In the previous Insight, we noted that Central 1 was winding down their forge and Member Direct digital banking platforms. In the three months since October’s announcement alternate providers have stepped up their efforts to fill credit unions’ digital needs:
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• VeriPark added First West, Prospera, DUCA, and Coastal Community credit unions to the already-announced Beem 
• Temenos secured FirstOntario, expanding beyond their Saven subsidiary to cover the entire enterprise 
• ebankIT is gaining new customers through mergers 
• Intellect Design is currently converting Vancity’s platform
• Other vendors are exploring the feasibility of entering the market

​There are over sixty credit unions still on forge or Member Direct who have not selected or publicly announced alternate providers. Central 1 has committed to supporting a smooth (and potentially multi-year) transition. Supplier risk is extremely low. However, decisions will need to be made.

• ebankIT has secured approx. 1/3 of credit unions by assets
• VeriPark, Intellect Design and Temenos are each carving out niches
• Many large credit unions continue to develop bespoke solutions in-house
• Over a third of credit unions still need to announce where they are going post-forge/Member Direct
• This presents an opportunity for existing suppliers and new entrants
• Smaller credit unions may lack the resources and expertise to pick the right strategic partner

​For credit unions, this is a pivotal moment. Decisions made now will define your digital strategy for years to come. Suppliers should see opportunities in the untapped market – 60 credit unions and $50B in assets remain unclaimed. If you need a clear plan to succeed in this competitive environment, I can provide actionable, tailored advice. Reach out today to explore your options.

Canada's 100 largest credit unions comprise over $317B in assets and serve six million members. This is approximately 98% of the sector’s total assets (all figures Q2 2024).

Of this segment, ebankIT is the most popular digital banking vendor with an installed/announced base of 29 credit unions representing $117B in assets. Half of the assets are managed via direct relationships with ebankIT, with the other half provided via a service agreement with CGI (legacy Celero).

Second is VeriPark, with one live client and six more announced totalling $51B. Intellect Design’s Vancity win gives them $29B of assets. Rounding out the vendors is Desjardins Ontario’s AccèsD platform sourced from Desjardins Group, and FirstOntario’s Temenos. Meanwhile, eight credit unions in the Top 100 have chosen to deploy in-house digital banking platforms totaling $58B in assets.
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This leaves 53 credit unions on forge or Member Direct who have not publicly stated their conversion plans. Several RFP processes are known to be underway, both individually and in groups.

Beyond the Top 100 are an additional 80 or so credit unions, each less than $300M in assets. Forge and ebankIT are the most popular providers. Notably, all the small credit unions in Atlantic Canada source their forge platform via a group contract with League Data.
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For small and mid-sized credit unions, transitioning to a new digital platform can feel insurmountable. Resource limitations make it harder to assess vendors or make strategic decisions. Collaboration among credit unions, centrals, and shared service providers will be key to leveling the playing field. 

Digital banking is a critical technology for financial institutions. The digital layer sits between core systems and members. Digital platforms provide integration to key functionality like loan origination and payments, and generate critical reporting.

When evaluating vendors, start by asking these key questions:

• How will the solution improve the member experience?
• Is the solution built to support open banking and real-time payments?
• How easy are third-party integrations, and are partners already available?
• Is the solution scalable, flexible and customizable?
• Is the solution secure and compliant?
• What kinds of data analytics and reporting will be available?
• How complex and risky is the conversion process?
• How will the choice of vendor impact potential mergers?
• How much will the system cost to deploy and operate?

Some credit unions may also choose to develop and deploy systems in-house. Self-driving institutions must balance the ability to develop customized solutions with the cost, complexity and deployment risk of going it alone.

Central 1’s exit has opened the door for new providers to enter the market. In the past three months several existing providers and potential new entrants have explored the feasibility of providing an alternative. Is there a market?

