Canada’s credit unions are up against an ultimatum: grow or go extinct. A ramp-up in merger activity is spreading through this often-overlooked part of the financial sector as a host of smaller players, designed to cater to small communities, scrambles to keep up with new technologies and changing consumer habits.

Credit unions—co-operatives that provide financial services to their member-owners—emerged in Canada in the early 1900s, mostly to serve small communities and ethno-religious groups, especially those that were part of a wave of immigration from Eastern Europe. The biggest credit unions provide a community-owned alternative to banks. But independent consultant Doug Macdonald, who advises Payments Canada, among others, said they’ve struggled to adapt over time. 

In 1989, the 1,421 credit unions across Canada held $31.1 billion in assets. Last year, there were 184 credit unions, but the asset value had ballooned tenfold to $315 billion, Macdonald’s data shows. Small credit unions that historically targeted small communities or specific demographics are now struggling to “stay current” on their own, Macdonald said, with few adapting to serve new immigrant populations.

There’s going to be a “flurry” of activity in the sector as credit unions try to keep up with bigger banks, KPMG partner and financial services national industry leader Geoff Rush said in an interview. The pace at which banks are investing in new technology is making it more difficult for credit unions to compete. “It’s inherently harder, given their scale, to keep pace with those investments,” he said.

Deals are likely to happen, especially among Canada’s biggest credit unions, Rush said. “There are lots of conversations going on” between them, he said, and expects to see M&A pick up the most with deals between the top 20 largest credit unions. They’re also best positioned to expand across different provinces and “create a viable alternative to the major banks,” he said.

There has already been a recent spate of activity: a potential merger between Integris Credit Union and Coastal Community Credit Union announced in April, a merger between Saskatchewan credit unions Conexus, Cornerstone and Synergy that will close in January, and discussions are underway between B.C.’s Vancity and First Credit Union. 

Vancity, one of the largest credit unions in the country, hasn’t done a merger in over 15 years but has recently shifted its strategy. That’s in part because a lot of communities in B.C. have their last financial institution in “jeopardy” and may be looking for a larger entity to bring in capital, new products and technology for users, CEO Wellington Holbrook said in an interview. Its talks with B.C.-based First Credit Union will likely kick off a series of future acquisitions, Holbrook said. 

Vancity will take a “different approach” in those future acquisitions, he said—providing small credit unions with tools like a platform for users to open up digital accounts or instantaneous credit approvals—but allowing them to still serve small communities. They’re not just trying to “hoover up” small credit unions, said Holbrook.

Technology remains a major barrier for credit unions looking to compete with big banks. “It’s hard to be small and invest in technology,” and acquisitions can inject capital into small credit unions, said Jeff Guthrie, chief executive of the Canadian Credit Union Association (CCUA), the industry group that represents credit unions in Canada.

As credit unions look for new ways to expand, Guthrie’s group is lobbying the government to break down interprovincial borders and allow mergers and acquisitions between credit unions in different provinces. 

The push comes amid a wave of enthusiasm for breaking down interprovincial barriers to trade in the face of tariff threats from the U.S. “Up until the threat of tariffs, it was a hard slog,” Guthrie said in an interview with The Logic. “It’s a good opportunity to modernize the sector.”

Credit unions are currently not allowed to have branches in provinces outside where they are registered, and regulations are different across the provinces—so some credit unions are advocating for a “passport” model, which would allow credit unions in different provinces to merge and stay provincial. It’s very much theoretical, Macdonald said, but something for which the CCUA is advocating.

As of now, if credit union members move to a new province or start businesses in a different province, it’s difficult for the union to retain them as members, Guthrie said. “Let credit unions follow retirees if they decide to move from one province to the next,” he said.

There are also federal credit unions, Macdonald said, and merging with one is an “obvious path” for credit unions that are looking to operate across the country—and one the CCUA is lobbying to make easier.

But if credit unions get too large, they risk losing the communities they were created to serve, Macdonald said. There are still small clusters of credit unions that won’t merge—it would mean giving away their “secret sauce.” Those that choose to remain on their own face the mounting challenge of gaining scale—or risk their profitability, turning into “zombies.”