Collaboration and diversity will complete the 2020 vision for credit unions

Following 15 years of steady decline in the loans-to-assets ratio in Britain’s credit unions, the Association of British Credit Unions (Abcul) is kickstarting a conversation looking at how...

Following 15 years of steady decline in the loans-to-assets ratio in Britain’s credit unions, the Association of British Credit Unions (Abcul) is kickstarting a conversation looking at how to better the sector’s lending situation.

Billed as a ‘2020 vision for credit unions’, the intention is to encourage credit unions to think about the products and services members want and which will keep them thriving in the future.

At the Abcul annual conference in March, the organisation’s chief executive, Mark Lyonette, was joined by Richard Woolhouse, chief economist of the British Bankers’ Association, and Andrew Milton, head of product marketing for Barclays, to discuss the lack of diversity in British credit union offerings in the context of the broader economy and the wider lending market.

“As credit unions in Britain we are lending less and less each year […] as a percentage of our assets,” said Mr Lyonette. “We are not using our members’ deposits as well as we might.

“Globally, the loans-to-assets ratio ‘sweet spot’ is between 70-80%. The British credit union loans-to-assets ratio has been below 80% since around 2001, and below 70% since 2009. It now sits around 55%.”

Mr Lyonette pointed out that this decline was not the direct result of the financial crisis, but began before and continued after the events of 2008. He cited other global credit union systems which have operated successfully in a competitive modern financial services market, including the US, which has maintained a loans-to-assets ratio of 60-70% over the last 20 years. Canada has maintained 75-85% over the same period, while Australia has managed a steady 80%.

“The only other large credit union system which has a downward trend like us is Ireland,” said Mr Lyonette.

He suggests that one possible reason for the decline is the lack of diversity in credit union lending products in British credit unions, and the fact that their once unique products are now available outside the credit union sector.

While more people may be aware of credit unions, Mr Lyonette believes the sector needs to re-examine its customer base and tailor products around demand. He gave the examples of successful US credit unions where traditional unsecured personal loans made up just a fraction of the loan books; the rest comprised products such as mortgages, vehicle loans and student loans that are not part of the standard British credit union offering.

“Across the whole of the US credit union system,” said Mr Lyonette, “only 5% of the loan book is unsecured personal lending.” In Canada, consumer loans make up just 8% of the total loan book.

This diversity of product is achievable, he said, because of collaboration. “There are a number of back office service providers that provide infrastructure, technical expertise, compliance and other support for small credit unions to offer a wide range of loan products by sharing the fixed costs.”

Credit unions in developed economies started offering credit cards, car loans and mortgages “a long time ago,” he said, in a way “which was compliant, safe […] and had to meet the needs of the regulator every bit as much as we would here in the UK.”

Mr Lyonette added that “the only credit union systems in the world (apart from Ireland and GB) with only unsecured lending are those operating in underdeveloped countries.”

However, he acknowledged that credit unions in Britain could not easily broaden their offering overnight due to the many regulatory and scale barriers, and that adopting a wider range of lending products would not automatically maintain loans-to-assets ratios.

“What we are saying is that when loans-to-assets are falling we can’t afford to ignore that. We must look at ways in which we can lend more of our members’ money responsibly,” said Mr Lyonette.

“Credit unions in developed economies where they are competing with a range of commercial providers such as banks, payday lenders, and other non-bank commercial lenders have survived and thrived by offering more than ‘one pair of shoes’.”

Abcul is now forming a short-life working group, including relevant expertise from other countries, to consider some of these challenges and examine a range of questions covering: the future product mix; the potential regulatory barriers and risks involved in expanding a product range; the economies of scale needed to offer car loans, credit cards or mortgages; and how these can be delivered by working together co-operatively.

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