The current situation is conducive to competition – with some qualifications. Over sixty financial institutions with a critical mass of $50B in assets are on the market. They could be joined by one or more credit unions currently using an in-house solution or who are unhappy with their current supplier.

To succeed a new entrant must be able to demonstrate superior functionality, reduced risk and/or lower price. Potential differentiators could include:

• Differentiating the credit union by building a new solution around open banking
• Customizing for specific credit union needs
• Offering a lower cost of operation for small credit unions

​Potential suppliers must also keep in mind that many credit unions looking for a new solution may end up merging into larger institutions with an established provider. Scale is also critical, as individual credit unions are unlikely to offer a compelling business case. Credit unions exploring options can offset this risk by going to market as a group, potentially as part of a larger infrastructure consolidation play.

​Shown below is a list of all credit unions over $1B in assets as of Q2 2024. Institutions who have publicly announced a change in vendors are listed.

​Change can be intimidating, but it’s also a chance to unlock new potential. Whether you’re exploring vendors, preparing for RFPs, or planning bespoke solutions, I can help your credit union stay ahead of the curve.

​Need help making strategic technology choices? Need to correct an error? Start the conversation by reaching out to me via email or on LinkedIn.

• Digital banking is a key area of uncertainty, transition and opportunity
• Open banking strategies are still in development
• Payment systems need consolidation
• Abundance of legacy cores and limited standardization makes scaling difficult
• Many credit unions are hesitant to procure technology as a bundled service
• Lack of centralized decision-making complicates modernization
• Huge opportunity for credit unions to build partnership-friendly infrastructure

What does this mean for your credit union? If you are a supplier, where are the opportunities? What’s coming next? If you are looking for unbiased support to answer these questions, let’s talk!

Core systems must have very high uptime and be hardened against cyber-attacks and data loss. Downtime for maintenance and upgrades must be carefully managed. Migrating a core banking system is expensive, complex and generally avoided wherever possible (ATB’s 2010 conversion to SAP took years to complete and cost over $300M). It’s not unusual for large banks to be running core systems that were originally built in the 1970s using Cold War-era programming languages and held together with duct tape.

Who’s who
Credit unions run an unusually large set of core systems. Large credit unions generally operate Temenos Transact (aka T24), or older cores such as Ovation or Wealthview. Fiserv’s DNA platform dominates in the small- to mid-sized segments, either provided directly to credit unions or rebranded under CGI’s (nee Celero’s) eroWorks platform. Smaller credit unions can run one of these platforms or a niche core such as Smart Solutions, Infonantial or CGI’s RFS. Most Atlantic credit unions run CGI’s Horizon via League Data, which is in the process of converting their clients to Mambu.
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Financial institutions must occasionally replace obsolete, end-of-life or severely underpowered cores. This gives an opportunity to start from scratch and consider innovations such as cloud-based or multi-tenant solutions. In the last decade or so several credit unions have converted to Temenos, while others have adopted Fiserv DNA.
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Credit unions may choose to run their cores in-house, but many also rely on providers such as CGI and Telus to keep the systems running and kept up to date. League Data provides a third model, where core and other systems are wrapped up in a unified IT-as-a-Service offering.

Key issues for credit unions

• CGI’s post-Celero acquisition plans for Fiserv DNA, RFS and Horizon
• Ability to integrate real-time payments, open banking and third-party applications
• Cost and complexity of operating, maintaining and upgrading legacy systems
• Provider’s ability to keep software competitive and up to date
• Cost and complexity of core banking replacement
• Integrating data from merged-in credit unions

Who’s who
Many credit unions have relied on Central 1’s Member Direct platform for online banking. MD was developed by Vancity in the 1990s and licensed to C1. MD provided a critical interface between a standardized online banking environment and the hundreds of core banking systems in use across the country. As digital needs progressed it became apparent that MD needed replacement. Central 1 responded by creating the Forge platform, originally in partnership with Backbase. Despite a number of credit unions successfully converting to Forge, high development costs and architecture issues resulted in Central 1’s decision to discontinue to the offering. Central 1 has promised a smooth transition to other providers. Credit unions on MD or Forge must now decide where to go next.

