The Slow Demise of Member Dividends

The Globe and Mail ran this piece today about online mortgage discounters. You’ll see similar stories in the coming months as the media picks up on this trend.

Just as notable, however, was the article’s comment from Mitchel Chilcott, CEO of North Peace Savings and Credit Union (NPSCU).

Chilcott was talking about member dividends, a form of profit sharing that’s long been a hallmark of credit unions. He noted that NPSCU chose to reduce its patronage dividends so it could lower its mortgage rates.

Mitchel Chilcott, CEO NPSCU

“For most homeowners, having a $90 or $100 lower mortgage payment a month was a lot more meaningful and impactful than maybe getting money back 14 months later,” he told the Globe‘s Tamsin McMahon.

Such dividend payments are becoming more anachronistic each month that goes by. In an age where consumers are increasingly mortgage rate-savvy, and where comparing rates is done in mere mouse clicks, member dividends pose an unclear benefit. They’re hard to quantify, hard to compare online and hard to rely on as a borrower.

In this author’s view, they’re becoming a disadvantage to credit unions who use them. There’s only so much of the revenue pie you can share as a CU lender. Either you advertise the most competitive rate you can, or you charge a higher rate and rebate some of the interest. And for the reasons above, consumers may increasingly be attracted to the simpler bird in the hand, a lower rate.

That’s exactly what DUCA Financial concluded last year. The credit union did away with dividends on broker-originated mortgages, in favour of 5-year fixed rates that are near the lowest in the nation.

Looking into the future, highly efficient credit unions that reinvest in their members (via lower rates), don’t pay dividends and don’t pay traditional originator commissions may have the biggest edge amongst their peers.

  1. I like the dividends both as a borrower and a broker, As a broker it offered a unique selling advantage, but ultimately where a specific rate (now) becomes very important, and the ability to quote the future potential rebate / benefit (now) as only a maybe, it does make sense to put it aside to be more competitive.

    Another (negative) change to credit unions moving them closer to the banking format of a more impersonal numbers game

  2. It is very interesting that individual financial institutions at the Board level have reached the conclusion that mortgages are becoming a commodity and they have to change time honored beliefs to manage their future outcomes. Nothing was ever more cherished in the Credit Union movement than the dividends and yet we see them sacrificed on the alter of mortgage marketing.

    Clearly the debate about the tipping point in public attitudes about mortgage origination is no longer about “whether” mortgages are viewed as a commodity play; it has become a question of “when” the majority of the public view mortgages in that way.

  3. It’s a unique selling proposition for credit unions but I’d rather have a guaranteed lower rate, even if it works out to a little less money.

  4. Thanks for covering this story, Rob. While I am not a member of any locally-based credit unions, I am a member of two Manitoba-based ones (Sunova and Entegra) that offer virtual banking branches that offer leading edge high interest savings & GIC products. One of them (Sunova) still pays annual dividends on common and surplus (essentially, shares awarded to you as dividends paid out paid out in additional shares). Entegra pays no dividends on its shares, not common share dividends, not surplus share dividends and not even patronage dividends (based on product holdings with the credit union).

    This is a somewhat worrying trend to me since, by the nature of having to be an ‘owner’ in the financial institution through the holding of at least one (or more) common shares and potentially a different class of dividend-paying, non-voting shares for investment purposes, the fact the ‘owner’ (i.e., member) is no longer paid dividends on that invested capital is troubling. As well, what of the possible regulatory impact? With dividend-paying common and other classes of shares, redemptions, based on the share’s par value, can be done generally once a year or at certain times and approved by the credit union’s Board of Directors, limiting easy “flight of capital”. If you see people shrink their holdings to just one common share (which you will, as they notice their dividend payments evaporate), you need to rely on members’ deposits which are much easier to “flee”.

    I get the cross-selling aspect and the increasing the institution’s share of a member’s “wallet” and all that, I just wonder if this is a case of long-term pain down the road for short-term “wins” in market share.

    Cheers,
    Doug

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