Payday lenders have lessons to learn from credit unions

A cap on interest is the first step to transforming predatory lenders into responsible ones.

We know we have come a long way when Iain Duncan-Smith says, "for too long now predatory lenders have been plaguing the homes of vulnerable people." But what does his government intend to do about it? Not a lot so far.

Admittedly, if there was to be an interest rate cap on the loans dealt out by predatory lenders, then they would just find ways around it, like loading up administrative fees and charges elsewhere. So what then? A cap on the total cost of credit is what we should pine for today, placing a cost ceiling on how much a loan, inclusive of charges and administrative fees, would be to a consumer.

The benefits to a person taking out loans would be unprecedented.

Since the "Big Bang" – the sudden deregulation of the financial markets back in the 1980s – policymakers have been loath to right the wrongs of market irresponsibility with anything other than mere guidance. The same must be said of the credit market. At an official level, we require responsible lending, but it is all self-regulated. This has to change.

However there is one financial product that does have, imposed upon it, a legal cap. That is a loan from a credit union. Currently a credit union cannot lend at more than 26.8 per cent interest. This has always been the main pull of a credit union’s appeal – it can lend at a low interest, and offers advice and encourages savings as well.

The first credit union in the UK was likely to have been born out of the first properly documented cooperative institution which was in Rochdale in 1844. As Ann-Marie Ward and Donal McKillop in their paper on the relationship between credit union objects and cooperative philosophies point out, it probably wasn’t the first credit union as such, as the unions grew out of less formal savings groups – but certainly it was the most successful of the day on which many others were subsequently modeled.

Political support for the institutions didn't occur until the 1980s/1990s as they started to become part of local and central government discourse on tackling poverty and disadvantage. In the late 1990s/early 2000s, the Association of British Credit Unions (ABCUL), the sector’s largest trade association, decided to encourage credit unions to be a bit more like a business, so as to encourage middle-class savers and shift the image of being the "poor person’s bank".

Credit unions have been subject to many levels of so-called modernisation. In the Blair years there was a commitment towards more funding for credit unions, which was perfectly consistent with the "third way" appeal to a savings culture assisting with welfare, such as the savings gateway and the child trust fund.

Unions received a great boost from the Department for Work and Pensions (DWP) in 2011, receiving a funding package of £73m for a modernization, but given that only 2 per cent of the UK population is a member of a credit union, something is missing the mark.

A recent report commissioned by the DWP has said that the sector is not financially sustainable. This might suggest that with continued funding, in the amounts that it has been coming, credit unions cost more than they are worth. I take a different view.

It is not how much they cost in funding that is the problem, but how the money is spent. When I asked Sally Chicken, Chairman (Volunteer) at Rainbow Saver Anglia Credit Union, how to make credit unions more appealing to a greater amount of people, she told me:

We are already very appealing to people once they have heard of us, so we really just need a good loud marketing campaign, I don’t understand why ABCUL is so against a national marketing awareness campaign… in the US there are still such public information radio ads, even though there is already high awareness. We need to use modern media in a better way, radio, TV, even Facebook.

The same DWP report suggests raising the maximum annual interest rate from 26.8 per cent to somewhere in the region of 42 per cent. This is bound to cause gasps. But I think it is rather modest – especially given the finding from the Community Development Finance Institutions (CDFI)'s project My Home Finance that credit unions need to charge 68 per cent to cover its costs alone.

One of the modernising moves I recommend is for credit unions to offer a home credit service. A regular feature that always comes up in Provident Financial’s annual reports is that the majority of their customers find the convenience of the loans, from their doorstep, very satisfactory indeed. So much so, in fact, people are willing to pay way over the odds for it.

On the face of it, home credit, at a representative APR of 272.2 per cent, seems irrational, particularly given the availability of lower cost loans elsewhere. Taking note of this, the Joseph Rowntree Foundation, back in 2009, published a report assessing whether there could be scope for a not-for-profit home credit provider – taking the best from the industry and seeing whether it could be achieved at a price that doesn't exploit the customer.

The resulting conclusion from the study found that even without profit, at a break-even rate, 129 per cent APR was going to be typical on a loan of £288 over an average 56 week loan, assuming an investment of £18m with the intention of becoming cash-positive, operating without further investment, after five years.

Credit unions should enjoy continued investment, and in the last few years have received far more than £18m, so a lower rate home credit service could be feasible. This is guaranteed to get people to join credit unions, and signposts a more creative approach to modernisation.

If we want better credit unions, interventions like this one are the way forward. The stock answer that credit unions, as they are, will help wean people off high-cost credit is simply not good enough.

A supporter of credit unions in Los Angeles. The organisations are more widespread in the US. Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

Chuka Umunna speaks at the launch of Labour's education manifesto during the general election. Photograph: Getty Images.
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After so badly misjudging the leadership contest, how will the Blairites handle Corbyn?

The left-winger's opponents are divided between conciliation and aggression. 

