A Passport to Success : How Credit Unions Can Adapt to the Urgent Challenges They Face

Banking is the bedrock supporting all other Canadian industries. Without a robust, healthy banking industry, liquidity and investment in other industries will dry up. Stability is therefore a key pillar of financial sector policy. Regulatory barriers to entry have to a significant degree insulated the banking industry from competition from high-tech firms that transformed other industries such as newspapers, travel and entertainment. Instead, we have witnessed a much more gradual integration of technology within the banking industry, which has also contributed to the stability of the Canadian banking sector. This is likely to change. The technological evolution in banking is going to speed up exponentially. The difference this time is that the very infrastructure, systems and regulations upon which the movement of money in Canada depends is being pressed to join the 21st century. Billions are being spent by incumbent financial institutions and big technology companies. These changes will be unlike any we have seen in the past. The future of Canadian banking is about open banking, application programming interfaces (APIs) and artificial intelligence. Most credit unions outside of Quebec are falling behind when it comes to making the very significant investments required for the next decade. Technology and scale will be required for the most basic loans and deposits, as well as new products currently being developed. Those that don’t act quickly to acquire the required scale will be left behind. Outside of Quebec, credit unions run their operations on a myriad of different banking systems and serve their members through a wide range of partnerships, relationships and affiliates. They also have their own by-laws, regulations, policies and guidelines, which have been shaped and influenced by different provincial regulators. This fragmented system built around tight geographic borders is affecting the ability of provincial credit unions to acquire the required scale the industry will need to compete. This paper shows that most credit unions cannot shift from provincial to federal regulation and operate across the country, as permitted by 2012 legislation, and will be challenged to compete effectively as technology continues to grow. Is there a better way to adapt? An alternative path forward would be for provinces to institute a passport system. Such a system would allow credit unions to operate, serve members and grow across provincial boundaries. This would allow credit unions to gain similar benefits as those of going federal, while adjusting and harmonizing the regulatory environment in response to the particular risk profile of credit unions. The provinces could look at the passport systems in place in the Canadian securities industry and in European banking for inspiration and lessons learned on how to implement a similar regime for their credit unions. An opening of borders with a new cooperative approach to oversight, as well as efforts to harmonize regulations and thus reduce the likelihood of regulatory arbitrage, will allow credit unions and regulators to find the right balance between member services and efficient oversight