At the beginning of February, the Bank of England released its quarterly statistics on credit union performance. They appear to have passed almost unnoticed in the press, and were not even mentioned on the website of the Association of British Credit Unions (Abcul). This is perhaps surprising, since in February 2015, Abcul had devoted an entire page to the Bank of England’s report.
That report was glowing: “The unaudited figures from the September 2014 quarterly returns of 362 credit unions in England, Scotland and Wales show that in the decade since 2004, credit union membership and lending have more than doubled, with savings and assets almost trebling.”
Indeed, credit unions have performed spectacularly well in the last decade, and particularly from 2008 onwards, as anger about the failure of large banks in the financial crisis and revelations about widespread mis-selling and rate manipulation led people to abandon them in droves. Organisations such as Move Your Money encouraged people to move their accounts to smaller banks, building societies and credit unions, while the account switching guarantee introduced in September 2013 made it easier for them to do so. There have, of course, been failures among credit unions, but they have not hit the headlines. The popular perception is that credit unions and small mutuals are both socially responsible and safer than the large high street banks.
The figures for September 2015 show that credit union membership has continued to increase. Since September 2014, the total number of depositors in the UK (including young people) has grown by 4.32%, from 1,568,558 to 1,636,289. But among young people, depositor growth is only 1.71%, from 226,335 to 230,198. And the figures for the year conceal a further, worrying development.
In the third quarter of 2015, membership growth tailed off. Adult membership across the whole UK only grew by 0.02%, and actually fell in both Scotland and Wales. Youth membership fared even worse, falling by 0.18% across the whole UK and 2.68% in England.
Interestingly, though, there is no corresponding fall in savings and lending. Credit union balance sheets have continued to grow robustly, with total assets and liabilities rising by 7.19% over the year from September 2014 to September 2015, and by 1.70% in the third quarter of 2015 alone. So depositors are depositing more money, and borrowers are borrowing more money.
This is consistent with a recovering UK economy. Credit unions also overall have rising capital levels and falling bad debts, which is reassuring for their depositors. It is an encouraging picture.
But the membership trend is nonetheless a cause for concern. There have been considerable initiatives to raise credit union membership, not least by the Church of England, which in January 2014 launched a Task Force Group as part of its aim to promote a fairer financial system. According to Abcul, the Task Force Group has done a lot to encourage credit union membership: “Local initiatives inspired by the Task Group include mass sign-ups to credit unions; recruiting volunteers for credit union boards; ‘pop-up’ credit union service points in churches and halls; encouraging engaged couples to join a credit union to save or borrow for their wedding; and promoting payroll saving with credit unions.”
So why is credit union membership levelling off, and falling among young people?
There are a number of possible explanations. Among older people, it seems likely that the problem is low interest rates on savings. Credit unions have traditionally paid lower rates on deposits than banks, since they are subject to a cap on the interest rates at which they can lend: although a few large credit unions feature on “best buy” comparison websites, the majority do not. For people whose primary motivation is safety and a wish to engage productively with their local community, this has often been sufficient.
But as low interest rates become entrenched, people looking for positive returns on their savings than the banks can offer increasingly turn to peer-to-peer lenders and crowdfunders, who offer better rates of interest and comforting transparency of information. This is a worrying trend: as I write, the former City regulator Lord Adair Turner has warned that the peer-to-peer lending market is neither safe nor well regulated, and there may be large losses to come, which would hit people who have turned to these platforms in a desperate search for yield. But the rise of peer-to-peer lending may partly explain the tailing-off of adult depositor growth.
More significantly, though, credit unions have not until recently offered the current account functionality of the high street banks, and some still do not. Abcul’s standard current account scheme is a welcome development, but not all credit unions are members. The fact is that the high street banks continue to dominate the current account marketplace.
But this has been the case for a long time, and yet credit union membership has been growing until very recently. Clearly, current accounts are not the main problem.
The core offering of credit unions – safe savings and cheap loans – remains attractive, and with a bit of government support, the access problems could be solved
In July 2015, the Guardian reported that although credit unions were regarded as value for money, access to them was regarded as a problem. The access problems were of two kinds: limited online and mobile access, and difficulty setting up regular savings.
The first of these in my view explains the falling numbers of young people joining credit unions, especially in England. Many young people do not have permanent homes or jobs, which tends to make them ineligible for credit union membership. But even if they are eligible, and they have disposable income, they may find that credit unions simply do not fit their lifestyles.
In August 2015, the British Bankers Association reported that mobile money had become “the UK’s number one way to bank”:
“Banking by smartphone and tablet has become the leading way customers manage their finances, as mobile banking overtakes branches and the internet as the most popular way to bank.”
The figures are startling. In 2015, customers moved £2.9bn per week using mobile device apps – up from £2bn in 2014. Banks are sending 1.3 million text alerts to mobiles every day. Telephone banking fell by 43% between 2008 and 2013, as the mobile money revolution gathered pace. And in 2014, there was a 6% decline in branch use across all types of banks. This last is particularly difficult for small geographically-based mutuals and credit unions, who have traditionally relied on personal contact and local presence.
To be sure, credit unions are beginning to respond to the growth of mobile money. Abcul is working to improve online and mobile access for credit unions, and many of the larger ones now offer online banking and mobile payments. But they have some catching-up to do, and in the meantime applications such as Apple Pay gain traction. There are alternative providers in the payments space too, offering a fast, cheap, fully mobile payments service which is attractive to today’s mobile, internet-savvy young people. It is not clear whether credit unions can really compete with these technologically advanced companies.
However, the core offering of credit unions – safe savings and cheap loans – remains attractive, and with a bit of government support, the access problems could be solved. The Scottish government, in a welcome development, recently announced that it would back payroll deductions for credit union savings schemes. Payroll deductions are an easy way for people to save, and even young people need to save, for house deposits and rainy days. If the UK government also backed payroll deductions for credit union savings, the declining trend in depositor numbers could be reversed before it really takes hold, and the credit union sector could become a far more significant part of ordinary people’s lives. And that is something we would all like to see.
Young people tend to be mobile, internet-savvy and wedded to their smartphones. Credit unions have, unfortunately, taken far too long to adapt to their needs.