Published: January 2014
We keep hearing about ‘challenger banks’ at the moment. Politicians including Vince Cable, Ed Milliband and even George Osborne have called for more of them to bring competition into the market and ‘challenge’ the Big 4 high street names Barclays, HSBC, Lloyds Banking Group and RBS. Of course we already have Santander, Co-op, Nationwide and others but they are generally seen as more of the same type of bank.
There are various possibilities around to challenge the current models including TSB, which has broken away from Lloyds, some local banks that have been set up (and some have already failed), Metro Bank, Handelsbanken and more, but no one is sure if they will really eat into the banking market.
The big problem for most of them is how to scale up to the point where they can take on the big boys in terms of the number of customers they have. They need to have very large reserves of cash to meet the criteria for banks and, even harder, they need to persuade a largely apathetic public to move their current accounts from their current – largely hated – banks.
Not only that but, so far, there don’t seem to be any suggested banks that offer an alternative philosophy – a different way of banking – to the ones already on the high street.
It’s credit unions, of course, which have been around, quietly, for decades though they have only recently been getting the kind of publicity they should have.
Of course the same challenges face credit unions that face the new challenger banks:
- they need to have a decent number of members to keep money flowing in
- they need to attract local people who have money to help lend to those who don’t
- they need to be ethical and transparent but still have enough money in reserve to keep themselves afloat.
Not surprisingly, some credit unions have foundered because they haven’t had enough cash coming in. However, there are many that are solid and flourishing. Indeed, in America, some credit unions are as big as banks and are the only place some people go for their savings and loans.
Here they are covered by the Financial Services Compensation Scheme (FSCS) so that even if they do fold, your money (up to £85,000) is safe.
I think that it would help a lot of people to be part of a credit union, even if it were their second ‘bank’. You don’t have to move everything to a credit union, you could just use it as a place for your savings or the bank where you pay your monthly household bills while your other bank is for the fun spending.
Join me when I interview Mark Lyonette, chief exec of ABCUL, the Association of British Credit Unions, in our next Google+ Hangout at 7pm on Tuesday 21st January. Add me to your circles on Google+ to take part and ask questions.
Here are the facts about credit unions:
- What is a credit union?
- Why should I use a credit union?
- Are credit unions safe?
- What are the downsides?
- How do I join a credit union?
It’s highly likely that you have a credit union in your area and it will offer a good savings and loans operation, and possibly much more besides (such as mortgages).
Credit unions are like building societies used to be. They are run by local people for local people or they are run for people of a particular profession – like the nurses’ credit union and the police credit union. Customers (or ‘members’) open up current accounts and savings accounts and the money they put in is used to lend out to other local people.
This is a good reason for putting some of your savings into a credit union – the money can help people in your community who might otherwise have to resort to doorstep lenders or payday loans.
Credit unions have been around for decades and are huge in many other countries including the USA, France and India.
However in this country they were held back for years, because governments in the 80s and 90s feared that they could present serious competition to the City. New Labour and the current coalition government have been very supportive of credit unions though, and have helped them grow recently.
- Unlike banks and building societies, credit unions are non-profit – so any excess they make gets ploughed back into the operation itself.
- Credit unions often offer competitive savings rates, so it can be worth joining just to open up a savings account (even if you don’t use it for normal banking).
- Money put into a savings account with a credit union not only attracts decent rates but is used to help the local area. Statistics show that every £1 put into a savings account with a credit union does roughly £10-worth of good in the community.
- They also provide an alternative for many people who would otherwise find themselves taking out high interest payday loans or, worse, borrowing from loan sharks. It’s not a quick fix as you have to be a member first who is saving, but if you join now, when you need money later you will be in a good position to get it.
- Credit unions are usually willing to give small loans to members which banks generally won’t do. In fact a feasibility study by the DWP found that credit unions offer the most competitive interest rates on personal loans of up to around £2,000 in the UK market.
- They also help members to budget and encourage them to pay off their loans as quickly and cheaply as possible, so they are particularly helpful for people on low incomes and those who have difficulty stretching their income to make needs meet.
Yes. Credit unions are regulated by the FSA and covered by the Financial Services Compensation Scheme (FSCS) – which means that up to £85,000 of your money would be protected in the unlikely event that the credit union went bust.
- Credit unions vary across the country. Some offer a wide range of services and can rival banks – like the credit union in Leeds which is very popular in the area. Others offer very few and are only open at certain hours of the week.
- Many credit unions still don’t have online banking services, so you may well need to go into your local branch to carry out transactions.
- As credit unions are often small and favoured by people with lower incomes, they sometimes don’t have the cash to keep going and are more likely to fail than the big, cash-rich banks.
You can find your local credit union by going to Findyourcreditunion and putting your postcode in. It will show you which is the nearest one to you.
When you go to the credit union they will need to see some ID and will need to meet you in person at least once before you can open an account.