How credit unions can grow in a time of rapid change

Credit unions are faced with a changing financial environment and new players trying to disrupt the market – and one solution is to work together. Mark Lyonette, chief...

Credit unions are faced with a changing financial environment and new players trying to disrupt the market – and one solution is to work together. Mark Lyonette, chief executive of the Association of British Credit Unions (Abcul), speaks to Co-op News about future trends in the financial services sector.

Abcul has just held its annual general conference in Manchester, bringing together over 300 representatives. It was the organisation’s most successful conference to date, says Mr Lyonette, who has led Abcul since 2004. “There’s a time of great change in the sector,” he says. “Credit unions are innovating, they are trying new ways to improve services.

“We hadn’t had huge regulatory changes over the last two, three years until about this time last year when the Bank of England, the FCA and the PRA came forward with a review of the sector, the biggest review in 14 years.”

He says that while the intention was good, certain changes recommended by the regulators would have caused some unintended consequences. “For example, there was a requirement in there that credit unions wouldn’t be able to take savings above £75,000, the protected limit in the UK,” he said.

Credit unions need to work together – because even a very large credit union’s voice is not going to be as powerful as many credit unions speaking together

“That in itself wouldn’t be a huge problem because we don’t have many people at all who have savings above £75,000. However, it’s the message it would have sent to the 65 million people who are eligible to join credit unions – that somehow we were not as good a place to save as a bank or a building society. That, I think, would have limited the ability of the sector to grow.”

He adds: “There were probably a dozen kinds of proposals that hadn’t been fully thought through in terms of the impact to the sector.”

Abcul engaged with the regulators and politicians to ensure the changes would not place an extra burden on the sector. “Now we have a better regulatory settlement than we had even a year ago,” says Mr Lyonette. “The good things that were in the proposal are there and the things that were going to drive some unintended consequences are not.

“That’s another good example of where credit unions need to work together – because even a very large credit union’s voice is not going to be as powerful as many credit unions speaking together. It is another example of why being a co-op – Abcul is a co-op owned by its members – is a good way to organise a trade association.”

In 2013 Abcul set up Cornerstone Mutual Services as a subsidiary to provide services for members and is looking overseas for inspiration.

“When you look at credit unions in Britain and see that we’ve grown our membership to 2% of the population – and then compare that to other countries where membership can be anything from 15% and 50% of the population, that would get anybody looking at what’s different with credit unions in those countries, and what we can learn from them,” says Mr Lyonette.

One distinction is the wider range of services provided by credit unions in other countries – made possible by collaboration. “Credit unions in other parts of the world co-operate as co-ops,” says Mr Lyonette. “Where credit unions do that well, their market share is higher.

All our coverage from the 2016 Abcul conference and AGM

“In the USA there are 6,000 credit union service organisations, co-operating in all sorts of ways to get more value for their members – sometimes through economy of scale, sometimes to provide a product they couldn’t do alone.

“Many of those credit unions, some of which are not much bigger than credit unions here, can provide a full range of financial services because they’re not doing every bit of it themselves.”

And this is the thinking behind Cornerstone, he says. “It’s an ambitious type of co-operation where credit unions are committed to working on the same operating model. That’s quite a challenge. We’ve got 35 credit unions who are all committed to that operating model. That means that for every single one of them it’s different from what they do now.

“Committing to working in a new way – underpinned by new technologies, mobile and digital advancements, and processing systems that will allow payments to happen quickly – demands some sense of compromise, because the model they’ve collectively chosen to work on is not what any one person is doing now.

“Co-operation is a challenge, it is easy to say and difficult to do.”

The sector faces other challenges, with savings growing quicker than loans. “The problem with that is that you’ve got savings that are coming in that you’re not able to lend out.

“You have to pay a dividend or perhaps an interest rate and the money that you’re not lending out on a loan is sat in a bank account earning pretty much next to nothing. So the challenge for credit unions is how to increase the lending they do.”

Again, Mr Lyonette finds inspiration in the USA, where credit unions grow by offering more than just unsecured personal loans.

'When you turn up to buy your car, even if you've not heard of the credit union, it could be offered to you' - Mark Lyonette
‘When you turn up to buy your car, even if you’ve not heard of the credit union, it could be offered to you’ – Mark Lyonette

“Credit unions that are bigger than us tend to have at least three different product offerings that we don’t offer here: retail mortgages; responsible credit card offerings; and some exposure to car loans. With the same membership you can grow your business, because you’re a part of that bigger lending ecosystem that your members are already a part of.

“The 1.2 million members in Britain, they’ll have a card, they’ll have a mortgage. If they can’t get that from their credit union, they’ll get it from somebody else. Perhaps if their credit union were able to offer that to them, some of those people would be quite happy to purchase that through their credit union.”

Currently only four credit unions in Britain have mortgage permission, but Abcul is working on this in its vision for 2020, which explores what credit unions will be able to offer members in four years’ time.

The increased importance of the digital offering also needs to be considered – but, says Mr Lyonette, it all goes back to co-operation. “Credit unions need to work together to afford these technologies.”

Abcul’s conference included presentations on auto lending.

“Most people in the UK finance their car at the point of sale or showroom or broker and we need to find a way to be part of that distribution network. We’ve heard a lot from our colleagues in the States about how they found an easier way to be part of that process, so that when you turn up to buy your car, even if you’ve not heard of the credit union, it could be offered to you.

LOGO“It was at that point that car lending really took off in the USA.”

In July, Mr Lyonette attends the World Credit Union conference in Belfast, with 2,000 credit union representatives from across the world. “It’s a huge opportunity for learning. Whenever our credit unions from Britain have been to those conferences they’ve found it an incredibly exciting opportunity.

“A whole range of people are starting to use digital now. Competition is coming from new sources with the rise of financial technology. All over the world people are starting to disrupt the financial environment. Credit unions have to compete in that.”

Credit unions in the UK have been growing their membership base at a higher rate than in other parts of the world, says Mr Lyonette. He admits this could also be due to having started from a smaller base of 2%.

“They are growing at almost as high a rate as you can comfortably manage. As you grow very quickly you have to put more of your members’ money aside to boost your reserves – and there’s a limit as how quickly a co-op, a true financial mutual, can put that capital aside without charging too much or giving too little back to their members.”

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