Size does matter.

One of the busiest businesses this province has seen in the last two or three years is the one responsible for changing the signs at local credit unions. The mergers and amalgamations that have become synonymous with the province's credit union system have resulted in two things: bigger credit unions and a drive for brand recognition that has included the purchase of naming rights for some of Saskatchewan's biggest venues.

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The history that led up to the rash of mergers in this province can be traced to the national scene and a wholesale rationalization of the Canadian financial sector.

First it was the elimination of the traditional pillars of the financial community--insurance, banking, brokerage and trust services--as the lines between financial institutions all but disappeared. The crumbling of these so-called pillars, the rules that kept each distinct, allowed chartered banks to buy brokerages, insurance companies to venture into banking while trust companies pretty much vanished. Underlying the drive towards industry consolidation was scale.

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One element, new technology, necessary but expensive, meant these organizations had to expand to fund the tech purchases.

Secondly, a push towards consolidation and mergers in the international financial sector that meant Canada's financial industry had to keep pace. And, while the federal government has not approved mergers among the banks since the days when venerable firms such as the Bank of Commerce and Imperial Bank came under one roof, Ottawa was more amenable to the idea of clearing the way for these players to diversify beyond their traditional pillars. And the industry seized the opportunity.

On a regional level much the same thing has transpired.

At one time, for example, credit unions, which operate under provincial legislation rather than the Bank Act, were prohibited from venturing beyond their traditional roles of deposit taking and lending. However, years of debate ultimately led to the province dropping its opposition to credit unions owning shares in insurance brokerages and the local financial co-ops were soon acquiring local insurance agencies. Unlike the banks, though, the credit union system in this province was not precluded from merging and merge they did.

In the past few years, the names of dozens of local credit unions have changed to reflect their new structures. And none was more visible than Regina-based Conexus Credit Union with roots in the Sherwood Credit Union. Its rapid expansion included mergers of CUs from Assiniboia in the south to Moosomin on the east and Prince Albert in the north. Today, Conexus has an asset base of $3 billion, roughly one-third of all credit union assets in the province, and one-in-six Saskatchewan residents are members.

More recently Saskatoon Credit Union merged with Shellbrook and Langham Credit Unions to create FirstSask.

"This has been going on since the '60s so this is nothing new," says SaskCentral CEO Sid Bildfell. "Maybe it's picking up speed."

Two years ago Affinity Credit Union was created through the merger of PAGE, Sask Valley and St. Mary's credit unions. Last year Eastshore and Kamsack were added and this year Kenaston, Lintlaw, Milestone and Prairie Diamond joined in.

"At its very core," Affinity General Manager Mark Lane says of mergermania, "it has everything to do with meeting changing member expectations." A dozen years ago, he adds, the typical credit union's business was comprised of taking deposits and making loans. Today, wealth management and providing advice have supplanted traditional functions which have, in large measure, become commoditized.

"Advice givers are more expensive and you can't afford to deliver that on a small membership base," Lane observes.

While acknowledging that regulatory changes may have influenced merger decisions, the real factor driving the process is the need to achieve a larger scale of operations. "Members want advice right in the branch or they'll go somewhere else. You need to leverage a large enough membership base to afford that expertise."

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Bildfell, who heads the system's central support organization, says demography has been giving the process some momentum as well. As population shifts from rural to urban centres, smaller credit unions simply can not afford to keep up with the changing demands of the market.

"The make up of the province is certainly driving it. As we look at population shifts, smaller towns had trouble attracting talent," offers Bildfell, adding that the merger process has allowed smaller communities to retain the credit union footprint, complete with its expanded services, while management can be delivered from larger, centralized operations.

The rash of mergers in recent years may not be new but it certainly has become far more noticeable, something that Lane attributes to the fact that credit unions have undergone name changes, a development that has caught the public eye. He notes, for example, that Affinity's forerunners went through their first merger in 1995, so the concept is not new. And, while names have changed, service levels haven't.

In 2001, Saskatchewan had 130 credit unions. Today there are 70. But the number of service locations today is 320 compared to 330 in 2001.

University of Saskatchewan Agricultural Economics professor Murray Fulton has watched the co-operative sector for years. He too points to the need for financial institutions to increase the scope of their business to achieve efficiencies as the driving force behind mergers.

"There's clearly a real benefit in terms of your cost structure," offers Fulton while noting that the entire financial industry, not just the credit union system, is headed in that direction.

"We're starting to see that now," says Bildfell. "Once you've got your original amalgamation costs behind you on your income statement, we see the efficiencies."

Democracy

A hallmark of the credit union movement is its democratic governance structure--one member, one vote with serious emphasis on grassroots involvement of its owners who are called members, not shareholders, purposely. The mergers have led to changes here too.

For example, Affinity's Lane says, "credit unions have continued their grassroots connection by doing regional representation."

In Affinity's case, seats on the board of directors are now allocated on the basis of the number of members in a specific region. Further, community councils are appointed to "provide another grassroots connection. They spend out budget for community-based initiatives" in their own regions.

Bildfell also says the central body has changed its voted and governance practices to reflect the shifting population trends and the changes brought about by these mergers.

Market Share

Professor Fulton says the system appears to have found the key to maintaining members' loyalty in the face of changing service delivery models, pointing to the success of the credit union system in holding market share when addressing this aspect of the merger trend.

"The credit unions have managed to hold on to a substantial portion of the mortgage market and the land market. What's enabling them to do that? Obviously good service plus the local element of having your local credit union."

He points to the debate spawned in the late '90s by the prospect of bank mergers. The visceral response we saw in many parts of the province, a backlash against allowing banks to get bigger and more powerful, offers Fulton, is something the credit unions have been able to capitalize upon.

"We are seeing increased market share," Bildfell confirms, adding that the rate of that growth is slowing as the system garners a larger percentage of the overall market. Nonetheless, he says that competition from new players such as virtual banks means customers have a broader array of options.

"There is something in the marketplace they've been able to tap into that other financial institutions haven't been able to," asserts Fulton.

"At what point, as we go through these mergers, do the credit unions lose that edge?" he asks. "There seems to be no sign of it yet. It is about how well they keep in touch with members cast over a larger and larger area."

Bildfell notes that the larger credit unions have begun to create subsidiaries that have branched out into new business lines including mortgage brokerage, insurance and even real estate brokerage.

While some restrictions on how the credit unions deliver these services, targeting practices such as 'tied selling' remain in place, there is no doubt that the credit union presence is penetrating the Saskatchewan marketplace more widely.

"That (diversification) certainly has helped us in terms of market share," Bildfell offers but, with this success, Fulton believes credit union boards and management must constantly ask themselves: "how do you give a sense of being big and modern and, at the same time, locally driven? That's an interesting balance."