The Archbishop of Canterbury’s remarks about his desire to compete payday lender Wonga “out of existence” by strengthening credit unions in the UK has got people thinking power has gone to his head.
However, Archbishop Welby could be on to something, if the Church gets its execution right. Just look at the success of Islamic banking to see how religion can be a powerful force in banking. The first question is: why would the Church take on a market leader in its own game from a standing start? The second is whether credit unions are a business the Church should be getting into, given that mainstream lenders steer clear of this sector with a bargepole?
The first answer is pretty simple: the Church loves a fight. Think the Crusades, gay marriage or female priests. Although the latter two show that more recently it’s been internal rather than external conflicts. So Archbishop Welby picking a fight with payday lenders, of which Wonga is the best known, is par for the course. Welby said this could be a “decade-long process”, which again isn’t a concern, since the Crusades lasted 200-odd years. A couple of decades is a cakewalk.
So now to the second question, why do it? Backing credit unions is risky, but could pay off, for several reasons, not least the social good it could generate. There is little doubt that credit unions represent a small slice of the overall retail /commercial banking, although that is changing. According to the most recent unaudited figures by the Association of British Credit Unions, there are 1,025,438 people in the UK using credit unions, including over 123,000 junior savers. Since 2007, the number of members has increased by almost 50 per cent while the number of credit unions has dropped by 23 per cent. The Department of Work & Pensions say up to seven million people use sources of high cost credit e.g. home credit, pay day lenders and pawnbrokers.
So there is a rising market worth £2bn, with a falling number of competitors – both good and bad news. Good because there’s demand, bad because it’s tough to make money.
A second reason is that the Church has a strong brand to leverage off, a loyal customer base (parishioners) and presumably trust in its overall intentions, something badly lacking from many mainstream retail banks. Thirdly, on the surface, its costs/overheads would be relatively low. It already owns the church halls and properties it’ll operate the credit unions out of – a reason why many mainstream banks have cut back branch numbers. It also has a ready supply of cheap labour. According to Welby, there are plans to encourage church members with relevant skills to volunteer at credit unions. It would need to invest in an easy-to-use and quick technology platform to make the most of its countrywide scale.
Now to the downsides. The main reservation about launching such an initiative is the fact that most financial institutions steer clear of the sub-prime sector because there’s significant risk. Mainstream banks don’t go there because these are high risk loans with a danger of not having them paid back. Although Airdrie Savings Bank has launched its own short-term loan, Co-op is an example of a mutual (so not in itself a credit union) that is clearly not working at the moment. Finally, there is the reputational risk. If Church-backed credit unions were caught up in a PPI-style, or sub-prime mortgage, scandal, it would lose the trust of not only its customers, but its parishioners too – the ultimate death knell for The Church.
So why do it? To provide an alternative for those who can’t get credit from traditional lenders, with a social, rather than profit, motive is a noble cause. I wish them good luck, but with the words from a report by Civitas ringing loudly: “To be effective charities, they must first be effective financial institutions.”