After Central 1, the next largest provider of digital banking solutions to Canadian credit unions is Portugal’s ebankIT. The platform is deployed directly by credit unions such as Coast Capital (rated the #1 digital credit union experience by Serviscor), and Conexus. CGI (née Celero) also deploys ebankIT for their clients under the Celero Xpress brand.
A more recent entry to the increasingly crowded space is VeriPark. A Microsoft-partnered global provider, VeriPark is live at Innovation Federal Credit Union and is in the process of converting Beem Credit Union. Vancity, meanwhile, is the first Canadian credit union to adopt Intellect Design’s MachAI platform. FirstOntario Credit Union, which already uses Temenos as their core provider, is live on Temenos Infinity.
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Other credit unions have developed and maintain in-house digital banking platforms. This provides opportunities for customization but can be expensive and complex for individual credit unions to maintain.

Key issues for credit unions

• Conversion process from Forge/Member Direct to new platforms
• Market fragmentation across multiple platforms
• Ability of third parties to integrate products and services
• Member experience and omnichannel integration
• Ability of vendors/in-house teams to build/maintain/evolve digital platforms

Loan Originations Systems (LOS) manage member on-boarding, know your client (KYC), anti-money laundering (AML), loan terms and conditions, rates and other details. The LOS stores electronic versions of loan documents and connects to the core system for recording balances and payments. Key LOS providers to credit unions include Alberta-based Thirdstream, nCino, Valeyo, ASAPP and Finastra. Core providers may also offer LOS functionality as an add-on.

Keeping track of digital documents is a critical activity for credit unions. Popular enterprise content management systems include OpenText’s Documentum, Oracle NetSuite and Microsoft SharePoint.

Storing member information, running marketing campaigns and reporting are handled by the Customer Relationship Management (CRM) System. Salesforce and Microsoft Dynamics 365 are popular credit union choices. These are often linked to Business Intelligence tools such as Tableau.

Credit unions also deploy a range of back-office services for functions like IT automation. Mulesoft is one such provider.

Key issues for credit unions

• Capabilities of third-party systems
• Ease of integration
• Ability of providers to maintain/upgrade systems
• Member privacy and cybersecurity

Central 1’s payments solutions group also offers bill payment, Interac eTransfers, cheque clearing and wires for credit unions and small banks. Some credit unions get these services via the Prairie Payments Joint Venture, while others connect directly to Interac and/or use 3rd parties such as BMO or Telus for bill payments and business tax remittances.

Some important payments assets are owned collectively by the system. Most notable is an ownership stake in Interac Corp. These assets are held and managed by CUCC.

Payments modernization is a major driver of cost and complexity. Credit unions must keep up with regulatory and industry changes such as Payments Canada’s Lynx and Real-time-Rail. Central 1 uses Fiserv Dovetail for some modernization services while the PPJV has contracted with IBM. Notably, credit unions split their ~5% transaction share between two services, while the big banks achieve scale by combining their massive volumes in joint ventures such as Moneris (RBC/BMO) and Symcor (RBC/BMO/TD).

Debit cards and ATM access are primarily managed by system-owned Everlink, while some credit unions source from Cardtronics. Credit unions share their ATMs via one or both of Ficanex’s Exchange Network and ACCULINK. This results in some degree of member confusion and higher operating costs.

Most credit unions source their credit cards via Desjardins subsidiary Collabria. Three credit unions issue their credit cards directly and one issues cards in partnership with Brim Financial.

Key issues for credit unions

• Loss of scale via multiple providers / direct connections
• Ongoing operating losses at PPJV
• Access to new payments networks, particularly Real-Time-Rail
• Payments integration with digital banking platforms
• Sourcing of competitive payments loyalty programs

Open banking creates a range of strategic challenges and opportunities for credit unions, but there are also practical considerations. Participating credit unions must be registered with the FCAC, adopt certain privacy and security standards and provide API connectivity to their digital and core banking systems.

