Restructuring credit unions to better serve low and

moderate-income membersPaul A Jones PhD

Research Unit for Financial InclusionUniversity College Cork, 23rd May 2013

Extent of financial exclusion in UK

• Over 1.6 million adults in the UK do not have access to a transactional bank account, (Fin Inclusion Task Force 2010)

– Of the 2.7m originally found to be unbanked, 1.1 m have been moved into banking

• 54% of unbanked are family households (Policis / FPF 2011) At least 800,000 children live in households without bank accounts (HMT 2006).

• 64% of low income households have no cash savings, rising to 74% of those in the lowest income quintile Source : Policis / FPF 2011

• 2.4 m home credit users. Circa 1m payday users. 25% of home credit users and 23% of payday users don’t have other credit options. Source : Policis / FPF 2011 payday use up to near 2m

Extent of financial exclusion in UK• 1.1 m low income individuals need to borrow and have been unable

to do so in last two years. Policis and FPF 2011• 35% of low income households – circa 5 individuals - believe that it

would be impossible for them to borrow £200 – 500 from a mainstream lender Source : Policis / FPF 2011

• 310,000 users of illegal money lending, 2% of low income population rising to 6% of most deprived communities Source: Policis / BIS 2010

• 3 million households in social housing lack contents insurance, while they are twice as likely to be burgled as people living in privately owned properties (Widening the safety net; Demos, 2005)

• 60% of all calls to Citizens Advice about debt and benefits– Around one in four of the issues brought to Scottish bureaux

relate to debt

Extent of financial inclusion • Two-thirds (67 per cent) of low-income credit

users, some 6.7 million individuals, pay behaviour-driven costs on their mainstream credit use. On an annualised basis 3.6 million, or 44 per cent of the 8.2 million low-income borrowers, incur behaviour-driven costs. These account for a total of £630 million per annum and an average per head of £174 per annum. – Friends Provident Foundation 2011

A challenging market for credit unions

• Can be higher risk

• Often higher cost – time and resources

• Often people come with significant debts

• People on a squeezed low-income budget have a particular approach to financial services – Robbing Peter to pay Paul – Need for close control of finances

Changing Credit Unions• Historical line of theoretical and

methodological progression – Traditional model credit unions – Business-oriented credit unions– New Model Credit Unions– Regulated Credit Unions– Quality Credit Unions

• Development of a new paradigm

2001 New Model Credit Unions

• Learning from the International Movement • Business and market orientation• Radical financial and organisational restructuring• Financial discipline – introduction of PEARLS• Commercialisation and mainstreaming

– to be successful, credit unions must attract a varied membership base

• Fundamental to developing capacity to serve low income communities

• Rationalisation of the movement– Significant growth within individual credit unions

Doctrines of Success

• Serve the financial needs of the wider population• Savings mobilisation• Product diversification• Operating efficiency• Financial discipline • Self-governance• Assimilation

– David Richardson 2000

2002: Regulated credit unions

• The impact of Financial Service Authority regulation• Introduction of Approved Persons Regime• Established operational standards and financial

discipline• Development of a culture of compliance• Impact on service delivery

– Financial Services Compensation Scheme

• 59% of directors think Approved Persons Regime is a good thing. More likely to say this in larger CU:– 76% directors in 5,000 plus member CU– 50% directors in 200 or less member CU

2005: Quality Credit Unions• New Model in the British context

– learning from the West Midlands Action Research

• Modern and professional, accessible and visible• Commitment to good governance

• Building Better Credit Unions (Goth and McKillop 2005)

– credit unions not meeting WOCCU standards

• Member/Customer focused• researches, understands and meets member wants• understands dynamics of the low income market

• Accessible savings, affordable credit, transaction services, insurance, money advice, money management support

• Access to Credit on a Low Income (Co-operative Bank 2001)

2005: Quality Credit Unions• Emphasising savings mobilisation

• Child Trust Fund and ISAs

• Flexible and responsible approaches to lending• includes greater use of credit scoring

