Central 1 Credit Union is helping Canadian credit unions compete with the big banks and the fintechs in the highly competitive small business banking market. Canadian credit unions have struggled to keep up with banks due to the pace of technological innovation, Robin Arnfield reports
Vancouver-based Central 1 can be described as a credit union-owned cooperative or as a credit union of credit unions, as it is owned by credit unions in the Provinces of British Columbia and Ontario.
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It provides financial resources such as liquidity, cash management, and treasury as well as payments processing and digital banking technology to its members. In addition, Central 1 provides services to credit unions in other Canadian Provinces.
Small business focus
“Small business banking is a major push for Central 1,” Central 1 Senior Product Manager Randy Johal tells RBI. “We want to help our credit union members to become leaders in the small business banking space.”
Central 1 surveyed 100 credit unions and 2,000 businesses and found that the average age of Canadian credit union customers is 53, while the average age of Canadians is 40.
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By GlobalData“We also found that two thirds of business owners over 45 want to exit their business in the next decade,” says Johal. “Separately, Deloitte did a review of Canadian credit union payments in 2014 and found that 34% of the Canadian credit union system’s payments revenues came from 9% of their customers, which is basically small businesses.”
Johal says that the main source of Central 1’s payments revenues has been from processing cheques. “Small businesses are prolific users of cheques and the problem is that cheque volumes are declining significantly every year, while electronic payments are rising.”
New services
Following its research, Central 1 decided not to launch incremental products for the small business market but to undertake a fundamental review so that its members could enhance their service to SMEs.
Credit unions only have 11.5% of the small business market in Canada, which means credit unions really aren’t making inroads into the small business market,” says Johal.
“Yet the Canadian Federation of Independent Business’s (CFIB) annual survey of its members has consistently rated the credit unions number one since 2000 in terms of meeting the banking needs of small businesses.”
“We decided to look at small business owners’ unmet needs,” says Johal. “We found that many young business owners say banks aren’t viable for them and that they’re using Square for POS along with FreshBooks or QuickBooks for receipt capture and payroll provider Ceridian for payment services.
“But the problem is that each of these fintech solutions providers offers a platform experience. Square isn’t just about POS terminals and, once you’re using the Square platform, you’re disintermediating the credit union. You can do your financials on the Square app and dashboard, so what do you need a credit union account for?”
“Small business owners told us that, if credit unions put valuable features into their online banking to give them an all-in-one vision of their business, they wouldn’t need to go elsewhere.
“We also spoke to younger business owners – 25-to-35 year-olds. Nearly half (47%) of millennial business owners said that, if credit unions added valuable features to online banking, they would move to a credit union.
“Clearly, there’s a big opportunity to win millennial customers. We identified several key areas of unmet need for small businesses, e.g. saving them time and money and providing peace of mind by giving them insights into their firm, and incorporating electronic invoicing and the ability to track invoices into online banking.”
E-invoicing
Central 1 launched its e-invoicing service in October 2017. “Our e-invoicing service is priced well below the market and is the first in Canada to be integrated with an online banking platform,” says Johal. “
The banks switch their SME clients to a third-party fintech provider via a plug-in for e-invoicing which isn’t integrated with online banking. With our service, SMEs can log into their credit union online banking account and issue electronic invoices from within the app with their own logo and business information. The credit union will notify them of incoming payments and match these with the appropriate invoices.”
Central 1’s service allows SMEs to receive invoice payments via Interac e-Transfer, a P2P/B2B payment service provided by Canada’s Interac debit card scheme. “By the end of 2018, we’re going to add a feature enabling SMEs to request payment via Interac e-Transfer when they send invoices to clients,” Johal says.
“The recipient will be able to click the Request to Pay button on the invoice and the funds will be transferred direct to the SME’s credit union account. This will cost a lot less than accepting a credit card payment via Square, which charges 2.75% per transaction.”
Payroll
In June 2018, Central 1 will launch a payroll payments service including tax deductions provided by a fintech, which will be integrated with the Central 1 online banking platform MemberDirect, says Johal. He didn’t name the Fintech.
