Credit Unions: Scaling up the sector to empower communities

4^th April 2013

Mark Lyonette, Chief Executive of ABCUL, contributes to ResPublica's Making It Mutual collection

It was racial discrimination in 1960s London which led to the setting up of the first credit union in Britain fifty years ago. Credit unions have existed in the Caribbean since the 1940s, and immigrants to Britain from Jamaica and Trinidad decided upon their arrival in the UK to set up a self-help organisation so they could get the financial services they needed. [1]

Credit unions vary widely both in size and in the services they provide. But they all have unique qualities which both set them apart from commercial providers and mean that they have great potential to play much more of a role in financial services in Britain. These qualities are rooted in credit unions’ mutuality: their co-operative democratic ownership which gives each member-customer an equal say in their running and draws an unequivocal line of accountability directly back to the people that use the service, not remote shareholders seeking only maximum financial returns.

The co-operative credit union business model, which operates in over 100 countries around the world provides:

• Services which reflect the needs of their unique membership
• Local ownership, control and empowerment
• A cost effective business model that keeps money within communities
• An ethical alternative to commercial providers
• Advantages from being part of a wider national and international network

Formed and run by the people who use them, credit unions’ products and services reflect the needs of those people. Nearly everyone in Britain can join a credit union because of where they live, but this is not the only way that people can access their services.

Many people belong to a credit union that is linked to their employer. And many of the large credit unions that operate in cities and counties around the country started life as credit unions for local authority employees.

Payroll deduction has been vital to the success of these credit unions. Convenient for employees who can save from their wages or salary before it hits their bank account, it also means employers can provide a valuable staff benefit at little or no cost. An affordable source of credit reduces the likelihood of financial stress and schemes have also been credited with reducing staff turnover.

Credit unions for employment groups such as the police force, public transport employees and postal workers are among the most successful in the country, offering great value financial products that can beat those found on the high street. A streamlined operation that shares its profits with members means that these credit unions offer highly competitive rates.

But credit unions are more often recognised for their work to tackle financial exclusion. Credit unions were the main drivers behind the Labour Government’s expansion of affordable credit through the Growth Fund – £400 million of credit was made available in low income communities between 2006 and 2011. And before financial inclusion had been adopted as a term, credit unions played a significant role in local authorities’ anti-poverty strategies.

But it is not just through providing access to financial services that credit unions can affect communities. They can change lives in different ways through the sense of empowerment that can come from gaining control over finances, or skills learnt through volunteering that have led many people onto paid employment. The ‘one member, one vote’ principle means that everyone has a say in the focus of the credit union, even if they aren’t involved in its operations or governance directly.

Local control and ownership is just one of the ‘softer’ benefits perceived as important by many credit union members. The knowledge that money saved in a credit union is being invested in the local community, and profits are shared among members is also valued. This is especially so when the credit union will lend affordably to people who may otherwise only have the option of borrowing from doorstep lenders at 400% APR or payday lenders at 4000% APR.

But the warm feeling of knowing that your money is doing ‘good’ isn’t enough to incentivise most people to move their money from a high-street bank to a credit union. If an organisation doesn’t offer the products that people need and the level of service that people expect, then most consumers will stay away.

And although credit unions are often established with people on lower incomes in mind, if this is the only focus of a credit union it is likely to struggle to operate sustainably. Credit unions need to be able to attract people from a broader range of income groups.

As co-operatives without external ‘shareholder value’ to maximise, however, credit unions have been shown internationally to have an advantage over their commercial counterparts since their prices have one less expense to account for. [2]

Getting the products right

Limited product development has been cited by the World Council of Credit Unions as one of the seven deadly sins of credit union development. [3] We are living in an age where people can manage their finances online and get instant access to credit when they need it. So a credit union which requires its members to be in a certain place at a certain time to access their money, or has a 2 week wait for decisions on a loan, is going to be ruled out as an option by many potential members.

Without savings from people with spare income and a loan book that includes larger loans, credit unions will struggle to cover their costs. So it is vital that credit unions offer products that are attractive to as many people as possible in the communities they serve.

But the challenge for any small organisation is how to develop the products and service levels which will attract people to use them, when they have limited financial and human resources to do this. That is why credit unions around the world have embraced the sixth Co-operative Principle of co-operation among co-operatives – a significant factor in credit unions in the US and Australia reaching over 30% of their populations. [4]

By coming together to work behind the scenes credit unions can:

• ensure their members benefit from a wider range of products;
• harness the advantages of economies of scale and the sharing of knowledge and resources;
• retain the unique, local features which set credit unions apart from other financial firms.