When Labour lost the general election in May, the party’s modernisers sensed an opportunity. Ed Miliband, one of the most left-wing members of the shadow cabinet, had been unambiguously rejected and the Tories had achieved their first majority in 23 years. More than any other section of the party, the Blairites could claim to have foreseen such an outcome. Surely the pendulum would swing their way?

Yet now, as Labour’s leadership contest reaches its denouement, those on the right are asking themselves how they misjudged the landscape so badly. Their chosen candidate, Liz Kendall, is expected to finish a poor fourth and the party is poised to elect Jeremy Corbyn, the most left-wing leader in its 115-year history. For a faction that never ceases to underline the importance of winning elections, it will be a humbling result.

Though the crash has been sudden, the Blairites have long been in decline. Gordon Brown won the leadership unchallenged and senior figures such as John Reid, James Purnell and Alan Milburn chose to depart from the stage rather than fight on. In 2010, David Miliband, the front-runner in the leadership election, lost to his brother after stubbornly refusing to distance himself from the Iraq war and alienating undecided MPs with his imperiousness.

When the younger Miliband lost, the modernisers moved fast – too fast. “They’re behaving like family members taking jewellery off a corpse,” a rival campaign source told me on 9 May. Many Labour supporters agreed. The rush of op-eds and media interviews antagonised a membership that wanted to grieve in peace. The modernising contenders – Chuka Umunna, Liz Kendall, Mary Creagh, Tristram Hunt – gave the impression that the Blairites wanted to drown out all other voices. “It was a huge mistake for so many players from that wing of the party to be put into the field,” a shadow cabinet minister told me. “In 1994, forces from the soft left to the modernising right united around Tony Blair. The lesson is never again can we have multiple candidates.”

While conducting their post-mortem, the Blairites are grappling with the question of how to handle Corbyn. For some, the answer is simple. “There shouldn’t be an accommodation with Corbyn,” John McTernan, Blair’s former director of political operations, told me. “Corbyn is a disaster and he should be allowed to be his own disaster.” But most now adopt a more conciliatory tone. John Woodcock, the chair of Progress, told me: “If he wins, he will be the democratically elected leader and I don’t think there will be any serious attempt to actually depose him or to make it impossible for him to lead.”

Umunna, who earlier rebuked his party for “behaving like a petulant child”, has emphasised that MPs “must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office”. The shadow business secretary even suggests that he would be prepared to discuss serving in Corbyn’s shadow cabinet if he changed his stances on issues such as nuclear disarmament, Nato, the EU and taxation. Were Umunna, a former leadership contender, to adopt a policy of aggression, he would risk being blamed should Corbyn fail.

Suggestions that the new parliamentary group Labour for the Common Good represents “the resistance” are therefore derided by those close to it. The organisation, which was launched by Umunna and Hunt before Corbyn’s surge, is aimed instead at ensuring the intellectual renewal that modernisers acknowledge has been absent since 2007. It will also try to unite the party’s disparate mainstream factions: the Blairites, the Brownites, the soft left, the old right and Blue Labour. The ascent of Corbyn, who has the declared support of just 15 MPs (6.5 per cent of the party), has persuaded many that they cannot afford the narcissism of small differences. “We need to start working together and not knocking lumps out of each other,” Woodcock says. There will be no defections, no SDP Mk II. “Jeremy’s supporters really underestimate how Labour to the core the modernisers are,” Pat McFadden, the shadow Europe minister, told me.

Although they will not change their party, the Blairites are also not prepared to change their views. “Those of us on this side of Labour are always accused of being willing to sell out for power,” a senior moderniser told me. “Well, we do have political principles and they’re not up for bartering.” He continued: “Jeremy Corbyn is not a moderate . . .
He’s an unreconstructed Bennite who regards the British army as morally equivalent to the IRA. I’m not working with that.”

Most MPs believe that Corbyn will fail but they are divided on when. McFadden has predicted that the left-winger “may even get a poll bounce in the short term, because he’s new and thinking differently”. A member of the shadow cabinet suggested that Labour could eventually fall to as low as 15 per cent in the polls and lose hundreds of councillors.

The challenge for the Blairites is to reboot themselves in time to appear to be an attractive alternative if and when Corbyn falters. Some draw hope from the performance of Tessa Jowell, who they still believe will win the London mayoral selection. “I’ve spoken to people who are voting enthusiastically both for Jeremy and for Tessa,” Wes Streeting, the newly elected MP for Ilford North, said. “They have both run very optimistic, hopeful, positive campaigns.”

But if Corbyn falls, it does not follow that the modernisers will rise. “The question is: how do we stop it happening again if he does go?” a senior frontbencher said. “He’s got no interest or incentive to change the voting method. We could lose nurse and end up with something worse.” If the road back to power is long for Labour, it is longest of all for the Blairites. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 03 September 2015 issue of the New Statesman, Pope of the masses