Credit where credit is due as movement challenges status quo

Credit unions have topped the rankings of Ireland’s most reputable organisations in the annual RepTrak survey, which coincides with moves by credit unions to expand their range of services and make a more aggressive play for the mortgage market.

But what role do credit unions have to play in the market in the wake of the departure of Ulster Bank and KBC? Can they bring much-needed competition to the mortgage and personal finance markets, or will they always be minor players?

Spot the difference

Credit unions are much more than a bank, says David Malone, CEO of the Irish League of Credit Unions. “They have their own unique DNA, built from principles around simplicity, being local, being flexible and personal.

“It’s the only financial institute owned by its members. When you’re a member, you’re much more than a customer; you’re a part owner. You get a say in how the credit unions are run at the AGM. You can also be elected to the board. You’re really a part of the family. You’re not just a customer, you’re an individual and the credit union treats you as such. That’s really key. They’re owned by the public. Everything we do is focused on the quality of our service.”

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Credit unions don’t have profits for large corporate shareholders, they have surpluses which they use to improve or enhance services, pay dividends or pay interest rebates to members who have taken out loans.

A credit union is a financial institution, with a core business model of taking in savings and providing loans from those funds, says Kevin Johnson, CEO of the Credit Union Development Association (CUDA).

“A unique feature is that they are membership organisations and only transact with those members,” says Johnson. “The members are both the owners and the consumers of the services provided. Each credit union is a separate legal entity, subject to the specific credit union legislation (Credit Union Acts 1997 and 2012) and with its own statutory regulator (based in the Central Bank of Ireland).

“The value that credit unions bring to Ireland is rooted in the co-operative model. These co-op principles have distinguished credit unions from the commercial banking system in Ireland. Democratic control translates to governance that resides in the community and represents, as much as possible, each member’s needs in the community or workplace serviced by their credit union. Member economic participation enables members to share in the surplus generated by the credit union. These principles have distinguished credit unions from the commercial banking system in Ireland.”

Since its foundation in 1958, the Irish credit union system has flourished, Johnson says, both in urban and rural communities, often being the only option for consumers to access financial services. “Credit unions have grown significantly, and collectively have branches now located in all cities and most towns across Ireland.”

Bridging the banking gap

Interest rates in the wider financial services sector are rising, with banks reporting significant increases in profits, particularly in their corporate interest income – which is great for shareholders but not the members of the public, says Malone. “This is an indication of what’s gone on with Ulster and KBC leaving the market,” he adds. “The lending market, particularly in mortgages and small business lending, is dominated now by three pillar banks that have over 80 per cent of market share in each of those markets. However, banks have moved away from their community and are evolving all the decision making away from their local branches – closing many of them – and moving that more into remote centres.”

Malone says many people come to the credit union for a loan, having previously applied to a bank and received a “No”, without any opportunity to speak to someone. “They have a very different experience in the credit union,” he says. “They’re able to come in, sit down face to face, be treated as an individual, explain their scenario and, in many cases, when the credit union has that opportunity we’re able to work out a solution where we are able to organise a mortgage or small-business loan.”

There’s a growing recognition of credit unions as key players in providing real competition and value to retail consumers of financial services, says Johnson. “Over the past decade, credit unions have invested in growing their range of products – loans, savings, and insurance policies – and also significantly enhancing their digital services while maintaining the valued personal touch. The published Credit Union (Amendment) Bill 2022, with a number of enhancements, is soon to be enacted and this will facilitate credit union services to be delivered consistently across the country.”

David vs Goliath?

Malone says there are several myths about the credit union sector that he wants to bust. “We are not minor players,” he says. “We have €6 billion in personal loans and over 40 per cent of the personal lending market – and we are continuing to grow it. We have €20 billion in assets – which is the same size as Permanent TSB. We have a huge footprint, with over three million members.” The vision is to fully utilise that footprint.

Credit unions continue to build on a series of positives, namely their respected brand and the loyal trust of their members, high levels of reserves and savings, and the strong commitment by volunteer directors, professional managers, volunteer board oversight committee members, professional dedicated staff, and other volunteers, says Johnson.

“We have a long-term vision that is reflective of the unique role of credit unions and how they will improve the financial, social and environmental wellbeing of credit union members and their communities,” he adds. “Credit unions are bringing real competition to the market now; they have the potential. It is encouraging that the Retail Banking Review Team state in their report their understanding is that the Department of Finance and the Central Bank will engage constructively, developing new legislation, if required. Hopefully, this will also extend to enhancements to credit union regulations.”

The next iteration

It is important to understand that credit unions have no desire to be banks; they simply want to be bigger and better credit unions, Johnson says. “Over many years credit unions have operated in outdated legislation – legislation not fit for purpose in a modern era,” he says. “For some time now, CUDA has called on the Government to introduce enhancements to the existing credit union legislation to ensure credit unions can reach their potential on behalf of their members. Last November, the Government published a new Credit Union (Amendment) Bill.

“This unique opportunity will enable credit unions to offer and deliver more benefits through enhanced products and services to existing and future credit union members. Credit union legislation was last overhauled over ten years ago by the Credit Union and Co-operation with Overseas Regulators Act 2012.”

The aim of the legislation is to allow greater collaboration and choice when developing credit products and offerings to consumers such as sharing large community project loans among a number of credit union participants (“loan sharing” or “loan participation”), and the ability to offer a full range of services to consumers, irrespective of the fact that a credit union may not have that product themselves – mortgages, for example – by introducing the member to a colleague credit union that does offer the product or service (“loan introduction”), Johnson explains. “These are standard practices among credit unions in other jurisdictions such as Canada,” he says.

“The new legislation will also reduce some of the admin burden for volunteer directors, who provide a professional service pro bono,” says Johnson. “The changes will allow them to focus more on the overarching governance, strategic direction and policymaking of the credit union while allowing the professional management team to focus on implementation and operations. It is now imperative that the Central Bank of Ireland is prepared, with supportive regulations, to enable the benefits that can flow from the legislation to be harvested.”