Government cash to help credit unions ditch 'poor man's bank' image

Published by 24publishing for 24dash.com in Housing and also in Central Government, Communities, Local Government

The Government says it is determined to help credit unions ditch their "poor man's bank" image after announcing the sector will receive up to £38m of investment by 2015 to expand and improve their services.

It follows its decision to take forward the recommendations of the independent Credit Union Feasibility Study which concluded that without further financial support the sector could contract or cease to operate altogether.

The Government sees them as serving the 1.4m people who have no transactional bank account in addition to those hit by mainstream bank charges or forced to turn to loan sharks.

It wants credit unions to be a "mainstream option for savers and borrowers" and to offer bank accounts with direct debit and savings account functionalities and other facilities such as jam jar accounts - which help people to budget and prioritise bills, such as rent.

Jam jar accounts - which allow customers to split their account balance into separate pots for spending and bill payments - are also being developed by other financial specialists, including allpay, which works with housing associations to provide user-friendly ways for tenants to pay their rents.

Just 2% of people in the UK are members of a credit union, compared to 24% in Australia, 44% in the United States and up to 75% in Ireland.

The £38m, which follows the £13m already invested last year, will help credit unions to buy in new IT systems and infrastructure to reach one million more people.

To help the sector stand on its own two feet, the Government has also announced it will be consulting on plans to allow them to increase the 2% monthly cap they face on interest rates.

The feasibility report - published in May - found that if they were to charge up to 3% pcm on loans from April 2014 "they could become sustainable within five to seven years, and have a much greater chance of maintaining sustainability in the long term".

It says the biggest challenge to expansion is not demand, but awareness with may believing that the Government could assist the movement by facilitating links to other partners such as the Post Office.

In particular, the Government sees credit unions linking up with housing associatons to help tenants through Universal Credit which will see claimants paid their benefits directly from October 2013.

The feasibility study says: "RSLs in many areas of the country work very closely with credit unions, with a number sitting on their boards. There is a natural affinity for the two organisations who serve a similar client base. With the upcoming changes to the way benefits will be paid many organisations are looking for methods that ensure they are paid by clients who are now receiving benefits directly and credit unions offer a route to do this. In particular, this is the case if they can create a common jam jar account. The RSLs will be able to drive significant rises in membership.

"The cost of administering jam jar accounts is fairly high and almost certainly above a level which it is appropriate for someone on benefits to pay. It is proposed that RSLs would pay these costs as a quid pro quo for guaranteed rent. Early indications are that RSLs would be willing to pay an average of £5 for each monthly payment processed."

Through taking forward the recommendations of the independent Credit Union Feasibility Study, the Government has committed to a "highly focused expansion programme".

Thus, the investment will be conditional upon the credit union industry meeting a number of agreed milestones for collaboration, modernisation and expansion.  

One of the study's recommendations notes: "Money should not be invested in expensive systems procurement until there is evidence of necessary change and commitment from the credit unions."

It adds: "The project should only proceed of the basis of the tight project management discipline to maximise the chance of success and to minimise the risk of financial failure."

Welfare reform minister Lord Freud said: “Credit unions provide an essential service for communities and we want to help them to extend the support they provide.

“Credit unions are growing – almost doubling in membership since 2006 – but we want them to be a mainstream option for savers and borrowers just as they are in other countries and to ditch the image of a ‘poor man’s bank’.

“Our investment will help credit unions reach up to one million new customers providing a real alternative to rip-off interest rates from payday loans, doorstep lenders and illegal loan sharks.”

The Association of British Credit Unions Ltd (ABCUL) - the main trade association for credit unions in England, Scotland and Wales - welcomed the funding.

ABCUL Chief Executive Mark Lyonette said: “Credit unions in Britain already provide financial services to nearly a million people, many on low to moderate incomes. But we know that credit union sectors around the world, by working together behind the scenes and offering a broad range of products, reach many more people, including, but certainly not restricted to, those at the lower end of the income scale. 

“So I very much welcome the recognition from Government that credit unions should be a mainstream option for saving and borrowing. This £38 million investment will help provide the infrastructure the sector needs and assist credit unions to develop services that will benefit everyone in the communities they serve, on a sustainable footing.”