UNISON, the UK's largest trade union, has announced that it will be creating a network of credit unions to “help impoverished members deal with personal debt and financial difficulties”.
Only a matter of weeks ago the Archbishop of Canterbury Justin Welby told an interviewer at Total Politics that he had met with the chief executive of Wonga and told him credit unions would out-compete his payday lending company.
In that time Wonga recorded profits of £63m 2012, more than £1m a week. After the excitement even supporters of the credit union movement were wondering how on earth the Archbishop could believe such a thing.
But the optimism that an ethical financial institution such as a credit union can out-compete Wonga and the like has had a boost in recent days.
UNISON, the UK’s largest trade union, has announced that it will be creating a network of credit unions to “help impoverished members deal with personal debt and financial difficulties”.
David Prentis, the UNISON general secretary, has said:
“The credit union network is a practical solution to help members drowning in debt … Many have been turned down by banks and building societies unwilling to lend to low paid workers … leading to growing financial hardship and insecurity”.
As more money is sucked up by payday lenders in extortionate interest rates (remember it costs around £25-35 to borrow from a high street payday lender per £100 borrowed over 2 weeks) there is less chance of a financially vulnerable person being able to save against financial shocks in the future.
A network of credit unions working together to better help the members of UNISON will begin a trend of more successful models to combat poverty and financial exclusion.
But UNISON will not just leave it there. In response to the rise of payday lending (which grew from being worth a mere £100m in 2004 to £2.2bn in 2013) they are today starting a 5 point programme to tackle debt and the growth of payday lenders. The plan includes:
Extending opportunities through the network to deliver high quality debt advice and budget guidance to increase the value of credit unions to more people;
Call on government to start a major investment programme to credit unions in order to ween existing payday lending customers away from costly loans and into more suited savings and lending products;
Advocating a cap to be placed on the total cost of credit;
The establishment of joint partnerships with an eye to highlighting the importance and value of savings schemes; and
Negotiating the campaign for fairer pay.
This comes at a time when a London Mutual Credit Union (LMCU) report has detailed findings of its payday loan-type product which aimed to offer short term loans with a quick underwriting process at a fraction of the cost of loans by payday lenders on the high street.
One interesting statistic found in the report noted that customers liked the ease of access to loans, but appreciated longer payback terms. The report said:
“Applicants liked the option of repaying payday loans over a longer repayment term. Just 29 per cent of loan applicants wanted to borrow over the traditional one month term, with the majority (59 per cent) opting to repay over three months.”
This is particularly interesting as one way payday lenders seek to win hearts and minds is by saying they offer a product which is in high demand – short term credit of relatively small amounts – that mainstream banks don’t offer (instead offering larger, long term personal loans or overdrafts).
However payday lenders rarely say much about the attitude of longer terms for loans on small amounts.
There is two ways to look at this: the payday way or the cynical way.
The payday way: Maybe payday lenders say less about this because they really believe their product is to the end of payday. Despite evidence to the contrary maybe they think this billion pound industry is purely on the back of shortfalls before the next paycheck and not profit from debt spiralling.
The cynical way: Maybe payday lenders say less about this because of the following finding from the OFT in March 2013:
“Payday lending firms describe and market their product to consumers as one-off short term loans but in practice around half of their revenue appears to come from loans which last longer and cost a lot more because they are rolled over or refinanced.”
If payday lenders offered longer terms for consumers to pay back their loans they would make less money from rollovers – which, scarily, makes up around half of their revenue.
This is what makes the need to create good credit unions even more vital. Payday lenders are doing a roaring trade. Millions of people are in hock to high cost credit. While banks withdraw from many lower income communities 9 out of 10 leading payday companies record double profits on 2011.
The solution to this is credit unions actively participating in joint working, better presence, and a better deal for consumers. They are beginning to succeed in this process. The dream that they will out-compete payday lenders is starting to come to fruition.
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