I’m an alternative finance geek. I work in community finance, campaign for Move Your Money UK, and lobby on financial reform. But I’m not a member of a credit union. Neither for that matter are any of my friends or colleagues. Why not?
For a start most people have never heard of a credit union and even if they have they don’t know what they do, how they work or why they might want to become a member.
I was recently at a green business speed-networking event in the City and asked all of my ‘dates’ whether they knew what a credit union was. Only four said yes.
In many other countries it would have been a different story. In the US 44% of economically active citizens are members of a credit union, in Ireland it’s 72%. But in the UK the figure is less than 1%.
That’s starting to change. Credit union membership and deposits have grown by over 300% in the last decade. Given recent changes to the legislation enabling them to expand more easily, that growth looks set to continue.
So how does a credit union work? In brief, members put their savings into a credit union and those savings are then lent to the members that need to borrow. The profits made from the interest on those loans are then distributed back to the savers in the form of interest of dividends.
I asked Martyn Saville, ‘Which? Money’’s principle researcher, why I might want to become a member of a credit union.
“The purpose of a credit unions is to serve a particular community. So they are good places to access credit at reasonable rates if mainstream lenders like banks turn you down. Basically they mean low-income borrowers don’t have to use high cost or doorstop lenders - or worse, loan sharks”
But what’s in it for the savers? Are savers pretty much just higher-income individuals who want to help their community?
“There’s an element of that. People like to know that their money is going to help the local community, not being used to pay astronomical bonuses. But because credit unions are doing simple, old-fashioned banking they can offer very competitive rates for both savers and borrowers.”
“Banks put your deposits on the money markets which requires lots of expensive staff and systems, whereas credit unions are essentially just a way of enabling members to save into a central pot and then borrow from it when they need - so they have a much lower cost base."
“Also because credit unions are mutuals, there are no external shareholders to cream off the profits so everything is redistributed back to members.”
Credit unions are pretty small. Isn’t there a risk you could lose your money?
“Your savings are just as secure in a credit union as in bank. Both are insured by the governments FDIC scheme up to £80,000.”
So what’s the downside? Why aren’t we all members of credit unions?
“Until recently, legislation governing credit unions meant they couldn’t offer fixed interest rates on savings, only dividends at the end of each year, so savers couldn’t compare them to banks to see if they were getting the best deal. There were restrictions on credit unions expanding so provision is geographically patchy and they have remained fairly small.”
Credit unions may be safe and offer competitive rates of return but they face some pretty big challenges if they are going to attract enough middle income depositors like me to go mainstream.
I don’t need to borrow regularly but I do want to save more. I would love my money to be reinvested into my local community, and the idea of being an owner-member appeals to me. In short, I’m a sitting duck for my local credit union. But I’ve never seen any marketing material from them. Credit unions need to try harder to promote themselves beyond the niche market they already serve.
What’s more, I often need to raid my savings account and as most credit unions don’t have the resources to provide remote banking, accessing your cash at short notice can be pretty inconvenient unless you’re very local.
And, even though I know it doesn’t really make a difference, I like having my money in one place and the vast majority of credit unions don’t offer a current account.
Some unions, like London Mutual, do offer current accounts, but don’t see themselves as competing directly with the bank banks, as director Lucky Chandrasekera explained to me.
“It’s about offering services local people need. We offer an ISA, current account with online banking, savings account, and even payday loans."
"All of our members either live or work in Lambeth and Southwark. Many of them struggle to access banking services, they’re either stuck on a basic bank account or can’t access credit."
"These are services they just couldn’t get elsewhere. It’s not about competing with the banks. We’re providing finance to people who the banks simply won’t serve.”
Julia Thurton is a 46 year old health worker from Lambeth and is a member of London Mutual:
“I joined the payroll deduction scheme which has really helped me to save. Last year I was hit with a big bill for housing repairs and it was great to know that there was somewhere to go to borrow the money.”
The market in high cost credit and payday loans is one of the fastest growing in the UK. Net personal lending in the UK has increased in recent times but bank lending is down. As banks are retreating from the personal loans market, households feeling the squeeze on their incomes from austerity cuts, inflation and stagnant wages, are turning to high cost and payday lenders, who charge up to 4000% APR, just to get through the week.
Credit unions may well be able to take on these high cost lenders. But the attraction of these lenders is their immediacy. You apply and get an answer right away. And as for the APR, well, what’s an APR anyway?
To borrow from a credit union you first have to become a member and in many cases, already have put some savings into it. So before credit unions can take advantage of this market opportunity they have to expand their membership. The challenge is expanding in a way that preserves the culture of mutuality that makes credit unions so different to other financial providers.
What about the long-term plan? To achieve sustainability and growth, credit unions need the right mix between savers and borrowers. They need more middle-income savers like me. As the big banks are doggedly pursuing customer deposits to strengthen their balance sheets, credit unions will have to take a more commercial approach to attracting deposits. That will mean offering a wider range of services and investing in infrastructure and marketing. Is it possible?
Mark Lancaster, Conservative MP for Milton Keynes North, is as supporter of credit unions. I asked him what he thought would be their future role:
“I first became involved when I was invited to visit Milton Keynes Credit Union. What struck me was not only that they were offering a real alternative to door step lenders and loan sharks but that the face to face service, personal relationships and mutual structure that the credit union is built around was contributing to a genuine sense of community in the wider area.”
“Credit unions have real potential to grow. The challenge is how they can increase in scale whist not eroding their mutual culture and ties to local communities.”
So will I join my local credit union? Given the sorry state of my savings account, it's clearly time I did. Meanwhile, Move Your Money UK is getting the message out, encouraging groups of campaigners and activists to work with their local credit unions to take on the power of the big banks and exploitative payday lenders.
To find out about your local credit union visit the Move Your Money website. You can follow Move Your Money UK on twitter https://twitter.com/#!/moveyourmoneyuk or facebook http://www.facebook.com/MoveYourMoneyUK.