Credit unions can (and must) win in the GTA... but are they ready?

In a five-minute walk from my Toronto house there are six full-service bank branches, and one credit union. The CU is profitable, grows deposits at 12% annually and serves an important ethno-religious community. But it also has just $500M total assets, less than 7,000 members and no ATMs.
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Niche credit unions are of course important. However, the GTA should also be home to multiple $100B credit unions, serving millions of members and driving System scale. Today there are none.
 
For the national credit union System to remain relevant it must harness the economic power of Southern Ontario. Holding ground at 3% deposit share will not be enough to drive the movement. Credit unions, both niche and full service, thrive in cities such as Vancouver, Montreal and Winnipeg. What makes Toronto different, and how can these challenges be overcome?
 
In this Insight we look at three issues are particularly critical in the GTA:

1. Too many (and not enough) branches
2. Immigration mismatch
3. Balance sheet handcuffs

​1. Too many (and not enough) branches

Branches still matter. While digital offerings are critical for growth, they are most successful when combined with a solid brick and mortar footprint. Big 6 banks continue to invest in branches as a critical marketing and servicing channel.
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The first challenge for credit unions is too many branches. Nationally, Canada’s credit unions operate 1,669 locations (plus an additional 530 under Desjardins), while the Big banks are each in the 900-1,000 range. CU branches are also much smaller - an average credit union branch serves $177M in assets, about half that of the competition.

​While this does help credit unions serve members where they live, it materially increases operating costs. The current footprint is also heavily biased in favour of rural and small urban locations, and not in the regions of greatest population and economic growth.

Toronto region
This is particularly true for Toronto. In the city proper there are 63 credit union branches, of which 29 are focused on specific labour/ethno-religious communities. Compare that with the big banks - for example RBC's 124 locations. A similar story is presented in the L postal codes, where 154 credit union branches compete against RBC’s 230.  

​But raw numbers alone don’t tell the whole story. Because they are centrally planned, a big bank's are distributed much more uniformly across the GTA. Banks place particular focus on the fast-growing 905 region surrounding Toronto, opening new branches where new communities are built. In contrast, credit unions are disproportionately clustered in the traditional labour markets of Hamilton-Niagara and areas of historic European immigration such as West Toronto/Etobicoke. Meanwhile, regions of explosive population growth such as Halton and Peel receive much less branch coverage.

ATM Access
ATM volumes may be dropping, but they are still a critical requirement for prospective members. ATM networks give members the ability to access cash and make deposits anywhere in Canada, helping to alleviate the “range anxiety” of using a provincial financial institution.

Credit unions run the country’s largest ATM network, but you’d never know it. Unlike Australia’s shared CUSCAL ATM network, Canada’s credit unions each run their own branded ATM fleets. Off-premises locations are rare, and the existence of two overlapping shared ATM services is unnecessarily complicated.

With the GTA’s high population growth and mobility in/out of the region, lack of a national ATM strategy and low local ATM visibility makes member acquisition much more difficult.

Challenge
If credit unions cannot establish a physical footprint in regions of highest growth, they will be forced to battle for members through purely digital channels - and without the deep pockets required to compete online.
 
Opportunities

• Meridian has had success with smaller advice centres centres in the west end of Toronto
• Many smaller credit unions in the United States utilize a shared branching model to pool resources and extend reach
• Credit unions looking to enter the GTA could consider partnership models with other credit unions, non-bank financial institutions and retailers
• Focus on expansion in high-growth regions coupled with targeted New Canadian strategies
• Establish a true national ATM network to boost visibility

​2. Immigration mismatch

Ontario welcomes half of all immigrants to Canada, with one in three choosing in the Toronto Census Metropolitan area (Toronto, Halton, Peel, York and Durham). From 2016-2021 Canada received 8.4M new Canadians, of which 2.9M settled in and around Toronto. For context, that’s greater than the combined population of Saskatchewan and Manitoba.

Approximately 60% of immigrants to the Toronto CMA were from Asian countries, with Europe, Americas and Africa at 19%, 14% and 6% respectively.

​Two thirds of immigrants to the Toronto region came from just 15 countries – nine from Asia, four from Europe and two from the Americas.

Role of ethno-religious credit unions
Canada’s ethno-religious focused credit unions have a long tradition of serving their communities. This is particularly evidenced by the support provided by Ukrainian credit unions over the last two years. However, of the top 15 immigration countries listed above only three have a corresponding ethno-religious credit union operating in the area.
 
Challenge
Without a footprint of niche credit unions, the vast majority of today's immigrants arrive in Canada without the instant community and support provided by a targeted ethno-religious offering. Credit unions looking to capture their natural market share of New Canadians must compete directly against the big banks, all of whom have deployed extensive outreach programs. This is a complicated and expensive endeavour.
 
Opportunity
As the success of niche ethno-religious credit unions shows, Credit unions need to focus. An immigrant from the Philippines will likely have different banking needs from a Ukrainian refugee or a Guyanese family. Mass market credit unions will need to focus on specific immigrant populations with tailored products and services in specific geographic, areas rather than a generic one-size-fits-all approach.

3. Balance sheet handcuffs

​The combined assets of Ontario’s credit unions exceeds $80B, with an impressive five-year growth CAGR of 10.0%. However, these resources are spread across over 60 financial institutions. And that means over 60 decision-makers, 60 balance sheets and limited central planning.

While Ontario’s five largest credit unions do hold 2/3 of total assets, modest balance sheets make it significantly more difficult to compete in a crowded financial services market.
 
Lending
In 2022 the Toronto region recorded $407B in mortgages outstanding, with an average new mortgage amount of $567,000 – the highest in Canada. For a small credit union with $300M in assets, that could mean a portfolio of less than 1,000 mortgages. It also means that small credit unions could be unable to underwrite the entire value of Toronto homes, where initial loans routinely exceed $1.5M.

It's a similar story with business and commercial accounts. Small balance sheets make it difficult for credit unions to compete for business members such as municipalities and manufacturers.

Marketing
In 2022 the Big 6 banks spent a combined $3.8B on marketing, much of it in the GTA. In comparison, Meridian and Alterna spent $11.2M and $3.4M respectively. In a crowded media landscape every dollar counts. Large balance sheets mean larger budgets and greater ability to target specific populations.
 
Capital and Risk
As we head into a yet another challenging economic environment, risk and capital adequacy loom large in the minds of regulators and credit union leaders. Staying competitive in an evolving digital marketplace requires significant and ongoing investment. Regulatory capital is needed to secure a growing deposit and loan portfolio. Credit unions must fund these activities through profits. And that requires scale.
 
Challenge
Ontario’s credit unions are individually too small to launch sustained campaigns for member acquisition in the GTA. Meanwhile, niche credit unions may lose the benefit of system scale that allow them to focus on their specific communities.
 
Opportunity
Further consolidation in the credit union space is an absolute necessity. Failure to do so will handcuff credit unions in their attempts to grow market share. Ontario credit unions must also look opportunities to partner with their inter-provincial and federal peers to share capital and risk.