Who’s who
Several vendors have stepped forward to enable open banking capabilities. Caspian One has the endorsement of the Large Credit Union Coalition, Central 1 and several large credit unions. Flinks has also been approved by Central 1 and individual credit unions. CGI is expected to provide a solution for their customers, and other vendors such as Symcor may come forward. How these providers will work together or compete against each other is still under development.
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Key issues for credit unions

• Achieving scale across multiple providers
• Ability of core and digital systems to support open APIs
• Cost and complexity to build/maintain API connectivity
• Organizational ability to leverage open banking market opportunities

Public cloud adoption is far from universal. Private cloud, hybrid cloud and colocation hosting services are provided by IBM, Telus, CGI and others. Some credit unions continue to operate systems in-house in raised floor facilities. Twenty years ago it was not unheard of for small credit unions to be running their cores out of a basement closet, but those days are (or at least should be) long gone.

Key issues for credit unions

• Security and resiliency of critical systems
• Business continuity and disaster recovery
• Cost of delivery
• Ability to connect multiple systems via APIs

RBC, for example, was recently ranked #3 globally for its “outsized team focused on AI-specific Software Implementation and AI Product Management… Most importantly, the bank excels in AI-specific Research citations, Patent citations, and participation in Academic Conferences—underscoring a quality over-quantity approach that bolster’s the bank’s outsized influence.”
The Canadian Credit Union Association has introduced training programs for AI. Some credit unions are developing in-house AI business intelligence capabilities, while other have partnered with fintechs such as JUDI.AI.

Credit unions will need to rely on delivery partners and pool resources where possible. This is complicated by the variety of systems and solutions currently deployed, and limited collaboration infrastructure.

Key issues for credit unions

• Staying current with competitors and consumer expectations
• Ability of existing systems to integrate AI capabilities
• Ability of technology partners to deliver sustained AI innovation
• Collaboration to share best practices and achieve economies of scale

The most significant collaboration body is the Large Credit Union Coalition. Credit unions do collaborate in procurement, such as for core banking services or credit cards. However, technology decision-making remains concentrated at the individual credit union level. This results in a lack of standardization and loss of effective scale.

Credit unions also tend to source their technology from multiple providers, vs a “Bank-in-a-Box” model that delivers the back office as a unified service and offloads significant overhead. This model is deployed to great effect by Desjardins, where each caisse populaire benefits from a standardized and scaled technology stack.
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Lack of consistency also provides significant barriers for potential delivery partners. While credit union volumes are attractive in aggregate, requiring individual contracts limits most suppliers to a top-5 or top-10 strategy. As the sector continues to bifurcate, it will be increasingly difficult for smaller credit unions to access technology innovation and maintain competitiveness.

​Uncertainty over the future of digital banking, open banking and payments presents a challenge, but also an opportunity. If credit unions use this generational change to leverage scale they will have the chance to drive down costs, deliver enhanced functionality to members and make it easier for partners to integrate services that enhance credit union differentiation.

Let's chat!
Want to discuss credit union technology strategy in greater detail? Start the conversation by reaching out to me via email or on LinkedIn.

After dropping to a pandemic low of 2.45%, Canada's prime rate rose dramatically in 2022 and 2023. Banks and credit unions started 2023 at 6.45%, rising to the current 7.2% in July. This uptick has resulted in mortgages crossing the 7.0% posted and 5.49% discounted level. However, the speed of this increase was rapid. Many financial institutions are still carrying a lot of five-year fixed mortgages in the 2-3% range.