• Development of transaction services• ABCUL and Co-operative Bank banking project

• Benefit direct accounts • Insurance services • Money and debt advice and financial education

Effective promotion and delivery

• Through partnerships and networks– Working strategically with other organisations– Reaching out to the community through others– Councils and local authority departments, Sure Start,

Primary care trusts, housing associations, employment agencies, schools, refugee councils, CAB offices, community and charitable organisations, victim support groups, churches and faith groups

• Promoting mutual benefits

DWP Financial Inclusion Growth Fund• July 2006 – March 2011• 405,134 loans to a total value of £175,351,444.

Circa 100 credit unions delivered GF– 86% of loans and 86% of the money

• 76% of credit unions delivering Growth Fund say it had assisted growth (2008)

• Eight in ten Growth Fund lenders reported that their organisation had improved its working practices as a result of the Growth Fund and now operated in a more business-like way. ( Bristol University 2011)

Two research studies

• Jones P.A and Ellison A. (2011) Community Finance for London. Scaling up the credit union and social finance sector

• Jones P.A. (2012) Strategies for Growth: A research study into the progress and development of credit unions in the North East of England and Cumbria

Demand for financial services in London• Much of inner London is in the top decile of the index of multiple

deprivation

• Almost 25% of housing stock is social housing, rising to half in some boroughs in East London.

• Average household income for Londoners on low incomes, is £11 ,240 p.a. lower than the national average of £12,175.

• Ethnic minorities represent 57% of the low-income population.

• 57% of low-income Londoners are credit users.

• 61% of Londoners have no savings

• Three quarters (74%) of Londoners on low incomes would find it difficult or impossible to raise £200 – £300 in an emergency without borrowing

• Many low income Londoners not able to access credit – 39% no credit in last 5 years, rising to 45% in BME households

Credit unions in London (2012)

• 35 credit unions in Greater London• Serving 27 of London’s 33 boroughs• Strong social and community focus• Growing faster than in Britain generally• 2005 – 2009

– Assets up 92% (national increase, 44%)– Loans up 70% (national increase, 36%)– Savings up 79% (national increase, 39%)

Modest penetration

• In 2009, 60,000 credit union members in London

• 1% of Greater London population

• Growing at 18% per annum

• Demand-side research revealed 0.75m individuals, (30% of low-income Londoners and 42% of social tenants), lacked access to credit

Financial Inclusion Growth Fund

• September 2006 and to March 2011, 11 credit union contractors in London have:– Granted over 44,000 loans to low-income borrowers, 78% of

whom are women and over 80% social housing tenants– Made loans to total value of over £19 million– Opened over 25,000 current or savings accounts for Growth

Fund borrowers– Maintained less than 10% DWP target delinquency rate16

on loans in 87% of the participating credit unions

• GF credit unions grown most significantly – 80% increase in savings since 2005 – 2009 (non GF 43%)

Financial challenges• Low income to average assets

– 50% negative net income

• High operating expenses– 9 exceed 10% expense to average asset ratio – Endemic to serving segments of low income market

• Bad debt – GF credit unions 9%; non-GF 11.7%

• Dependency on external subsidy• Loan to asset ratio – 57% GF and 56% others• Need to maximise savings • Need to price realistically

Organisational challenges

• Leadership, governance and management

• Consistency in products and services

• Serving wider target market

• Developing information technology

• Developing effective partnerships

Rationalisation and strain

• Focus on business efficiencies

• Expansion and merger– Current approach to increasing efficiency

and driving down costs

• Current credit union model under strain– Organisational and financial strain – Impact of new legislation and regulation

Credit unions in NE and Cumbria

• 29 credit unions currently in NE and Cumbria• 31 at start of project (2011)

– 1 merged and 1 closed

• The 31 credit unions– 50 to 4,300 members– £50k to £2.6m

• Average membership around 1,000 • 32,000 members approx

Credit union growth • Credit unions overall are growing• 2010 – 2011 (sample 10 cus)

– Assets up 9%– Loans up 19%– Savings up 9%– Membership up 9%

• Hides great variability in growth– From expanding cus to stagnating cus– Assets growth 54% to -17%.

