Future Gazing

Credit unions – no longer the ‘poor man’s bank'

The middle classes are set to discover credit unions. But why would anyone ditch a high-street bank for a local financial co-operative?

All over the country a revolution is taking place. Ordinary people are turning to local, mutual organisations for banking services.

Mistrust of mainstream banking, disgust at bankers’ bonuses, and the banks’ reluctance to lend mean we’re looking around for alternative ways to borrow, save and bank.

It's long been true that some in need of a short-term loan would fall for easy-to-access local sub-prime lenders who have been walking the towns and villages of Britain for many years. Other more fortunate ones have come across credit unions – where they can borrow modest amounts of money at fair rates and where members own the union.

Erstwhile pop star, WAG and X-Factor judge Cheryl Cole said of her teenage years in a recent Vogue interview: "If ever I wanted to buy my own clothes, I'd have to get a loan from the Provi [Provident] man. And then you'd take yourself down to River Island or Topshop and pay him back weekly."

While Cheryl no longer requires the services of a sub-prime lender she would be very welcome at her local credit union today. Credit unions are intent on shattering their image as “the poor man’s bank” and want to appeal more widely in the future. They have trebled their reach in the last 10 years and, given their ethical, local credentials are on course to attract a more diverse following in the years to come.

Credit unions – the facts

Credit unions offer current accounts

• Credit unions are financial co-operatives owned and controlled by their members. They have been around in the UK since the industrial revolution in the 18th century
• They can be based in a local area, a workplace, or members can all come from one institution such as a union or a church
• They offer services including savings accounts, loans, ISAs and current accounts with standing orders, direct debit and debit card facilities. A few even offer mortgages
• They are regulated by the Financial Services Authority (www.fsa.gov.uk) which guarantees individuals' funds up to £50,000 per institution
• 2007 UK figures show there were 346 credit unions accredited to the Association of British Credit Unions (ABCUL) with 490,000 members. They were managing over £333million of members’ savings.

Credit unions – the current account

Credit unions have for some time been held back by onerous legislation dating back to the 1970s, but there is growing political will to encourage them to be more widely used. The government considers them an important weapon in tackling social exclusion, but credit unions are also keen to appeal to people from any part of society.

While only 1% of British people are members of credit unions, they are firmly mainstream in countries like the US and Canada. In these countries they are regularly used as a fair source of finance for home improvement loans or buying cars.

Anecdotal evidence from the credit unions suggests that they have been much busier since the credit crunch took hold. In some cases they have stepped in when banks have suddenly withdrawn credit facilities from long-standing customers.

And now, 18 credit unions have started to offer the one thing that could see their growth explode – a current account complete with debit card. This means that members can access their money through ATMs and can set up money-saving direct debits to pay for essentials such as utility bills and home phone and broadband bills – saving up to £200 a year in some cases.

Mark Lyonette, chief executive of ABCUL, says: “The Credit Union current account is enabling more and more people to access the benefits of the banking system, often for the first time. This will help them to manage their money more effectively and prevent them from getting into debt so easily.”

MP Mark Hoban said at a recent fringe meeting at the Conservative Party Conference in Birmingham: “The credit crunch is changing the face of consumer credit with mainstream lenders being able to pick and choose their customers. More people are finding it hard to pay their debts and people needing credit will turn to other types of lenders, such as home credit and credit unions.”

Beyond their straightforward loan and savings terms, credit unions are also tapping into increased interest in the financial co-operative. As an Abcul spokesman said: “People actively want to save with a local, ethical organisation where they feel more in tune with its ethos.”

David Anderson, chief executive of The Co-operative Financial Services which provides the background know-how for the Credit Union current account believes that mutuals are set to garner renewed interest.

“We are already seeing consumers look for ‘safe havens’ for their savings, spurred on by such positive press coverage of successful mutuals and their stability in the current climate.”

Indeed, one express aim when credit unions were established was to help people learn to manage money wisely and prevent them getting into debt. Advice that's needed just as much today. A local, well-trained adviser, not shackled to sales targets is one thing that many people need just now.

The Co-op's David Anderson neatly sums it up: "Knowing customers on a local basis is likely to become much more fashionable again – a major opportunity for credit unions.”

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