Savings rates have also increased, but with shorter durations their impact has hit income statements much faster. Many credit unions have been issuing HISA teaser rates, GICs and investment shares in the 5-6% range. When short duration borrowing is higher than long-term lending, loan books can quickly get out of balance. This is particularly true in institutions that are highly reliant on five-year fixed retail mortgages for the bulk of their loan portfolio. Many credit unions have also increased allowances on their portfolios in anticipation of future defaults.

The other major impact has been inflation. The Consumer Price index rose 6.8% in 2022 and 3.9% in 2023, the two highest years since 1991. This has driven up the cost of supplies at a time when many credit unions have expanded their workforces to develop new products and drive digital transformation.

One bright spot for credit unions has been non-interest revenue from fees, commissions, advisory services and financial instruments such as securitization. In the three example credit unions shown below, non-interest revenue increased. This provided an important buffer against interest rate shock. However, most credit unions lag their bank peers in share of revenue from non-interest sources, limiting the impact.

Finally, credit unions had varying success organically growing their assets and membership. Those who were able to stick to their growth strategies. despite the market disruptions tended to fare better.
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Let's take a look at how this played out under the three main scenarios.

Some credit unions managed to stay on track in 2023. One good example is Servus Credit Union in Alberta. Total revenue grew by 4.3%, including a 9.5% increase in net interest and 9.2% increase in fee income (offset slightly by higher allowances). Expense growth was limited to 6.6%. Meanwhile assets grew by 11%. The net effect is a 2.8% drop in earnings before taxes and dividends, which was quite impressive considering everything going on.

How did Servus achieve these results? Servus took difficult steps to reduce personnel costs and find other efficiencies in 2022. These moves paid off in 2023, as Servus was able to keep costs increases below their peers. Another is that 27% of their revenue comes from non-interest sources, one of the highest in the system. This provided an important buffer to interest rates.

However, the most important factor was Servus' ability to manage their loan book. Servus operates a diversified portfolio of 51% residential mortgages, 42% commercial and 7% consumer lending (net of allowances). The $160M acquisition of a leasing company also helped boost numbers. NIM stayed essentially unchanged at 2.3%, while net income before allowances grew from $419M to $459M.

​On the deposit side, member deposits increased by 9.1%, primarily via term deposits and registered plans. While term deposits are expensive, Servus did not go after rates as aggressively as some peers. Critically, $8B, or 48% of total deposits, is held in demand accounts that pay a much lower interest rate. The net result is that Servus was able to dodge the worst of the rapid rate increase.

Note that Servus has an October year end while most credit unions go with December. However, their Q1 2024 performance shows that they are still on track so timing alone does not account for Servus' strong performance.

Not everyone was as lucky as Servus. Most credit unions struggled to manage both rising costs and a difficult lending environment, finishing the year with reduced profit but profit nonetheless. Meridian is a good example of this cohort. After two very strong years, in 2023 Meridian saw its earnings before interest taxes and distributions drop from $224M to $90M. That drop looks big on paper but does represent a return to their 2019-2020 earnings range.

Like Servus, Meridian benefited from stable fee revenue, but at $93M this was only 19.5% of net revenue. Costs grew by 10%, with particularly large increases in salaries and administration. However, coming from a 61 efficiency in 2022 Meridian was better able to absorb the shock. Allowances and other adjustments also caused a negative variance of over $60M.

Unsurprisingly, the main difficulty was lending. Meridian's portfolio contains a slightly higher share of residential mortgages than Servus, at 57%. It also competes in the more competitive marketplace of Southern Ontario. This likely limited Meridian's ability to raise rates with the market. Meridian also had to deal with a more expensive deposit book, with 37% in term deposits and 63% in term and registered. As a result, NIM shrank from 1.8% to 1.5% and net interest revenue fell from $451M to $415M.

One other item to note is that Meridian has $765M of investment shares outstanding, representing 44% of Meridian's total equity. These generated $34M in dividends in 2023 ($9.9M in cash, the remainder reinvested). Meridian counts these dividends as member distributions after Net Income and not an interest expense.