“We will process the payments on behalf of the credit union client to their employees, and send the money via Interac e-Transfer,” he says. “While traditional payroll services take the funds from the SME five days in advance of the payment due date, we will take the money two and a half days in advance.”
Another service Central 1 is developing is an Android-based MPoS system for debit card payments that credit unions can offer their merchant clients. “POS isn’t a big money earner for us when displacing low-value cash payments, but it gives us the option to connect credit union customers and credit union merchant clients together,” Johal says.
“Similarly to Starbucks’ loyalty system, we can identify credit union customers and merchant clients and offer a discount at the point of sale to consumers for supporting a business that banks with a credit union.
“Our idea is to digitise the customer loyalty experience. In Canada, there are 5.2 million credit union customers 460,000 credit union business clients, and, if the credit unions could bring them together, there would be a lot of opportunities.”
Borrow Anywhere
An example of an innovative service developed by Central 1 is Borrow Anywhere™, an omnichannel end-to-end lending platform that supports loan applications by credit union customers via digital, in-branch and mobile channels.
“Borrow Anywhere is integrated with our MemberDirect platform,” says Johal. “It’s been rolled out initially in credit union branches so retail or small business customers can come in and apply for loans. But it will be integrated with digital banking, particularly to attract millennials since they expect to be able to open accounts and make loan applications digitally.”
Johal says that Central 1’s goal is to enable credit unions to retain the relationship with small business clients by providing them with the insights into their business that they need.
“The moment your partnership with a fintech goes external to your banking relationship, and you let the fintech handle the client relationship externally, you lose the insights into a client’s business and its credit needs,” he says.
“If your client has a pre-approved debit for $10,000 for 20 payroll payments including tax deductions, and you can integrate this payroll payment with online banking, you can provide the client with historical data plus cashflow forecasts and predictions of what would happen if interest rates go up 1% or they hire an extra employee.
“These insights allow credit unions to make recommendations to SME clients, offer special interest rates, or provide small business online accounting and management tools within online banking. So the client can log into online banking and manage all their financial needs.”
Transformation strategy
In the third quarter of 2017, Central 1 launched a national digital transformation and payments strategy to enable it to better meet the evolving needs of its credit union members and clients across Canada.
This involves Central 1 working with Backbase, an omnichannel digital banking software vendor, to revamp MemberDirect.
“Backbase will provide an open innovation model for credit unions,” says Johal.
Central 1 has also created a Transformation Office to build a client-centred, integrated organisation.
In its 2016 annual report, Central 1 noted that “Canada’s credit union system is approaching a tipping point. As the small player in the national financial services sector, credit unions are being consistently outpaced by the scale and marketing strength of the major banks.
The credit union system is struggling to keep up with the digital offerings of banks and of new financial technology entrants. We have an ageing membership base, and we lag behind the banks in selling secondary services to our members. We lack the capacity for data analytics that would help us understand and more effectively meet our customers’ needs. We face a complex and ever-changing regulatory environment.”
“We’re developing a National Payments Strategy that will serve the credit union network and our Digital & Payments Services team is working with Backbase to deliver a significantly enhanced MemberDirect platform,” Marilyn Mauritz, Central 1’s Interim President and CEO, said in a statement.
“We will continue to focus on building a competitive portfolio of client-centred solutions through stakeholder engagement, innovation and partnerships.”
Canadian Federation of Independent Business 2016 survey: Customer service of SMEs
Credit unions came out on top in terms of serving the financial needs of Canadian SMEs, according to the CFIB’s 2016 survey.
Institution Score
- Credit Union 7.2
- ATB Financial 5.5
- Scotiabank 4.8
- NBC 4.7
- CIBC 4.7
- RBC 4.4
- Bank of Montreal 4.3
- Toronto Dominion 4.3
- Desjardins 4.3
- HSBC 3.0
Source: the Canadian Federation of Independent Business (http://www.cfib-fcei.ca/english/article/8817-battle-of-the-banks-credit-unions-among-the-best-for-small-business.html)
