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.
 

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Our union backed Brexit, but that doesn't mean scrapping freedom of movement

We can only improve the lives of our members, like those planning stike action at McDonalds, through solidarity.

The campaign to defend and extend free movement – highlighted by the launch of the Labour Campaign for Free Movement this month – is being seen in some circles as a back door strategy to re-run the EU referendum. If that was truly the case, then I don't think Unions like mine (the BFAWU) would be involved, especially as we campaigned to leave the EU ourselves.

In stark contrast to the rhetoric used by many sections of the Leave campaign, our argument wasn’t driven by fear and paranoia about migrant workers. A good number of the BFAWU’s membership is made up of workers not just from the EU, but from all corners of the world. They make a positive contribution to the industry that we represent. These people make a far larger and important contribution to our society and our communities than the wealthy Brexiteers, who sought to do nothing other than de-humanise them, cheered along by a rabid, right-wing press. 

Those who are calling for end to freedom of movement fail to realise that it’s people, rather than land and borders that makes the world we live in. Division works only in the interest of those that want to hold power, control, influence and wealth. Unfortunately, despite a rich history in terms of where division leads us, a good chunk of the UK population still falls for it. We believe that those who live and work here or in other countries should have their skills recognised and enjoy the same rights as those born in that country, including the democratic right to vote. 

Workers born outside of the UK contribute more than £328 million to the UK economy every day. Our NHS depends on their labour in order to keep it running; the leisure and hospitality industries depend on them in order to function; the food industry (including farming to a degree) is often propped up by their work.

The real architects of our misery and hardship reside in Westminster. It is they who introduced legislation designed to allow bosses to act with impunity and pay poverty wages. The only way we can really improve our lives is not as some would have you believe, by blaming other poor workers from other countries, it is through standing together in solidarity. By organising and combining that we become stronger as our fabulous members are showing through their decision to ballot for strike action in McDonalds.

Our members in McDonalds are both born in the UK and outside the UK, and where the bosses have separated groups of workers by pitting certain nationalities against each other, the workers organised have stood together and fought to win change for all, even organising themed social events to welcome each other in the face of the bosses ‘attempts to create divisions in the workplace.

Our union has held the long term view that we should have a planned economy with an ability to own and control the means of production. Our members saw the EU as a gravy train, working in the interests of wealthy elites and industrial scale tax avoidance. They felt that leaving the EU would give the UK the best opportunity to renationalise our key industries and begin a programme of manufacturing on a scale that would allow us to be self-sufficient and independent while enjoying solid trading relationships with other countries. Obviously, a key component in terms of facilitating this is continued freedom of movement.

Many of our members come from communities that voted to leave the EU. They are a reflection of real life that the movers and shakers in both the Leave and Remain campaigns took for granted. We weren’t surprised by the outcome of the EU referendum; after decades of politicians heaping blame on the EU for everything from the shape of fruit to personal hardship, what else could we possibly expect? However, we cannot allow migrant labour to remain as a political football to give succour to the prejudices of the uninformed. Given the same rights and freedoms as UK citizens, foreign workers have the ability to ensure that the UK actually makes a success of Brexit, one that benefits the many, rather than the few.

Ian Hodon is President of the Bakers and Allied Food Workers Union and founding signatory of the Labour Campaign for Free Movement.