Welsh Government - Welsh Co-operatives & Mutuals Commission
The role that credit unions can play
A strong credit union sector can benefit a range of areas relating to the provision of fair and equitable financial services for the whole of society:
- Affordable credit – credit unions provide an affordable source of credit which is capped at a maximum interest rate of 26.8% APR compared with many hundreds or thousands of per cent charged by high cost alternatives such as doorstep or payday lenders. A loan of £300 from a credit union, repaid over 6 months would cost less than £22 in interest. From a doorstep lender, the interest would be likely to be over £150. But credit unions are also providing some of the best-value for larger, longer-term loans. A recent study found that credit unions offer the best value loan rates for all loans up to £2,000 and credit unions such as Glasgow Credit Union are even offering mortgages at competitive rates.
- Safe Savings – credit unions provide a safe place to save which is guaranteed up to £85,000 as an alternative to the unprotected savings clubs used by some such as Farepak which collapsed in 2006. Many credit unions also offer extremely competitive returns on savings deposits. Number One Copperpot Credit Union – serving the Police Force – for instance, pays a 3% dividend on its ISA accounts.
- Transactional banking and payment services – 24 credit unions now provide a full transactional banking service in collaboration with ABCUL and the Co-operative Bank: the Credit Union Current Account (CUCA). Unlike mainstream accounts, the CUCA charges a regular transparent fee in exchange for minimised default charges and extra flexibility in managing the account. Likewise, 62 credit unions have now issued a total of 15,000 Credit Union Prepaid Cards which provide full access to ATM and point of sale payment services including shopping online and around the world.
Credit unions work in partnership with a range of organisations to support their work, including:
- Social Housing – credit unions across the country partner with social landlords to provide their services to social tenants in an effort to reduce the costs of poor financial management for both the tenant and landlord. This can reduce arrears and evictions through helping tenants to better manage their budgets and assisting them to become more financially resilient through building a savings habit and reducing the amount spent on expensive borrowings. This role is likely to grow in the wake of Universal Credit which will see benefits claimants having to manage their own rent payment, in many cases for the first time.
- Employers – many of the most successful credit unions have strong partnerships with employers which has great benefits for the credit union through being able to administer payments through payroll deduction and having access to a well-defined, higher-income market but also for the employers through enhancing staff morale as a result of better financial resilience and well-being in the workforce.
- Local authorities – many local authorities work closely with credit unions to provide their residents with an ethical, community financial service which enhances the economic regeneration of their area. Leeds City Council, for instance, found that their work with the Leeds City Credit Union yielded a £10 benefit for the local economy for every £1 invested in the credit union.
- Schools – many credit unions work in partnership with schools to deliver and support financial education. This often involves setting up savings clubs and collection points in schools and involving children in the running of this.
Credit unions can also benefit a broader range of financial services and other policy areas:
- Diversity in banking and financial services – there is a growing body of thought which argues that a diversity of corporate forms in the financial services and banking sectors can create a more resilient system less prone to the types of crises seen in 2008. Mutuals and credit unions have a central part to play in this as has been identified by the Coalition Government. Furthermore, evidence has shown that mutual financial services have weathered the financial crisis very well.
- Local economic development – for a range of reasons, credit unions have been shown to benefit local economic development. The research already cited in Leeds, for instance, demonstrates an impressive ten-fold return for the local economy. The recent launch of the Bristol Pound, backed by Bristol Credit Union is another innovative scheme which is benefitting the local economy there by supporting local producers and retailers. Likewise the retention of funds that would otherwise go to high-cost lenders in interest payments is another means by which credit unions support the local economy.
- Health – several reports have looked at the question of how credit union membership and financial inclusion can reduce stress and worry through financial hardship and that this can have positive benefits for health outcomes.
The importance of sustainable development
As has been demonstrated, credit union services can have a great range of benefits for their local communities and, in aggregate, for the economy more generally. However, as has been shown recently by a UK Government feasibility study into expanding the sector, credit unions remain overly dependent upon ongoing financial support to continue operating. The result of this is to leave the sector vulnerable to the sudden withdrawal of support and to, paradoxically, create a culture of grant-dependency which discourages, or makes more difficult, the transition away from ongoing support.
