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Can Credit Unions Really Fix Britain’s High Credit Deficit?

A company that began in 1985 as a way of serving police officers to bundle their Christmas savings may not sound like the ideal recipient of a £ 200,000 prize aimed at developing a new generation of fintech lenders.

Still, that’s exactly what happened to Police Credit Union last March.

The member-owned cooperative, which has grown to 34,000 members since its inception in 2002, got the money from a treasury-funded fund to help the police, military, and other public services cover the costs of their cut loans as their financial habits improved.

Dating officially back to the 1960s and with roots stretching back to the 18th century, credit unions have long been praised for their membership model. Notable supporters of the cooperatives include Michael Sheen and Camilla, Duchess of Cornwall

Dating officially back to the 1960s and with roots stretching back to the 18th century, credit unions have long been praised for their membership model. Notable supporters of the cooperatives include Michael Sheen and Camilla, Duchess of Cornwall

Dating officially back to the 1960s and with roots stretching back to the 18th century, credit unions have long been praised for their membership model. Notable supporters of the cooperatives include Michael Sheen and Camilla, Duchess of Cornwall

And it wasn’t the only one. Despite their age, credit unions have been around since 1960 and can trace their roots back to the 18th century. Two of the three winners and four of the six finalists, of the £ 200,000 prizes, were credit unions.

The hundreds of thousands of pounds are designed to enable companies like PCU to “find innovative technology solutions to increase access to affordable, responsible credit,” said Nesta, the company behind the Affordable Credit Challenge.

For Paul Norgrove, the chief executive of PCU, operating under the broader umbrella of the Serve and Protect Credit Union, 2016, it’s largely about making more people aware of their existence and shortening how long it can last before potential borrowers get a loan.

“We saw a lot of people join the military with thin credit files, many had gone to a door or payday lender and didn’t know we existed. Many more predatory lenders were better at raising awareness through Google, ”he said.

Wonga made us all sit up and go “why did they go there and not us”. We’ve spent the past two years trying to refine our approach, improve our digital offering, and minimize that friction so we can be available when our members need us. ‘

Advertisements for payday borrowers like Wonga were more visible than those for local credit unions, which likely would have offered stubborn borrowers a cheaper alternative

Advertisements for payday borrowers like Wonga were more visible than those for local credit unions, which likely would have offered stubborn borrowers a cheaper alternative

Advertisements for payday borrowers like Wonga were more visible than those for local credit unions, which likely would have offered stubborn borrowers a cheaper alternative

It is also about trying to attract new blood from cooperatives that can be dominated by older savers.

Marlene Shiels, the chief executive of Capital Credit Union, which serves 24,000 members in East Scotland and was one of the other winners of the £ 200,000 grant, said: ‘For members looking to go digital, this funding was vital to our to transform.

‘Otherwise we have an aging membership (the average age of a member is 47). We try to attract and digitize younger people. ‘

And attracting younger members isn’t the only battle credit unions face.

How have credit unions grown?
20152019
Members1.85 m2.07 m
Loans made£ 1.25 billion£ 1.63 billion
Total assets£ 2.8 billion£ 3.5 billion
Income£ 186.3 million£ 210.9 million
Income earned from interest on loans£ 143.9 million£ 176.2 million
Source: Bank of England

Although membership of approximately 400 cooperatives in Great Britain and Northern Ireland has grown from 1.85 million in 2015 to 2.07 million in 2019 and the number of loans is at a similar level, both chief executives and regulators have raised concerns is stopped across the sector.

Credit unions have long been popular for their community ethos; all members must be unionized and united by a ‘common bond’, which can be geographically, such as Capital, or professional, such as Serve and Protect.

Notable contributors to such cooperatives include Camilla, Duchess of Cornwall, the actor Michael Sheen and the Archbishop of Canterbury Justin Welby.

And the story of such ethical local lenders can fill the void left by the demise of the likes of Wonga and help more underprivileged borrowers access credit, something many would want to buy even if it has yet to come true.

What does the Credit Union Act of 1979 say?

