By: George Scott, Principal, Level Five Strategic Partners, Inc.
For the scores of credit unions undertaking or contemplating a conversion
to a mutual savings bank, federal taxation tends to be the biggest
But the tax subsidy that all American credit unions enjoy has been
under attack by the banking community for years. And the passage
of time, or laws, may erode it or even eliminate it entirely. There's
growing political noise in Washington, DC, Alabama, Florida, California,
Texas, Iowa, and other states about stripping away non-taxable status
from credit unions - at least the larger ones.
Will that mean the death knell for credit unions? It doesn't have
to. Certainly, credit union bottom lines are thin, and there's little
room to pay new taxes. But when we look for reasons behind our less-than-stellar
market share, maybe the tax subsidy is part of the problem. For
a different approach, perhaps we should turn our heads north of
The Canadian credit union system, including the caisses populaires
in the province of Quebec, serves 11 million people - one-third
of the entire population. With $150 billion in assets, credit unions
collectively have become the sixth largest financial institution
in the country, serving just retail customers and small business.
And unlike their U.S. counterparts, which have a broad consumer
base but low wallet share, the collective market share of credit
unions in Canada ranges as high as 25% in the prairie provinces,
to 33% in British Columbia, to a whopping 50%+ in Quebec.
Canadian credit unions have been taxable for many years. And so,
unlike credit unions converting to thrifts, they don't think about
profitability in terms of having to make up lost ground.
The key to overcoming a taxation hit on the bottom line is not to
use the tax subsidy as a crutch in the first place. Don't just play
in the shallow end of the pool. U.S. credit unions need to move
away from a ''cheaper is better'' positioning. Unless you're
a buying and distribution powerhouse like Wal-Mart, which can keep
creating breathing room on the cost side, price is a loser's strategy.
It's too easily matched. It erodes profitability, and eventually
market share. If you're under-resourced to begin with, low pricing
is simply not a sustainable advantage.
The key to success for Canadian credit unions is strategy -- positioning
and marketing. They don't compete on price. They don't try to be
the place where someone can go for the lowest rate on a car loan
Since most are community bond, they don't have the cost advantages
that a lot of U.S. credit unions rely on -- in real estate concessions
or communication advantages from their sponsor organization. So
they couldn't play low-price leader if they wanted to.
But why would they want to? The kinds of customers attracted by
the best prices are often bottom-fishers, who will bail as soon
as a better offer comes along.
If you're always talking about price in your marketing, there's
also a tendency to draw the lower-income, lower-asset segment of
the market. Instead, send messages about service, product knowledge,
a sophisticated product suite, advice and relationships. Those are
the things that draw the better clients to credit unions, right
up to the mass affluent and even high net worth.
According to the Washington, DC-based Council on Financial Competition,
here's what banking customers say is important to them: recognition,
understanding my needs, advice, and personalized relationships.
If you think about the word ''Relationship'' in a human
sense, you immediately realize the essence of what makes a good
one. It's mutuality. That holds true for a husband and wife, or
best friends. Each partner has to get something out of the relationship
-- in the way of benefits -- in keeping with the effort they put
in. Otherwise, if it's too one-sided, then it's not much of a relationship.
And ultimately it's doomed.
From a business standpoint, the good news is most of your members
do want a relationship with you -- but not if it's just the credit
union that benefits.
For consumers, the keys to a relationship are:
- It's always going to be fair
- It responds to my needs
- I'm listened to, AND
- I'm valued.
Canadian credit unions have discovered that it's not so much co-operative
values that members care about - it's feeling valued.
There's no question they enjoy profit-generating advantages over
their U.S. counterparts, such as a wider ability to offer business
lending, mortgages, wealth management and insurance services. And
they can grow faster by raising extra capital through the issuance
of preference shares to their members - from a few hundred thousand
dollars' worth for smaller credit unions to tens of millions of
dollars for the big ones.
But with asset growth running at 20% or even 30% a year and ROE
in the teens, the leading Canadian credit unions are proving to
be scrappy competitors to Canada's biggest banks. They aren't handcuffed
by a tax subsidy, or resigned to deliver second-best services to
people motivated by co-operative values. They're fighting the banks
head-on for the best customers. And many are winning.
It's because they try to be better, instead of cheaper or different.
George Scott is a principal of Level Five Strategic Partners Inc.,
a consulting company exclusively serving credit unions in Canada
and the United States. Call: 888-311-3030, ext. 223; email: firstname.lastname@example.org
For more information about converting to a mutual bank charter,
contact Alan D. Theriault, CU Financial Services, 800-649-2741,
or email: email@example.com