Letting credit unions consolidate helps keep banking sector competitive

The cost of living remains the No. 1 economic issue on the minds of Canadians. Though the headline inflation number has come down over the last year, prices are still elevated compared to pre-COVID levels. Wages have not kept up, and consumers—and voters—are feeling the pinch. From housing to groceries to restaurant meals, household budgets are stretched, and incumbent parties are feeling the dual pain of frustrated voters and a lack of concrete policies to do much about it in the short term. Price controls are not a realistic option. Governments lack the levers and the competence to initiate any kind of controlled deflation, and this would not be desirable in any event. The most powerful tool for governments looking to address the cost-of-living challenge is to increase competition in the sectors that impact Canadian households. Other things being equal, more competition will almost always exert downward pressure on prices. Governments in this country and across the world are slowly waking up to this notion. Competition authorities have been given greater powers here and in many other nations to investigate anti-competitive behaviour, scrutinize mergers, and generally push back against what many would describe as a decades-long trend of power accumulation in the mega tech giants that dominate growing swathes of the economy. This represents a much-needed rebalancing, but those same competition authorities have to be aware of the unintended and sometimes perverse consequences of this shift. No one would describe our domestic financial sector as suffering from a surplus of competition. A small number of huge institutions dominate the market. Everyone knows who they are. From a retail and business banking perspective, credit unions have provided some of the only competition—such as it exists—for Canadians’ wallets for decades. Though it represents a relatively small share of this country's overall financial services market, the credit union sector still serves more than 10 million Canadians. We are also, collectively, the largest lender to small business in Canada. The sector is also undergoing significant changes to respond to market pressures, and the ever-increasing costs of regulation from both levels of government. This has meant a large degree of consolidation. What used to be thousands of mostly very small financial institutions now numbers below 200. We predict that number will continue to shrink to something close to or below 100 by the end of this decade, all the while growing assets and membership across Canada. Fewer institutions in the credit union sector is consistent with a stronger sector, and one that can compete more robustly with the industry giants. Enter the Competition Bureau, and its enhanced powers. A trend that started beyond our shores, aimed at the Googles and the Facebooks of the world, has seen its role in our sector and elsewhere materially expanded. The bureau is looking more closely at mergers in many sectors. Mergers, intuitively, can be associated with a reduction in competition and consumer choice. In the credit union sector, the opposite is true. Credit unions need to be able to continue to consolidate and partner in the years to come in order to continue to provide some of the only competition that exists to the large banks that dominate financial services in Canada. For that reason, in the credit union sector, further consolidation is consistent with more—not less—competition and consumer choice. In one recent egregious, yet informative, example, a credit union merger in Alberta has taken longer to approve than the tie-up between RBC and HSBC. One of these mergers will have a materially negative impact on competition and consumer choice in financial services, and it is not the credit union merger in Alberta. The bureau’s enhanced scrutiny of mergers is, therefore, having consequences that are not only unintended, but also utterly at odds with the agency’s objective of fostering greater competition in the marketplace. All mergers should be subject to review, and approval on consumer choice grounds. Mergers are often associated with a reduction in competition, and the associated increased consumer costs. However, in the credit union sector, the logic is the reverse: consolidation is one of the ways in which the sector will continue to provide competition to the banks and choice for Canadian consumers in the coming years. The bureau needs to understand this distinction, or risk outcomes at odds with its mandate of competition and consumer choice. Michael Hatch is vice-president of government relations at the Canadian Credit Union Association. The Hill Times