Credit unions ready to cash in as consumers turn away from high street banks

Credit unions have been tipped to lure more customers from mainstream financial services providers when new rules come into force next year allowing them to widen their activities.

Membership numbers are expected to rise under changes allowing unions to serve more people and boost their savings offers. The move comes as Scotland’s biggest credit unions benefit from increased demand as consumers seek an alternative to high street banks.

Changes to the credit unions act 1979, set out in legislative reforms put before parliament in July, will give credit unions the ability to expand beyond their traditional customer base when they come into force, expected to be early next year.

Credit unions are not-for-profit organisations that are owned by their members, usually drawn from those living or working locally or belonging to certain organisations.

However, their reach is currently limited by the “common bond” that members must share, usually living or working in the same area, working for the same employer (i.e. the NHS or police) or belonging to the same association, such as a church or trade union.

For example, Scotwest membership is open only to people living or working in the West of Scotland, while Glasgow Credit Union members must live or work in the G postcode area and the Capital Credit Union is open to people living or working in Edinburgh, the Lothians or Borders. But they will soon be able to widen their membership scope by serving groups such as tenants’ associations or, perhaps more significantly, employees of national companies.

In addition, the new rules will allow unions to pay interest on savings for the first time, as opposed to dividends, delivering a further boost to their appeal. Members will also be given access to their savings through Post Offices, under a separate government initiative aimed at boosting the sector.

Mark Lyonette, chief executive of credit union trade body Abcul, pictured below, said: “Credit unions around the country along with their partners have been eagerly awaiting these changes, which will see increased access to safe and ethical financial services in communities and workplaces across the country, and so I’m delighted that they are on track to be in force by early next year.”

Paul Walsh, the chief executive of Cuna Mutual Europe, believes the credit union offering compares increasingly well with that on the high street.

“Banks are withdrawing from localism to reduce costs; and in many cases they are closing down branches and pushing customers to online services,” he said. “As mutual lenders and credit unions offer a more personalised, local service, they are becoming even more favoured and loved by consumers.”

The larger credit unions offer similar products and services to high street banks, from mortgages and current accounts to their traditional savings and loans products.

Three of Scotland’s biggest – Scotwest, Glasgow and Capital – all offer mortgages already and have seen demand rise significantly in recent years as borrowers have struggled to secure finance with traditional lenders.

Rod Ashley, chief executive of Scotwest Credit Union, which posted a 42 per cent increase in lending in the first six months of this year, claimed there is growing awareness of credit unions as a viable financial alternative.

“Today’s consumers are more determined to seek out an alternative when they are unhappy with the service they receive from other financial institutions. For many, the trust in banks has all but gone and ‘trust’ is a key part of credit union philosophy. Credit unions are no longer seen as a ‘poor man’s bank’, but a safe and ethical financial alternative.”

The new legislation would allow Scotwest to offer services to people outside the West of Scotland, its current “common bond area”.Ashley believes a far wider range of people will be more likely to use the union once the new rules come into force.

“The legislation will mean that we can offer services to larger employers who have multiple locations and, consequently, fully service all their staff,” he said.

“It would also allow small businesses and organisations to have accounts with the credit union, which in turn should lead to an increase in individual members as well.”

The second part of the new legislation, and potentially even more significant, is the ability for credit unions to offer interest rates on member’s savings accounts, where they currently offer only dividend payments.

Savers typically get a dividend payment once a year, usually some 2 to 3 per cent of the amount they put away, although some offer more attractive returns. There’s also the advantage of being able to pay into savings account direct from pay, a feature that our case study found attractive.

Glasgow Credit Union – the biggest in Britain – currently offers the equivalent of 3 per cent AER on its cash individual savings account (Isa), more competitive than most Isas available on the high street.

Some unions – usually the biggest – have 30, 60 or 90-day notice accounts where borrowers are paid a bonus in addition to the dividend. However, the change in legislation will make it easier for them to promote the most popular savings offerings, allowing them to make the products clearer and more flexible.

For instance, Glasgow CU paid all savers a dividend of 3.25 per cent last year, yet it isn’t currently allowed to promise that rate at the outset. Not only can the union not advertise the rate, but it can’t feature in the influential best-buy tables with which consumers increasingly compare savings products. With interest rates shown, savers will be able to easily compare credit union deals with others on the market for the first time.

“This change will allow advertising rates of return, which we believe will help encourage more business,” said Ashley.

In the long term, credit unions may come to be seen as a more mainstream option, as opposed to the specialist niche they currently occupy.

Sarah O’Neill, director of policy at Consumer Focus Scotland, said: “Credit unions provide affordable and accessible banking facilities for many people across Scotland, but at present those who don’t live in an area where these are available or work in a workplace where they are on offer, may be missing out.

“Particularly at a time when some banks are beginning to charge basic account holders for ATM withdrawals, it is very welcome that credit unions are being given the ability to expand and offer more choice to consumers.”

lTo find your local credit union, visit www.findyourcreditunion.co.uk