• Credit unions are merging

Credit unions under strain

• Growing a financial service is demanding• Will be increasingly demanding

– Prudential Regulation Authority (PRA)– Financial Conduct Authority (FCA)– Consumer credit act

• Amazing what people achieve• But many spoke of stress and strain• Insufficient capacity and resources• Worry about grant dependency • Uncertainty about the way forward

Credit unions under strain

• Financial stability and operating efficiency– Most not generating sufficient income from the

business– Grant dependency – High expense to asset ratios

• Variable but around 19% across the sector • Needs to fall by about 50%

– Reserves• variable but around 9% overall

• Impact of the Growth Fund

• Some credit unions could be easily tipped over into insolvency

Credit unions under strain

• The business of lending– loans averaged 50% of assets overall

• Attracting savings– Growing but below national average

• Struggling to build and widen the membership• Product and service delivery• Accepting the need to change

– 69% of directors and 58% of paid staff felt that it was now important for credit unions to rethink their role and direction

Change and transformation

• Vision and leadership– Dependence on the people involved – Vision to be a more inclusive financial provider– Good governance

• need for effective board training, planning and development• Understanding the relationship board and management

– Effective management • Need for high performing, well rewarded managers• Effective systems and procedures

Change and transformation

• Continuing rationalisation of the sector• Transforming management and operational systems

– Need for technical expertise and advice

• Product and service development– To attract different segments of the market– Need to modernise the approach to lending– Budgeting and bill payment accounts– Focus on pricing – interest rates and fees

• Tran

Change and transformation

• Harnessing information technology– Payment and pre-paid cards– Online access

• Partnership working– Local authorities and social landlords want credit

unions to be organisations with which they can do business

• Tran

Key structural change - collaboration

• Current model – atomistic and competitive

• Need for radical new approach

• WOCCU – greater collaboration, greater market share

• Fischer (2002, 2005)

• Need for cohesive, networked and integrated system– To drive scale, efficiency and performance

A cultural shift

• A focus on commonality rather than uniqueness and a radical increase in operational excellence (Grace 2010)

• Focus on shared back and front office services

• Dependent on trust and commitment

Harnessing technology

• The electronic hub – or the back office

• Collaboration on back office functions

• Facilitate new products and services

• Enable link with the Post Office and other partners

Credit Union Expansion Project• CUEP – up to £38 million over the next

three years in credit unions (£20m into CUs)

• Project awarded to ABCUL and Cornerstones

• Looking for step change in organisational capacity and significant growth based on a shared business model

CUEP

• Banking products and services– Automated membership and product opening

• Account opening online• Loan application and automated assessment

– Budgeting accounts including enhanced pre-paid debit card (LINK TO WELFARE REFORM)

– Standardised approach to savings accounts (including Christmas savings account)

– Mortgages, insurance hub and affinity schemes

CUEP

• Integrated platform – Integrated automated delivery system

• Enable secure connections to credit unions, card and payment networks

– Post Office integration

• Marketing strategy– Establish profile of members, understand

barriers – a project with Experian

CUEP

• Central services– Treasury and liquidity management– HR services– Credit control services – Internal audit and accounting services– Compliance and ratio reporting – Strengthening governance – Leadership development programme

Northern Ireland

• Jones P.A. (2013) Towards Financial Inclusion, The expansion of credit union financial services for low-income households in Northern Ireland

A collaborative and action-oriented study• Research aims

– How credit unions serve low-income households– Their appetite and potential for future expansion

in the low-income market

• Research methodology– The consultation group– Survey, interviews, discussions and seminars– Case studies:

• Slemish n tha Braid and Derry Credit Unions

A commitment to community

• The main purpose of a credit union:– to serve the needs of the local community– Noted by 66% of credit union respondents

