Credit Union combat payday loans fiasco with a community centric financial vision which mirrors grassroots politics

11 July 2016

The not-for-profit savings and borrowing co-operatives are fighting back against exorbitant credit arrangements with a community-focussed vision involving automated payroll deductions, which has been supported by the Archbishop of Canterbury’s taskforce, with much of the technical skill being provided by the CIPP (Chartered Institute of Payroll Professionals).

Credit Unions offer exciting offset savings and loans products which are competitive with leading high-street ISAs and unsecured loans but which have a novel, personal and flexible approach to risk based on a system of local paper-based mandates. This means they remain attractive to financial services customers who in extremis may be denied credit elsewhere – or at the very least be given much less favourable rates.

Credit Unions are promoting themselves in local communities as money clubs – even going so far as to offer barbeques and other presences at village fetes – this is peer lending and borrowing in communities. Whoever said the old-fashioned spirit of mutualism within financial services was effectively dead?    

Most credit unions will develop a relationship with a consumer based upon a personal knowledge of him or her. Bank-statements and a few payslips are perused in detail and are found to be far more useful than credit scores in determining an appetite to lend.

The screen-in so far has been if anything too conservative, says Robbie Mochrie, associate professor of economics at Heriot-Watt University in Edinburgh, because unions need more members. Most of the customers né members thus far have been ‘promiscuous prime borrowers’ who believe they are getting an interesting offset savings and loans vehicle – and who like the community involvement.

There is an irony that it is these consumers, who may be paying £500 more over a number of years for a loan into the thousands, have been the quickest in terms of uptake. In the near-prime to sub-prime categories, rates will usually be cheaper than many of the high street lenders, but here there has been more consumer reticence. Some of the appeal may lie in the experience of being involved in a credit union – for those who wish to do so – being somewhat similar to those who choose to involve themselves in grassroots politics.

The credit union movement has grown hugely over the last ten years in Scotland, says Norman Crawford, business adviser at Lets Build Credit Unions. “In 2007 the government acknowledges that 1 per cent per month cap was holding credit unions back. You will find that 90 per cent of the loan portfolio for most credit unions will be at or below the 1 per cent mark. The rest will be up to the now higher 3 per cent final cap. They used to offer around £500 maximum in savings and loans, but now offer £15,000 each way. They accept 95 per cent of business and there is a 0.5 per cent default rate.”

Work has also had to be done to improve the time taken from the decision in principle to getting the money in the bank. A week is the typical time, but this can be immediate for customers who are in difficult circumstances because a white good has broken and they need credit fast. Savings are guaranteed by the Financial Services Compensation Scheme up to £75,000.

“Payroll deduction is a cheap route to getting large numbers of new members”, says Kenny MacLeod, chief executive officer at Scotwest Credit Union Limited, who talks of the closely guarded secret of not-for-profit saving and borrowing going over-ground. “The unique selling points are connected with market-leading rates on near-prime offset savings and loans, especially for customers who have been bullied with punitive bank charges.”

Mr MacLeod says mainstream lending with payroll convenience is a personal technique allowing consumers to find it easier to put aside money each month in a way which would be difficult for them to manage if the money made it into the current account. He says that these are community institutions which eschew traditional approaches to risk management and thorny issues such as ‘poverty premiums’. “You start offering the same rates; then you start saying to one customer you know well; we’ll give you a special rate. Quickly it becomes untenable in terms of managing relationships. You have to acknowledge where the equity is.”