According to the legislation that has formalized credit unions, the objectives of these cooperatives, which must have a minimum of 21 members, are:

1. Promote thrift among members of society through the accumulation of their savings

2. Creating sources of credit for the benefit of members at fair and reasonable interest

3. Using and managing members’ savings for their mutual benefit

4. The training and education of members in managing money wisely and in the management of their affairs

Marlene Shiels, Capital Credit Union chief executive, said This is Money regulators took a very restrictive interpretation of the law and what it allowed credit unions.

Last year, Chairman of the Financial Conduct Authority, Charles Randell, gave a speech entitled, “Is This the Decade of the Credit Union?”

He said: “The need for more sustainable community funding is enormous.

‘The transformation that the credit union sector must undergo to meet this need much more is enormous. But the benefits of this can also be enormous. ‘

And this time it could be really different.

Not least because a 68-page review of the UK unsecured credit market, prepared by the FCA and published this month, has thrown its weight behind the most substantial reforms of the system since it was formalized in the late years seventy. We

“Despite positive efforts to encourage more alternatives to expensive credit, the market has not performed at scale and further reforms are needed,” the review said.

“This includes liberalizing the approach to regulating credit unions and encouraging more mainstream lenders to participate in this part of the market at a lower cost.”

It added: “Credit unions provide an important alternative to expensive credit and enable broader financial inclusion. To realize their full potential, there is a reason to lift some of the current restrictions on their operations. ‘

The call for the Bank of England, FCA, Treasury and the Northern Ireland government to look into legislation published before the advent of the Internet, let alone smartphone banking, was welcomed by campaigners and chief executives alike.

“I’m 100 percent happy with the review’s recommendations,” said Paul Norgrove, “the Credit Union Act of 1979 is older than me.”

Robert Kelly, the chief executive of the trade association that represents 169 credit unions in England, Scotland and Wales, said that “a major priority” was to overhaul the industry’s laws and regulations.

Credit unions have one source of income right now, that’s not a great strategy to build a substantial business, we need to be able to compete and diversify.

Marlene Shiels, Capital Credit Union

The reality is that regulation has limited credit unions in terms of transformation and innovation.

The FCA has said credit unions can offer basic savings and loans. We’ve advocated for the ability to offer auto financing, credit cards, insurance facilitation, and greater collaboration. ‘

Marlene Shiels, who was on the review’s advisory panel, added: “ We have the most restrictive legislative framework in any country, it’s important that that’s changed. We must be able to offer our members more than saving and borrowing.

‘Credit unions currently have one source of income, that’s not a good strategy to build a substantial business, we have to be able to compete and diversify.’

According to figures from the Bank of England, credit unions made £ 210 million in revenue in 2019 – the vast majority, 83 percent, came from interest on loans. “There has become an increasing dependence on interest paid on loans,” it noted in its latest statistics released last July.

And while credit unions versus payday lenders aren’t a zero-sum game, unions offer savings accounts and deducted savings, a variety of cheaper loans, and in some cases even mortgages. APR limit and whether it ‘allows credit unions to fully serve the subprime part of the market’.

This recommendation was welcomed by Capital Credit Union’s Marlene Shiels, but some are more skeptical as to whether it would have a real impact.

Robert Kelly’s predecessor as chief executive of the Association of British Credit Unions told MPs in 2016 that a whopping 80 percent of credit union applicants could be turned down, with Kelly herself telling This is Money that the focus was on ‘responsible credit’ operations. ‘don’t throw money out the door’.

Peter Tutton, head of policy at StepChange Debt Charity, said the review “ raised questions about broader social policy.

‘Wider access to appropriate credit can help people who can afford to borrow on commercial terms,’ he said, ‘but there is also another important group of people who need cheaper and better ways to cover their necessary costs. . ‘

The charity called for an interest-free loan to help “ those in the most financially vulnerable positions. ”

But those in the industry who spoke with This is Money felt that the recommendations of the review, coupled with Nesta’s treasury-backed grants, were a step in the right direction to allow credit unions and community funding help more borrowers of all levels.

“We can play a more prominent role, of course we can, and we should,” Kelly said. We should definitely get a more prominent place in building financial resilience in the gaps where irresponsible lending has taken place.

“I’m not going to say we’ll fill it all up, but I think we can do a lot more.”

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