Fear and Fatigue point to New Credit Union Model

Credit unions are well used to the label of “sleeping giant” of the Irish financial services scene. But even with some three million members and the highest level of customer satisfaction in the financial services sector there is no question that the movement as a whole punches well below its weight.

The strong bond of the credit union with local customers is an undoubted strength but the singular, independent nature of the various individual credit unions makes the movement as a whole under-equipped in a competitive context: some consolidation of their resources is necessary to provide the scale to take on the main commercial banks. The improvements that could be gained from, say, a single IT platform and the ability to develop and market nationally-targeted products capable of drawing business from rivals are immeasurable.

Delegates to the recent address of by the Registrar of Credit Unions, Ann Marie McKiernan at the Credit Union Development Association (CUDA) Conference in Cavan last week may have detected a subtle change in tone from her previous remarks to the sector last November that might provide some encouragement but the shortcomings of the movement, as she articulated once more, remain clear, specifically:
• A fall in aggregate loans from €7bn in 2008 to €4bn in 2015
• A fall in total interest income of 40% over the same period
• “Unacceptably high” arrears at 13% of the loan book
• Downward trend in numbers of new loans

Perhaps more profoundly there are structural issues that inhibit the ability of the sector to catapult itself where it feels it ought to be. The challenges here, according to Ms McKiernan, are “considerable”.

“The biggest challenge is the need to grow income from core lending. This in turn leads to the need to address the ageing membership base, allied to the difficulties which many credit unions face in changing their product and service offerings to attract the younger members who will be the drivers of loan growth into the future. The need to offer new services via different channels is a particular challenge, given the technology and other investment costs which smaller credit unions, in particular, struggle to meet.

“For the sector’s future sustainability, we see four main requirements: further restructuring; a greater drive for new, active borrowers; a marked increase in core lending, and business model development in a multi-step, well-managed way.”

Signs are, however, that the movement is taking steps to provide such a sustainable platform through centralization. Weekend newspaper reports suggest that “A radical shake-up of how credit unions operate is being planned in a bid to turn the movement into a third banking force,” with a report presently being prepared that proposes that credit unions form a federated system, with a strong central structure, similar to the model successfully operated in Canada. “This would allow them to maximise their strengths, develop new products, and benefit from greater scale and savings from the economies of operating collectively,” according to the Irish Independent.

These proposals will apparently be put to the vote at the Irish League of Credit Unions’ Irish League of Credit Unions in April and the members of the rival CUDA body, the Credit Union Development Association, will also be involved, comprising as it does of some of the largest credit unions on the island.

One of the most timely and pressing examples of how such centralization of activities could benefit the movement as a whole is in the area of Anti-Money Laundering (AML), Countering Financial Terrorism (CFT) and Financial Sanctions.

Credit Unions up and down the country are currently grappling with the implications of the escalating compliance obligations in these areas and the growing realisation that as things stand they are woefully unprepared to implement the required supervisory standards insisted by the Central Bank. A 31st March 2017 deadline and the severe sanctions for non-compliance will concentrate minds but a coherent, sector-wide approach to the problem would surely provide great comfort, particularly for smaller credit unions. And the same goes for IT systems and product development.

In fact, there is no aspect of the credit union business that could not be utterly transformed by such a centralised approach with the potential to at last realise the vast, untapped potential of the sector.
Since the onset of the financial crisis and the well publicised difficulties of the movement the interventions of the Regulator have been consistently (and justifiably) downbeat (although it should in fairness be said that the damage to the public purse at the hands of credit unions was minimal in comparison with the commercial banking sector).

Yet the ongoing deluge of regulation, from lending restrictions to caps on individual customer deposits, and now AML, make the job of the typical volunteer member an increasingly uphill experience. The cumulative effect of fear and fatigue on the part of the workforce will surely lead to acceptance of a new model for the movement.

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