Internationally, credit unions are independent and self-sustaining financial co-operatives which do not generally depend upon ongoing financial support to continue operating. For many years, ABCUL, working with the global credit union apex body the World Council of Credit Unions (WOCCU), in order to support the achievement of sustainable British credit union development. The work of Liverpool John Moores University’s Research Unit for Financial Inclusion, particularly its 1999 report Towards Sustainable Credit Union Development, has sought to establish a basis upon which this can be achieved.
The core of this strategy is in providing a modernised service which is, first and foremost, a commercial enterprise with a social ethos and underpinning. It starts from the assumption that a credit union can only be socially effective if it is commercially viable. As such, credit unions have, since the turn of the century, moved towards a model based on staffed highstreet branches, modern and accessible services and transactional banking and payment services which are attractive to a range of people, not just the poorest. This has directly influenced the surge in credit union growth outlined in the introduction.
UK Government support for credit unions
Credit unions have been central to UK Government efforts to promote financial inclusion taking a pivotal role, for example, in delivering the previous Labour Government’s Department for Work & Pensions Financial Inclusion Growth Fund which provided capital for on-lending to those without access to a source of affordable credit. Ending in March 2011, the loans provided under the fund totalled 405,000 with a value of £175 million and an independent evaluation of the scheme found that it saved loan recipients between £119 million and £135 million in interest payments compared with high cost alternatives. Five Welsh credit unions were involved in the delivery of this. While the scheme’s primary objective was providing affordable credit to those otherwise excluded, it also set key operational and developmental targets which saw great strides made in credit union capacity and efficiency.
From January 2012, the Legislative Reform (Industrial & Provident Societies and Credit Unions) Order has allowed credit unions to open membership to new groups including businesses and social enterprises and to offer new fee-paying and interest-yielding products. Already a great many credit unions have begun to take full advantage of the new possibilities. This moves credit union legislation in Britain from among the most restrictive regimes in the world to among the most flexible and should allow for the continued rapid growth of the sector.
Most recently, the UK’s Department for Work & Pensions has announced that the ABCUL has been awarded a £38 million contract to lead a consortium of credit unions (containing several Welsh credit unions) in delivering the Credit Union Expansion Project which seeks to add one million new credit union members by 2019 and to help participating credit unions to full self-sustainability by the same date. The project builds upon measures already taken and will develop a collaborative, shared business model for the credit union sector which will enable a more consistent and sophisticated service, greater availability of transactional banking and budgeting accounts and a range of modern delivery channels such as online, telephone and mobile. It will also open the opportunity of a link with the Post Office network making credit union services available across the 11,500 branch network. It also aims to save consumers as much as £1 billion in interest payments compared with high-cost alternatives. Such a shared business model and collaborative approach has been shown to work in all of the best-developed credit union sectors in the world.
Credit union development in Wales and Welsh Government support
The document so far has focussed on the generalities of credit union development across Britain, however, the benefits of credit union development and the measures that have been taken by the UK Government to support this are just as relevant in the Welsh context as they are in the English or Scottish – all UK Government support outlined above has been available to Welsh credit unions. Equally, the challenge of building a sustainable business model which facilitates the creation of an independent and socially-effective credit union sector is, if anything, more relevant in Wales than it is in other parts of the country.
We appreciate the support from the Welsh Government since 2001. With the inclusion of EU and charitable support, over £11 million has been put into the sector in this time. This support has coincided with the achievement of full credit union coverage of Wales, credit union membership rising from 11,000 to around 58,000 and developments such as the North Wales merger where 5 credit unions merged to create a single, market-leading entity.