This, coupled with the opportunities that new legislation brought at the beginning of 2012, such as serving new groups and corporate bodies, and having the ability to pay interest on savings instead of a dividend, is how credit unions can face up to the challenges and opportunities arising from the current political and economic environment.

Scaling up the sector

At the peak, there were nearly 700 credit unions in Britain, but mergers have brought this figure down to below 400. Despite nearly everyone in Britain having access to a credit union, and the advantages of the credit union model, there are still only around 1 million people using their services. Further, millions of people are still using high cost doorstep lenders, rent-to-buy-shops and, increasingly, pay day lenders. The on-going economic malaise has also made market conditions difficult for credit unions.

In an era of austerity and with the advent of Universal Credit, organisations including social housing providers, local authorities and national Governments are asking more of credit unions. They are looking to credit unions to deliver affordable budgeting solutions and more affordable credit. Credit unions have also been cited as solutions to the lack of funding for small businesses and to problems in local economies. Added to this, many people are looking for a real alternative to the commercial banking sector.

To respond to these challenges, credit unions must look to develop answers beyond their current business model, and collaboration is the most important of these.

The Credit Union Current Account and the Credit Union Prepaid Card were developed by ABCUL and member credit unions to offer good value and appropriate ways to help people manage their money. Some credit unions have also expanded into offering Cash ISAs and even mortgages in recent years.
But in countries where this process is more developed, even the smallest credit unions can offer a wide range of services, including credit cards, mortgages and business loans. By sharing resources behind the scenes, credit unions can not only offer services to attract members, they can also increase access – through shared branching, mobile technology and call centres.

This need for collaboration was recognised by the Government in June when it adopted the recommendations from a feasibility study [5] commissioned by the Department for Work and Pensions. The Credit Union Expansion Project (CUEP) has invited consortia of credit unions to tender for up to £38 million with the aim of “supporting the sector to provide financial services for up to one million more consumers on lower incomes, and do so in a way that enables credit unions to modernise, expand and become financially sustainable.” [6]

This shared business model approach, which ABCUL has embraced in recent years, has already led to transactional banking services through credit unions. Through a new subsidiary, Cornerstone Mutual Services, the Association is also developing a range of other services including credit assessment tools and budgeting accounts. With a well-developed back office, we could eventually see a link up with the Post Office network.

A Consumer Focus report on the subject published in 2012 saw credit union services becoming available in post offices as something that would benefit credit unions, consumers and post offices themselves. [7]

Collaboration – co-operation between co-operatives – is one way in which credit unions in Britain are changing to help their communities access a sustainable and attractive alternative way of managing their money and face the challenges of a changing welfare state.

Diversifying the ‘common bond’ is another way in which more people can be encouraged into membership. This became much easier in 2012 when legislation was relaxed to allow credit unions to expand membership to new groups, as well as to corporate bodies.

Credit unions serving local communities can now extend membership rights to companies, housing providers or charities operating nationwide. A number of credit unions have already extended their reach to national employers – including many housing providers and their tenants. It is Bristol Credit Union’s move to allow companies to become members that has allowed the Bristol Pound to get off the ground. The complementary local currency estimates that it will have achieved a £1million Bristol Pound turnover in its first year. [8] This will both encourage the use of local businesses and ensure local money circulates amongst them.

Just as credit unions can contribute to local economies, we can all contribute something to the development of credit unions. Individuals and local organisations can make a contribution by becoming members or contributing towards governance or operational tasks.

In these ways, the principles of co-operation and collaboration which are central to the credit union model can be drawn upon to achieve a range of goals and objectives where stakeholders work together towards common ends. The success of credit union development depends upon the efforts of individuals and organisations with a stake in seeing the sector thrive.

It is unrealistic though to expect everyone to choose a financial services provider because of altruism or moral duty; the mutual model also needs to deliver on service and value. Meeting the needs of members and offering a share in the profits is how credit unions can attract more people and ensure that everyone in the common bond benefits.

Glasgow Credit Union has recently paid out a 3% dividend to all its savers, a total of £2 million. If credit unions work together to build the service levels and products people expect and need, we can see that success replicated across the country.

Offering a wide range of services, while ensuring that ‘cherry picking’ doesn’t leave the more vulnerable without access to services, is how credit unions can remain financially viable and socially effective. By working together as a sector we can achieve this.

This article was originally published in ResPublica’s Making it Mutual: The ownership revolution that Britain needs, a collection of essays covering all areas of policy – energy, financial services, education, infrastructure, welfare, public services, competition – proposing entrepreneurial and innovative policy proposals for structural reform.