Credit Unions vs. Wonga
(why we have bigger financial fish to fry)
It’s a grey day in Salford, and standing awkwardly by a desk in a local Gateway centre, I watch the growing queue of young women snaking back between rows of community-centre benches. The local Credit Union operates it’s child-benefit loan pop-up service here every Tuesday morning.
I’m here to observe the union’s processes, and to chat to it’s staff and members. I’m in the middle of the design-research phase of FutureGov’s latest project: to design a mobile product that enables Credit Unions to serve a 21st century audience and compete with the likes of Wonga; pointing people to more responsible loans, and building financial literacy and resilience. At least, that’s the idea.
The incentive for our brief is well documented: Consumer Focus estimates that the number of payday loan borrowers rose from 0.3 million in 2006 to 1.2 million in 2009 and a recent report by R3 found that 3.5 million British adults were considering taking out a payday loan over the next six months. They also found that a third of those who already took out a payday loan could not pay it off, so had to get another one.
Credit Unions have often been touted as a potential solution to the dangerous slide toward high-cost, short-term loan culture. As not-for-profit financial co-operatives owned by their members and run for their benefit, they are willing to offer low-interest loans to people who are likely to be refused credit elsewhere; the same people most likely to be tempted by Wonga’s promise of fast, anonymous credit with no questions asked.
But as I watch Mary- the loans registrar- digging into her own purse in order dole out her customer’s withdrawals (it’s been too busy to nip out to the post-office for more cash), I begin to doubt whether credit unions are a viable answer to the Wonga dilemma.
Awareness and access are two crucial issues vital for a Credit Unions’ success. Wonga seem to have an ad emblazoned across every second London bus at the moment (they spent over £16 million on advertising in 2011) and deliver an average money-to-bank time of just 5 minutes.
They’re a diverse lot, but from what we’ve seen credit unions cannot match the user experience the payday lenders provide; almost without exception they lack the technical infrastructure to support such speedy loans. What’s more, the current APR cap of 26.8% means Credit Unions make a big loss on servicing small loan amounts: on a loan of £300 for one month they can only charge a maximum of just £6 interest.
Even should they have the technical and financial capacity to do so, we found that Credit Unions are simply uncomfortable with giving payday loans. Many feel that the model of fast repayments goes against their ethos to teach responsible financial behaviour.
The longer I spend around victims of debt and those who work with them, the more I begin to question whether Wonga is really the biggest problem.
Time and again we heard stories of people whose debt problems have grown out of late payment and overdraft charges, which were the start of a downward spiral of managing interest repayments but never managing to pay off debt.
This spiral is exacerbated by the typical behavioural response of avoidance. StepChange Debt Charity say out of 950 clients surveyed, over 40% had struggled with mounting debts for a year or more before seeking help. We have heard of — and seen — several situations where carrier bags full of unopened letters are shoved behind the sofa; mobile numbers changed; land-line call IDs left unanswered.
It seems that although payday loans are undoubtedly financially dangerous, they have become something of an easy scapegoat for many larger critical issues around ethical practice and financial literacy. Broadly speaking, the solution is to teach better financial behaviour in schools.
In the mean time, it’s vital we that existing council and independent advice services are clearly signposted; financial institutions and service providers publicise incentives for contact maintained and the social norm of debt is dissipated.
Originally published at www.theguardian.com on October 2, 2013.