Can credit unions really solve Britain’s high cost credit shortage?

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

Yet that is exactly what happened to Police Credit Union last March.

The member owned co-operative, which has grown to 34,000 members since its founding in 2002, was handed the cash from a Treasury-backed fund so it could help those in the police, armed forces and other public services cut the cost of their borrowing as their financial habits improved.

Officially dating back to the 1960s and with roots which go back to the 18th century, credit unions have long been applauded for their membership model. High profile supporters of the co-operatives include Michael Sheen and Camilla, Duchess of Cornwall

And it was not 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 firms like PCU to ‘find innovative technological solutions to increase access to affordable, responsible credit’, according to Nesta, the firm behind the ‘Affordable Credit Challenge’.

For Paul Norgrove, the chief executive of PCU, which operates under the wider umbrella of the Serve and Protect Credit Union, 2016, that is largely about making more people aware they exist, and reducing how long it might take prospect borrowers to get a loan.

‘We saw a lot of people going into the military with thin credit files, many had gone to a doorstep 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 to us”. We’ve spent the last two years trying to refine our approach, to improve our digital offering and minimise that friction so we can be available when our members need us.’

Adverts for payday lenders like Wonga were more visible than those for local credit unions, which likely would have offered hard-up borrowers a cheaper alternative 

It is also about trying to attract new blood to co-operatives which can be dominated by older savers.

Marlene Shiels, the chief executive of Capital Credit Union, which serves 24,000 members in eastern Scotland and was one of the other winners of the £200,000 grant, said: ‘For members who want to go digital this funding was vital for transforming us. 

‘We’ll have an aging membership (the average age of a member is 47) otherwise.  We’re trying to attract younger people and digitise.’

And attracting younger members is not the only struggle credit unions face. 

Although membership of around 400 co-operatives in Great Britain and Northern Ireland has grown from 1.85million in 2015 to 2.07million in 2019 and the number of loans by a similar level, chief executives and regulators alike have raised concerns the sector is being held back.

Credit unions have long been popular for their community ethos; all members must have saved with a union and be united through a ‘common bond’, which may be geographical, like Capital, or professional, like Serve and Protect.

High-profile backers of such co-operatives include Camilla, Duchess of Cornwall, the actor Michael Sheen and the Archbishop of Canterbury, Justin Welby.

And the narrative such ethical local lenders can fill the void left by the demise of the likes of Wonga and help more disadvantaged borrowers access credit is one plenty would like to buy into, even if it has yet to come true.

Only last year, the chairman of the Financial Conduct Authority, Charles Randell, gave a speech titled: ‘Is this the decade of the credit union?’

He said: ‘The need for more sustainable community based finance is huge. 

‘The transformation that the credit union sector needs to undergo if it is to meet much more of this need is huge. But the benefits of doing so could be huge as well.’

And this time it really could be different. 

Not least because a 68-page review into Britain’s unsecured credit market authored by the FCA and published this month has thrown its weight behind the most substantive reforms to the system since it was formalised at the end of the 1970s.

‘Despite positive efforts to encourage more alternatives to high-cost credit, the market has not delivered at scale, and further reform is needed’, the review stated. 

‘This includes liberalisation of the approach taken to regulating credit unions and to encourage more mainstream lenders to participate at lower costs in this part of the market.’

It added: ‘Credit unions offer an important alternative to high-cost credit and enable wider financial inclusion. To fully realise their potential there is a case for removing some of the current restrictions on their activities.’

Its call for the Bank of England, FCA, Treasury and Northern Irish Government to look at legislation published before the advent of the internet, let alone smartphone banking, was welcomed by campaigners and chief executives alike.

‘I 100 per cent welcome the review’s recommendations’, Paul Norgrove said, ‘the 1979 Credit Union Act is older than me.’

Robert Kelly, the chief executive of the trade body which represents 169 credit unions in England, Scotland and Wales, said ‘a big priority’ was reviewing the legislation and regulation governing the sector.

‘The reality is the regulatory environment has restricted credit unions in terms of transformation and innovation. 

‘The FCA has said credit unions can offer basic savings and loans. We’ve argued for the capability to offer car finance, credit cards, insurance facilitation, as well as more collaboration.’

Marlene Shiels, who sat on the review’s advisory panel, added: ‘We have the most restrictive legislative framework of any country, it’s important that’s changed. We need to be able to offer more for our members beyond savings and loans.

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

Credit unions made £210million in income in 2019, according to figures from the Bank of England – the vast majority, 83 per cent, came from loan interest. ‘There has been an increasing dependency on the interest paid on loans’, it noted in its latest statistics published last July.

And while credit unions versus payday lenders is not a zero-sum game, unions offer savings accounts and payroll deducted savings, a variety of lower cost loans and even mortgages in some cases, the review also called for regulators to look at the 42.6 per cent APR cap 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 sceptical as to whether this would have a real impact.

Robert Kelly’s predecessor as chief executive of the Association of British Credit Unions told MPs in 2016 that as many as 80 per cent of applicants to credit unions could be turned down, with Kelly himself telling This is Money the focus on ‘responsible credit’ meant co-operatives were ‘not throwing money out the door’.

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

‘Wider access to suitable credit can help people who can afford to borrow on commercial terms’, he said, ‘but there’s also another important cohort of people who need cheaper and better ways of being able to meet their necessary costs.’

The charity called for a no interest loan scheme to help ‘those in the most financially vulnerable positions.’

But those from the sector who spoke to This is Money felt the review’s recommendations, coupled with the Treasury-backed grants from Nesta, were a step in the right direction in allowing credit unions and community finance to help more borrowers of all stripes.

‘We can play a more prominent role, of course we can, and we should’, Kelly said. ‘We should absolutely have 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 completely, but I think we can do much more.’