Community Finance: Expanding credit unions sustainably

16^th April 2015

The years since the turn of the century have been ones of growth and modernisation in the credit union sector.

In 2000, there were 687 credit unions with 325,000 members, lending £175 million and with total assets of £214 million. In 2014, for the most part through merger, the number of credit unions had fallen to around 370 while membership had mushroomed to just over 1 million, lending to £690 million and assets to £1.2 billion.   So in less than 15 years, credit unions’ membership has more than tripled, lending has quadrupled and assets have risen almost five-fold.

At the same time, credit unions have modernised their operations from the days of the 1990s when it was more common to see a credit union in a church hall, open for an hour or two each week, than it was to see them on the highstreet.  Similarly, credit unions are offering an array of products and services beyond simple savings and loans including current accounts, prepaid debit cards, cash ISAs, and even mortgages.

The sector, then, has come a long way in the early years of the 21st century.  At the same time it has expanded its role in disrupting the activities of high-cost lenders such as the widely-criticised payday lending sector where prior to 2 January 2015 interest rates of 6,000% or more and the ability to repeatedly roll loans over left many thousands in a hole.  Under the Department for Work & Pensions’ Financial Inclusion Growth Fund which ran from 2006 to 2011, participating credit unions saved their members between £119 million and £135 million in interest compared with the prevailing rates from high-cost doorstep lenders prevalent in low income communities.

But there’s another side to the credit union story.  For all its successes and growth, it’s positioning as an antidote to the problems of the over-indebted and perception as a “poor man’s bank” has left it – in many cases – too often without a compelling proposition for a broader section of society.  Similarly, due to inefficient operations, limited investment and a focus on small-sum, short-term credit, too many credit unions have required subsidy and government support to provide their services to the financially excluded.  In today’s austere times, however, this support is no longer available and these credit unions need to find a way to sustain themselves without it while continuing to support the most financially vulnerable.

Credit unions around the world – in countries like USA, Canada and Australia – are a much bigger section of the financial landscape than they are here in Britain.  Whereas 40% of people use their credit union in the US, only around 2% do so here.  Our analysis shows that there are a number of key factors which have led to our international colleagues’ success.

The first of these is philosophical.  The global credit union sector goes by a maxim which credit unions in Britain need to emulate – Not for Profit, Not for Charity, But for Service.  Credit unions must see themselves as mutual financial services which are not there to simply provide lending that no one else will provide but to provide a high-quality and value for money service which meets the needs of people from a range of backgrounds.  It is here that the mutual model is strongest, by delivering value to people through clubbing together and sharing in collective successes.

The second factor is collaboration.  Almost without exception, where credit unions are most successful they work together.  As individual organisations some credit unions will always struggle to reach the scale required to enable them to capitalise and invest sufficiently in their service.  But through grouping together and sharing systems and processes, more credit unions can gain access to services which are competitive and attractive to a broad range of people – something which is more important now than ever before as modern digital technologies continue to shake-up the way people expect to be able to access their financial service.

The third factor is employer partnership.  Both in the UK and abroad, the strongest and most successful credit unions are embedded in employment contexts.  Membership is seen as an employee-benefit, payments towards savings and loans are taken direct from payroll and a virtuous circle is created whereby all parties benefit:  employees through convenient access to a valuable service; credit unions through access to efficient payments and a diverse pool of members; employers through more financially-resilient, productive workers.

In a diverse sector, these factors and challenges are more pressing for some than for others – the leading credit unions are doing well. The Credit Union Expansion Project, funded by Government, is one effort to build on their success and address these challenges by developing a shared business model for participating credit unions.  More widely, support for the sector is at an all time high with highstreet banks such as Lloyds, the Church of England and all political parties supporting the sector’s development.

Future investment must support credit unions to continue on this journey through providing the capital necessary to expand and develop.