Did Meridian have a great year? Not compared to 2021 and 2022. But they also stayed on track and avoided a much worse result. Previous efficiency efforts helped Meridian stay in the black. Meridian is in a good position to recover going forward.

Finally, let's look at the third group of credit unions - those who were hit hard by economic conditions. Vancity is an example of this category. Vancity's assets grew by 1.9%, but cost increases and shrinking interest income took their toll. Net income before interest taxes and distributions dropped from $112M to a loss of $3M. As a result, community and member distributions (which Vancity records below EBIT) dropped from $24M to $3.7M.

Vancity's experience outside of lending was similar to Meridian's. Net fee income grew slightly, but only accounted for 23% of total revenue. Expenses rose by 10%, also mainly via salaries and administration. Unfortunately, Vancity's 80 efficiency in 2022 made them more susceptible to this increase. Allowances and adjustments took a $37M unfavourable swing. 

The big challenge for Vancity was the loan portfolio. Residential mortgages comprise two thirds of Vancity's loan book (65% before allowances). Vancity also operates in the highly competitive Lower mainland, requiring aggressive mortgage pricing. Vancity's business portfolio is very high quality, with only 1.1% of loans considered High Risk. The trade-off is a limited ability to extract higher rates. On the deposit side, Vancity did benefit from 43% of its book coming from demand deposit accounts. 

Morningstar noted these challenges in April when they confirmed Vancity's rating at R-1(low) but moved the trend to Negative. "The trend change to Negative from Stable reflects Morningstar DBRS’ assessment that Vancity’s profitability prospects and earnings capacity to absorb potential credit losses have weakened, which poses downside risks to the credit ratings... Vancity’s profitability will likely remain under pressure in 2024 and most of 2025, potentially reverting to the historical trend in 2026 as market conditions improve and loans reprice."

Vancity had a tough year, but they are going to be fine. Can the same be said for smaller credit unions in the "challenged" category with less resources and resilience? 2024 will be a critical test.

Each credit unions is unique, and each experienced rising rates in different ways. However, there are four key take-aways that apply across the system. These strategic imperatives are:

1. Fix mismatched loan durations
2. Diversify loan books
3. Grow non-interest revenue
4. Get serious about costs

1. Fix mismatched loan durations
Credit unions need to understand the specifics of their loan books, and how they will perform in a future that could see interest rates fall or stay stable. Reduced reliance on residential mortgages is an important strategy for shortening book duration, which will be important in an era of rate instability.

2. Diversify loan books
Moving beyond residential mortgages also provides portfolio diversification, which will be critical in managing portfolio risk. Unsecured lending, managed properly, will grow net interest margin and provide a buffer on rate moves. On the flip side, credit unions need access to stable, cheap(er) funds such as demand accounts from primary banking relationships. Chasing deposits with teaser rates can be a useful short-term tool, but over-reliance will make it hard for credit unions to compete.

3. Grow non-interest revenue
​If the past year has taught us anything, it's that credit unions can't rely on just interest income. Non-interest revenue from activities such as wealth advisory, insurance, agent credit cards, user fees, securitization and similar activities is a critical buffer. Most credit unions are well below the 30% non-interest revenue share of the big banks. Non-interest activities also drive membership growth and primary banking relationships, which is critical for lowering the cost of funds.

4. Get serious about costs
Credit unions who moved aggressively to control costs when times were good generally performed much better in 2023. More efficient operations were able to absorb reduced revenues, and will allow the institutions to bounce back faster as the market recovers. Credit unions cannot expect to remain long-term competive with an average efficiency ratio in the 80s vs big banks in the 40s. Credit unions are also facing significant expenses in digital banking, real-time payments and open banking. Reduced revenues will make funding these costs much more difficult.

Credit unions lacking the scale, capacity and funding to tackle these changes must consider alternate delivery models. Working together and working with partners will be critical for getting back on track and continuing to deliver excellent member services.