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September 26, 2012

Are credit unions up to the challenge?

The problem with this endless succession of banking scandals is that as time passes we slowly become inured to them. No one ever gets prosecuted, the bankers maintain that they need and deserve their bonuses (and then take them anyway), and eventually the general sense of outrage begins to dissipate.  Which is why we need to hear more stories like that of Kirsten Christian. But as Lesley Riddoch points out, for initiatives like Kirsten’s to succeed, there needs to be a robust alternative to the banks. Is there?


Credit unions could be an antidote to our poisoned financial industry but they’ll have raise their game, writes Lesley Riddoch, The Scotsman

Four years on from the banking collapse and it seems neither banks nor customers have learned a thing.

Banks keep “misbehaving” – Lloyds has just been referred to the Financial Services Authority (FSA); a British “rogue trader” is standing trial for bringing his Swiss bank to the point of bankruptcy, and the FSA’s new managing director has said banks still view customers primarily as sales targets. A fairly normal week.

So, why on earth do customers keep piling money into banks? Presumably because we think there’s no alternative – when, of course, there is. Credit unions are locally owned co-operatives, run by volunteer directors distributing profit to members – banks are national, even global, plcs, effectively run by big pension funds, managed by millionaires and (though some are government-owned) still motivated solely by profit.
Credit unions do charge fees (lower than banks), pay managers (less than banks) and charge interest (generally at lower than bank rates). The key difference, though, is the ethic of understanding, support and trust that underpins the movement and the personal contact which makes it all work. Put bluntly, credit union customers aren’t left to sink or swim.

Complaints against banks misselling payment protection insurance (PPI) schemes have soared but the ombudsman is yet to uphold a single complaint against credit unions whose PPI plans were sold responsibly, without commission or “all up-front” payments. Ironically, though, the post-PPI clampdown means credit unions can no longer sell members unemployment protection to safeguard loans. The banks’ bad behaviour has blighted the credit union movement’s sensible precautions and evidently a quarter of a million (mostly benefit-claiming) account holders don’t constitute a powerful enough lobby to warrant special treatment. But could that missing clout be about to appear?

UK government figures show credit unions made 610,000 loans over the last five years, worth £275m, saving customers £245 each in interest. Some 40 per cent of borrowers also save with their credit union and a quarter of Glaswegians are members. Glasgow Credit Union offers mortgages and the Scottish Police Credit Union offers good rates on loans of between £3,000 and £20,000.

What’s not to like? There is, however, a snag.

Only four of Scotland’s 109 credit unions offers current accounts and none offers internet banking, evening calls or access over a mobile phone. That may not be a problem for the existing 260,000 members but it’s a barrier to growth among the bank-weary “squeezed middle.” If this changed, credit unions could take off.

This time last year, a 27-year-old Los Angeles art gallery owner, Kristen Christian, posted a Facebook message to 500 friends announcing her intention to shift accounts from her bank to a credit union. Within a few days, 9,000 people had joined her Bank Transfer Day page and the slogan “Invest in Main Street, not Wall Street” was born.

Transfer day was selected with another memorable slogan in mind – “always remember the 5th November” — and the National American Credit Union Association estimates 700,000 American consumers opened new credit union accounts in six weeks.

Could the same thing happen here if credit unions felt able to raise their game?

Ms Christian is typical of “conscious consumers” everywhere – she was angered by the banks’ role in financial meltdown, infuriated by big bonuses and massive profits and exasperated by the unfairness of fee structures.

“I was tired of being charged bank fee after bank fee. If their website is down and I have to call in, I get a $2 charge. That’s not my fault. The bank decided to freeze my funds, but made no attempt to contact me. It took nearly three days to give me access again.”

Significantly, though, the “last straw” for Ms Christian was not something that affected her directly – it was Bank of America’s decision to charge poor customers $5 a month to use their debit cards.

Suddenly, the banks had gone too far, levelling punitive fees against folk hardest hit by their own greed and reckless lending. America’s “squeezed middle” finally acted out of solidarity and self-interest. Within days, a self-managing, social-network-based consumer movement was born.

A “can bank, won’t bank” campaign could easily happen here with a similar act of “provocation” and more user-friendly accounts at credit unions.

Thanks to Iain Duncan Smith, at least one of those preconditions could soon be met.

Last week, 70 welfare, housing and business organisations published a list of concerns about government plans to replace the current plethora of benefits with a single Universal Credit payment next October. They focused on plans to pay Universal Credit monthly to just one household member, with only online access to financial information and a possible funding gap as the system changes to payment in arrears after decades of payment in advance.

People on low incomes are generally excellent budgeters – and yet the vast majority currently opt not to receive housing benefit personally but get it paid directly to landlords. It’s easier all round. Currently too, benefits are paid weekly or fortnightly in advance to each household member, not one “lead tenant” (for the same reason child benefit is paid to the mother).

Universal Credit will scrap these arrangements so benefits are synchronised with a working world where salaries are paid monthly in arrears to employees who distribute cash to family members (or not). The government believes this will facilitate a leap from the dole to the workplace and will teach claimants (albeit the hard way) how to manage cash in banks like everyone else.

This may look empowering on paper – in practice it’s likely to cause mayhem. Even folk with jobs check their balance before withdrawing cash. A mistake for someone on benefits could have terrible consequences – fees when cheques bounce, then more fees, more debt and perhaps resort to a “payday lender” or even loan sharks.

That’s why credit unions offer “budgeting accounts” with internal “jam jars” to protect vital rent, heat and utility-bill payments. British banks don’t offer such accounts, so they’ll have trouble helping Universal Credit-receiving clients stay in credit.

And what if they don’t? What if eviction, repossession and destitution result from the present caveat emptor (buyer beware) approach of banks and government – how will the public react on the third anniversary of Bank Transfer Day?

Could Scots deliver the ultimate message to profligate banks – goodbye? It’s really up to Scotland’s credit union movement to decide.