The pandemic has highlighted the importance of community, from checking on elderly neighbours to buying more from local businesses. This renewed spirit has also extended to those beacons of neighbourhood financing: credit unions.
UK credit union membership, according to the Bank of England, has risen from 1.86 million in the second quarter of 2019 to 1.91 million in the same period in 2020.
‘People want to spend, borrow and invest locally,’ explains Robert Kelly, chief executive of the Association of British Credit Unions.
‘We provide a closer personal relationship than traditional banks. In many cases, we are the only financial service left on the high street.’
Help for SMEs
Credit unions mainly provide personal savings and loans to individuals based in their local areas, but they also help SMEs. For example, the East Sussex Credit Union (ESCU) offers ethical business loans to firms with an interest APR of 42.6% for up to £999 and 10.5% for over £10,000.
During the pandemic it has also launched ethical entrepreneur and trailblazer loans for those looking to start their own business, sometimes with redundancy pay.
‘We wanted to help people who have lost their jobs through Covid and get them back working in our community,’ explains ESCU’s deputy chief executive Emma Norledge.
Employee benefits
Another key service typically offered by credit unions is employee benefit schemes such as payroll deductions. One such example is the Money@Work scheme, run by Bristol Credit Union. Through their employers, staff can save money directly from their salary and borrow at discounted rates.
Large businesses have signed, including aircraft manufacturer Airbus, but it has also attracted SMEs.
‘It comes down to looking after your employees,’ says Sim Ilyas, business development manager at Bristol Credit Union. ‘We manage the process with the employer’s finance team and only need a spreadsheet to see that deductions keep tally with the payroll.
‘Employers acknowledge that their staff have been through the ringer, and a payroll scheme can take the edge off their financial stress’
‘All this reduces stress and means that employees don’t need to ask their payroll team for advances.’
He says the number of enquiries has increased since autumn 2020. ‘Employers are looking at the new normal,’ he says. ‘They acknowledge that their staff have been through the ringer, and a payroll scheme can take the edge off their financial stress.’
Mitigating factors
Norledge, however, doesn’t see the same demand from businesses. ‘We haven’t had a massive take-up with SME loans,’ she admits. ‘We do provide some, but not a lot. It is not the backbone of our business.’
Kelly says that a lack of business lending expertise and fear of risk is holding unions back from SME finance. ‘They are still finding their feet,’ he says. ‘We need more business lending expertise at the right scale. Profit margins can be tight for credit unions, as we are providing credit at affordable rates. We have to be careful in introducing new risks.’
‘Once SMEs know what a credit union is, they are excited about saving and investing in the local community’
Indeed, credit unions have faced new regulations in recent years, particularly around capital levels. Last March, in a review of credit unions capital regimes, the Bank of England stated that those with a capital-to-assets ratio below 5% should engage more fully with the Prudential Regulation Authority on their ongoing sustainability.
Despite the complexities, Kelly expects more SME services to emerge post-pandemic as businesses seek alternative finance routes in the battered economy.
According to the Bank of England, it took seven years for net bank lending to SMEs to recover from the shock of the financial crisis. A diversity of lenders is required, including credit unions, to ensure SMEs get the financing that they need. ‘We’ll see flexible credit facilities to help local firms, particularly social enterprises, manage cashflow and build scale,’ Kelly says.
Technology as catalyst
Unions developing more mobile app technology, online banking and working with fintech companies could also help extend their reach into small businesses.
One fintech working with credit unions is incuto, which via its online platform is helping more close to 50 credit unions digitise their offerings, including faster online sign-ups and automated lending decisions.
‘SME lending is more complex, and the risk assessment may be something that not all credit unions feel particularly comfortable underwriting,’ says incuto chief executive Andrew Rabbitt.
‘Part of our platform is standardising the onboarding and underwriting processes so they can automate more.’
Norledge, however, remains cautious. ‘There is potential to see more small business loans but there is also increased risk,’ she says. ‘SMEs have taken a massive hit and it can be difficult to judge affordability. But I would always encourage them to approach credit unions for loans, especially if they have a social or environmental mission.’
Credit unions should also be approaching SMEs. ‘We are advising our clients about marketing their services more to local communities,’ says Steven Cunningham, partner at Alexander Sloan, Accountants and Business Advisers. ‘Many people still don’t know what a credit union is.’
Norledge agrees that this is a major issue but is set to act. ‘Before the pandemic, we set out a networking strategy to get out and meet SMEs and their accountants,’ she explains. ‘We’ll start that again when we can.
‘We find that once SMEs know what a credit union is, they are excited about saving and investing in the local community.’
What is a credit union?
A credit union is a community savings and loans provider owned by members. The pooled funds that members deposit are used to make loans to other credit union members.
They are regulated by the Prudential Regulation Authority and Financial Conduct Authority.
