I have just read Charlie Westons’ great piece in the Indo on Credit Unions and the incoming changes to lending for the sector.
An announcement was made yesterday of a change to the legal framework restricting credit unions from charging more than 12.7% on loans. The move is perceived to be a welcome step forward for the Credit Union industry in Ireland as they struggle to lend. With €17.1 billion in assets and €4.5 billion lent out to members, the loan to asset ratio is 23% down on what it used to be.
These new rules mean that Credit Unions will be able to charge up to 26% a year for loans.
Whilst I remain dumbfounded that loan sharks, credit card companies and banks can legally charge up to 287% for loans, I am nevertheless encouraged by the fact that these loans will be made by individuals representing an organisation that puts the customer and the community at the centre of everything they do. You only have to look at the Customer Experience awards for the past couple of years to see Credit Unions beating the likes of Amazon and other far highly capitalised behemoths.
So are Credit Unions adequately equipped for this new business? How will the risks associated with the so called ‘higher risk loans ‘ be mitigated? We know as was the case with Charleville Credit Union that even with lower interest rates Credit Union businesses can still be in trouble. I doubt that even with the ability to charge higher interest rates that these riskier loans would have washed their faces.
There is also the question of being truly ready to offer these services. The systems and loan application processes in many credit unions today are not exactly ‘friction free’. When you compare these with AIB that can offer a loan in 3 hours and Chillmoney with a quick and user friendly application process there is still a large gap. The last time I borrowed money from my local Credit Union to buy my last car it was like getting resolution passed at the UN.
So what can we do?
For what it is worth here are a few pointers on what we can do to create a more fluid and less risky process for Credit Union lending:-
1. Give members a well-designed, easy to use application to enhance and streamline the loan application process…make the experience like more like using the Revolut app.
2. Provide members with the ability to see their credit score when they log into their Credit Union account by providing a link to organisations such as the Irish Credit Bureau. This will ensure they do not waste their time, nor the time of the CU spent on the loan application.
This will also provide members with an incentive to improve their score as it will be the first thing they see on login.
3. Reduce paperwork by getting applicants to upload their documents on-line.
4. Use optical character recognition combined with deep and reinforcement learning to scan and process supporting documentation.
5. Use reliable risk profiling in granting loans.
6. Make it quick! …give people a faster turnaround that allows CU’s to compete with banks and other lenders.
7. Put records on an immutable distributed ledger with built in smart contracts for maximum security and integrity. Use this digital fingerprint to grant further loans. Give them a great service and watch them coming back!
So in summary I agree that this is a good development for Credit Unions, as long as the culture is maintained and they dont turn into the sharks they are supposed to replace! So thank you Pascal Donohue more of this please. Who knows we may even progress to making it easier for Credit Unions to provide current accounts!
Footnote on Credit Card Debt
Anyone using a credit card (myself included) will know that when all of the balance is not paid off immediately that the interest charged daily can quickly mount up. In one example I saw recently a $10,000 credit card debt with a monthly minimum payment of $142 paying 17% in interest, meant that the loan would take 36 years to pay off at a total cost of $61,060! Steer clear.