However, while it is supportive of the overall impact, the Welsh Government’s own independent evaluation highlights some significant limitations of its most recent programme, Access to Financial Products Through Credit Unions:
- It identifies a tension that has not been appropriately addressed between encouraging credit unions to provide financially-inclusive products and supporting credit unions’ financial sustainability and urges future Welsh Government support to effectively address sustainability. It finds that credit unions in Wales remain financially weak and vulnerable to the sudden withdrawal of funding by the Welsh Government. This results from a weak and ambiguous focus on enhancing sustainability.
- It finds that while the intermediary organisation which manages the programme and provides support to the credit unions – The Social Investment Business (TSIB) – has met the KPIs it was set, the evidence suggests only a marginal impact on credit union development. According to the report, almost one third of phase two project funds were retained by TSIB.
- It shows that more tightly defined objectives for both credit unions and TSIB would have assisted improved outcomes.
- Its financial analysis shows only limited progress toward financial sustainability. This matches ABCUL’s own analysis which suggests that Welsh credit unions lag behind their English and Scottish colleagues in moving towards sustainability.
Though this report is supportive of the overall programme, it illustrates key shortcomings in its effectiveness and a key tension in the supporting rationale. We welcome the ways in which the Welsh Government has looked to improve on its programme during its course but we feel that, in line with the programme’s evaluation, a more fundamental re-think is required.
While we recognise that the Welsh Government faces significant financial constraints, the conclusion of the present programme in September 2013 provides an excellent opportunity to work closely together to design the best programme possible moving into the future.
An alternative plan for Welsh credit union development
As we’ve already set out and particularly in the current fiscal context, it is vital that the sustainability of credit unions is the key priority of any support that credit unions receive. Only when full-sustainability is achieved can credit unions’ services be guaranteed for the future. 86% of respondents to a recent survey of ABCUL’s member Welsh credit unions identified sustainability as the key challenge.
ABCUL’s strategy for credit union development is focussed tightly upon assisting credit unions to full financial sustainability and doing so through harnessing the power of collaboration. This involves:
- Improving the sophistication and consistency of service between credit unions – e.g. services such as the Credit Union Current Account and the Credit Union Prepaid Card – and harnessing economies of scale for back-room processing.
- Developing services which are more responsive to people’s needs and attractive to a wider-range of consumers – particularly higher-income, more profitable groups.
- Making credit union services available through a range of modern delivery channels such as online, telephone and mobile.
- Via the above measures, reducing costs and increasing revenues to address sustainability and cross-subsidise less-profitable work.
This model of development is influenced by successful credit union systems in US, Canada and Australia (where between 25% and 50% of people use credit unions) where collaborative business models are a common factor. On this basis and following detailed feasibility work the UK Government’s Credit Union Expansion Project has committed £38 million to the development of such a collaborative model.
ABCUL therefore recommends that, on behalf of our member credit unions and in line with the findings of the recent evaluation report, any future Welsh Government support should focus clearly on the sustainability challenge. This should be addressed through working alongside the DWP to maximise the impact of their programme and through incentivising positive steps towards sustainability through tightly-defined contracting arrangements. This should start from a clear acknowledgement of the need to be commercially viable and sustainable in order to be socially effective. The great benefits of collaboration should take a central place in this. The value-for-money delivered by third-party support arrangements should be reviewed.
We are very keen to work alongside the Welsh Government, UK Government and credit unions to ensure that credit unions in Wales are taking the appropriate steps towards achieving full-sustainability so that the full benefits of a successful credit union sector can be enjoyed.
Credit unions in Wales, as elsewhere, have great potential to play a significant role in a range of policy areas through the provision of a co-operative, ethical, community financial service. However, they must first be commercially viable co-operative businesses in order to achieve the social goals to which they aspire.
While the support that the Welsh Government has provided to the sector has had a positive impact over a number of years, the independent evaluation of the most-recent scheme highlights a number of clear limitations to the adopted approach and demonstrates the continued fragility of many credit unions in Wales.
We feel strongly that any future support that the Welsh Government provides to the credit union sector must maximise its impact by appropriately prioritising financial sustainability and, as such, should look to complement and support the work that the UK Government’s Credit Union Expansion Project is undertaking to develop a collaborative business model.
The full response is available to download on the right hand side.