• Strong sense of localism – Embedded in local social and family networks

• Focus on inclusivity and entire community – Unlike often in GB, not a primary focus on

serving the financially excluded

Serving the unserved

• Evidence to suggest that certain sections of Northern Irish society are not being reached by credit unions

• Little evidence of rigorous market analysis and segmentation

• Yet serving people on low to modest incomes is fundamental to credit union purpose and rationale

Credit unions and low-income households• Historic commitment to tackling poverty

• Operating in low-income market– Over 50% of survey respondents saw sub-

prime credit providers as main competitors.13% said illegal lenders

– Large numbers of small savers and low loan value borrowers

– 42 credit unions in the 12 highest ranked wards in the Index of Multiple Deprivation

Exploring need and demand

• Six focus groups on social housing estates– Importance of access to credit– The need for savings accounts– Around 50% of participants: current accounts

and bill payment and budgeting account– Standardisation of products and services– Ease of access – noted barriers to membership

• Joining procedures ( e.g. nomination)• Saving before borrowing

CU services for low-income households• 70% of survey respondents said that the financial

needs and wants were distinct– Promotion of saving central to product offer– Offer of low-value loans at 12.68% APR– Also some examples of transaction banking; budgeting and bill-

payment accounts; money and debt advice and financial education

• Over 50% of respondents keen to develop new products and services– Only five of the 48 respondents to the credit union survey were entirely

satisfied with the current range of products and services

Expanding product and service offer1. Money and debt advice

2. Benefit direct accounts

3. A current account with debit or ATM card

4. SMS alerts to members- reminders to repay loans.

5. Budgeting and bill payment accounts

6. Pre-paid debit cards

7. Bulk buying schemes for home heating oil

8. Internet access to account manager for members

9. Christmas saving schemes (locked-in savings)

10. Loans not linked to savings balances (instant loans)

11. Home contents insurance

(Savings accounts with an annual dividend, and loans for oil)

Reaching the hard-to-reach• Those outside CU social and community networks • 68% of respondents indentified importance of working

through partner agencies• Little evidence of working strategically with others to

reach marginalised groups (except in schools)• Credit unions want to develop partnership working with:-

• Debt and money advice agencies 77%• Community centres and organisations 72%• Other voluntary organisations 60%• Charities 51%• Local councils 47%• Housing Associations and The Northern Ireland Housing Executive 45%

Limitations and constraints

• Legislation

• Managing risk

• Operational capacity– Electronic deposit and payment channels

• Financial costs

• External financial support

Future development • Credit unions in a strong position to reach

out further within low-income and financially-excluded communities– A strategic approach to marketing – Modernisation of infrastructure and delivery

channels– Reconsideration of pricing for risk and cost

• Potential to be a major strategic partner with NI Executive and other agencies.

Bibliography• Jones P.A and Ellison A. Community Finance for London ( 2011) http

://www.ljmu.ac.uk/HEA/financialinclusion/96245.htm• Jones P.A. Strategies for Growth: A research study into the progress and

development of credit unions in the North East of England and Cumbria, January 2013 http://www.nr-foundation.org.uk/resources/publications/other-research/

• Jones P.a. Towards Financial Inclusion, the expansion of credit union financial services for low-income households in Northern Ireland (2013) http://www.housingrights.org.uk/component/content/article/4/258-towards-financial-inclusion-

• Bath C and Jones P.A. Unlocking credit unions (2013). Developing partnerships between credit unions and criminal justice agencies. http://www.ljmu.ac.uk/NewsUpdate/index_125449.htm

• Ellison A., Whyley C., Forster R., and Jones P.A., (2011) Credit and Low-income Consumers: A demand-side perspective on the issues for consumer protection. Friends Provident Foundation 

• http://www.friendsprovidentfoundation.org/credit-and-low-income-consumers-a-demand-side-perspective-on-the-issues-for-consumer-protection/