The PSCU-Co-op mega-merger: Three (hard) lessons for Canadian credit unions

Canadian credit unions can be forgiven for missing last week’s merger announcement between US shared services giants PSCU and Co-op Solutions. These organizations work largely behind the scenes, delivering strategic payments and digital capabilities for American credit unions.

Combining the payments, digital and operations expertise of these providers will deliver critical scale and expertise to their member organizations, reduce duplication and improve strategic flexibility. The combined organization will process 16 billion transactions annually and serve over 100 million members across more than 4,000 credit unions.

I’ve met with both organizations’ leadership, toured their operations centres and worked with their teams on a day-to-day basis. I am confident that this deal will deliver a robust and flexible payments and technology platform that will keep America’s credit unions competitive will into the next decade.

Unfortunately, this unification trend stands in contrast to Canadian shared services. Rather than trending towards combining forces, Canada's credit union system continues to experience fragmentation. In this week’s Insight I highlight three hard (and perhaps controversial) lessons from the merger for the Canadian ecosystem.

1. Payments need scale
2. In-house systems are strategic anchors
3. Collaboration requires collaboration

(Hard) Lesson 1: Payments Need Scale

PSCU and Co-op provide credit, debit and wholesale payments services to most American credit unions and numerous community banks. Co-op also provides the back end and digital credit card platform for Collabria, used by most of Canada’s credit unions, and holds a majority ownership stake in Everlink.

However, America's credit unions have concluded that each entity's 8+ billion annual transactions do not provide enough scale. The combined company will process an astonishing 30,000 transactions every minute and be one of Fiserv’s largest global payments customers. This will result in preferential pricing and support for all credit unions, allowing them to compete against the big banks. Co-op also operates a 30,000-strong ATM network with common branding, shared deposits and no fees.

Take-aways for Canada:

• Core Payments: Canadian credit unions currently split their 6-8% payments market share across two different providers. This was an interesting experiment that didn’t work out. Costs are high, expertise is diluted and the rest of the payments industry is nervous about credit union connectivity. Credit unions need to combine Central 1 and PPJVs operations, write off sunk costs and move forward together.
• Credit Cards: Three credit unions self-issue, one uses a fintech and the other 98% partner with Collabria. Again, costs are duplicated and expertise is diluted. Combining these portfolios would approach the one million account threshold needed for a credit portfolio to operate at full scale.
• Debit Cards: Credit Unions need to ensure that Everlink will continue to serve as a stable and effective debit partner
• ATMs: Canadian CUs should combine their networks to achieve economies of scale and serve as a critical marketing platform
• Real-Time-Rail: Combining development efforts will likely be far more effective than individual credit unions seeking direct access to the RTR

(Hard) Lesson 2: In-house systems are strategic anchors

The combined entity will offer full-service digital and payments capabilities for thousands of credit unions. By using "off the shelf" solutions, credit unions of all sizes have access to capabilities not present in Canada, including:
​

• 24/7 US-based contact centres offering full banking services to credit union members
• Shared branching (Co-op currently provides this for 62M members across 1,800 CUs)
• Combined payments and digital banking apps
• API integration with core banking, LOS, CRM and other services
• Centralized fraud and risk management
• Fully managed digital environments

PSCU and Co-op also serve as integration points for strategic partners. For example, when credit unions asked for improved mobile capabilities, Co-op partnered with app developer OnDot and took on responsibility for development and integration. This freed up credit unions to focus on their core activities.

Take-aways for Canada:

• It's currently too hard for strategic partners to sell to, develop for and integrate with the Canadian credit union system. Partners want to work with credit unions, but not via 200 relationships
• Central 1's Forge, Celero's XPress and League Data's Mambu have the potential to serve as third-party accelerators, but only if business, legal and technology capabilities are developed together
• Canadian CUs operate too many core banking systems, consuming scarce resources and exposing members to unnecessary risk for limited strategic gain. By 2030 all credit unions should be running on fully outsourced cores
• Digital innovation does not replace business fundamentals. Canada's large banks are growing quickly despite a hodgepodge of digital capabilities, while digital-first challenger banks are struggling to capture market share. Outsourcing digital roadmaps allows credit unions to realize scale while focusing on their core competencies of sales and service 

(Hard) Lesson 3: Collaboration requires collaboration

PSCU and Co-op have been successful in part due to how they work with credit union and bank clients. Co-op Solutions jointly develops its technology roadmap with credit unions via the use of Co-creation Councils and other feedback loops. PSCU runs an annual client survey and regularly gathers feedback from members. Both organizations also have Boards comprised of member credit union CEOs to ensure alignment with CU needs.

By keeping their clients close, PSCU and Co-op are able to build trust and buy-in. This both allows them to execute ambitious change programs and set the stage for successful merger discussions.

Take-aways for Canada:

• Canada's shared service organizations need to evolve how they engage with credit unions to collaboratively set strategic priorities and execute complex programs
• Shared services organizations must also develop service and pricing models that combine mandatory functions plus optional services based on client size and complexity.
• Canada's credit unions need to take a more active ownership of shared initiatives, at both the governance and execution levels
• American credit unions were able to negotiate the merger of two profitable multi-billion dollar organizations with competitive services and thousands of clients. They did it via building trust and planning for the future. There's no reason why Canada's credit unions can't do the same

---

​Have feedback, or would like to discuss how Canada's shared service providers need to evolve? Contact me on LinkedIn or via email.