Next year looks bright for community banking
2020 is shaping up to be an interesting year for the credit union and community banking sector. A series of events and announcements have paved the way for what will hopefully be an explosion of interest in membership to these institutions.
For example, we saw the high profile collapse of payday lender QuickQuid, just a year on from Wonga’s demise, as well as the Financial Conduct Authority’s (FCA) ‘Alternatives to High-Cost Credit Report’, published July 2019, which clearly highlights credit unions and community development finance institutions (CDFIs) as alternatives to high-cost credit.
Additionally, in October this year, HM Treasury announced the official launch of its Prize Saver scheme, an initiative designed to boost membership of credit unions with cash prizes for their savers. Against this backdrop and with many consumers looking for alternatives to traditionally high-street banks, credit unions have a unique opportunity to raise their profile.
It’s clear that the need for more ethical and affordable sources of finance has never been greater. Indeed, recent figures from the TUC on child poverty reveal that the number of children growing up below the breadline has risen by 800,000 since 2010.
According to its figures, there’s been a 38% hike in the number of children growing up in poor households, despite being from working families. These families face a poverty premium whereby they pay more for goods and services because they either can’t afford to purchase something outright, or, as is the case with financial services, can’t get access to the best rates or products. Until now, payday and doorstep lenders have taken advantage of this market, preying on the financially excluded with high-cost loans but times are changing.
Credit unions and community banks offer the ideal alternative to high-cost credit. These institutions exist for the benefit of their membership, are focused on financial inclusion and education, as well as working alongside members to build long-term financial resilience. They have, however, remained largely under the radar in the UK, with total membership numbers remaining comparatively low. Technology holds the key to extending their services to greater numbers of UK savers and borrowers in 2020.
The future of community banking
Fintech has an important role to play in helping credit unions and community banks take advantage of opportunities in 2020. To be successful, community-focused banks need to look at ways of bringing their services in line with traditional high-street banks, challenger banks and even pay day lenders. One of the main reasons credit unions have remained relatively invisible to UK consumers is because many still rely on old fashioned and outdated methods of interacting with their members. Slow, paper-based systems have remained prevalent and while it’s true to say that financial services as a sector has not blazed a trail when it comes to digital adoption, credit unions have been particularly slow to innovate.
Technology partners also have a responsibility to help these organisations scoop up the millions of customers who rely on payday lenders. Although some may herald the end of high-cost credit providers we mustn’t forget there are a large number of borrowers who absolutely rely on their services, especially considering sweeping cuts to the benefits system in recent years. Credit unions are well placed to provide a safety net to these individuals but they need to up their game so they can reach potential members and provide a consumer-grade experience.
If we consider the size of the payday loan market the opportunity for credit unions becomes clear. We know, for example, there are around three million payday borrowers in the UK and around 37% of this number are digital natives aged from 25-34.
We also know that the average loan is around £260 (although many pay this back many times over when taking high-interest payday loans) and that 83% apply for these loans online. If more motivation where needed by credit unions and community banks to digitise and streamline their services, 75% of payday borrowers will take two or more loans per year so the opportunity for repeat transactions is highly likely.
Fintech for social good
So, what should credit unions and community banks be doing to capitalise on the current trend for lower-cost, more ethical sources of finance in 2020? And what impact will fintech have as we move into the New Year?
In line with payday lenders, loan application and fulfillment must be moved online. We know from activity on our own platform that 47% of loan applications are made outside office hours so credit unions and community banks have the potential to double their loan book with a platform that allows members to complete applications and get decisions online. Similarly, and like most high street and challenger banks, members want the option of checking accounts and balances, preferably on the mobile, as well as managing their money and making withdrawals at the touch of a button.
Underpinning that customer experience, credit unions need a back office which allows them to be faster than a pay day lenders, better than a bank but maintain cheaper transaction fees so they can continue serving members in an affordable and ethical way. In order to become competitive, credit unions and community banks need to move away from manual systems to secure automated solutions which enable them to manage their loans and membership easily, as well as market themselves more effectively.
Technology that can allow both organisations and customers to make best use of their data, to automate member preferences and interactions, and give the credit union an instant and accurate view of its membership, will allow for better personalisation, experience, marketing and communications to boost awareness.
So while events and initiatives like the Prize Saver scheme are great news for credit unions and community banks, they will only go so far in persuading savers and borrowers to become members. The digital experience will play a crucial role in transforming these banks and uptake of their services into 2020.
By Andrew Rabbitt, CEO, incuto
This article is also featured in the holiday season Dec 2019 /Jan 2020 edition of the Banking Technology magazine.
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