Introducing the ‘digital credit union’ – how external partners can help this sector thrive

Credit unions are one of the oldest forms of financial services providers in the UK, offering an alternative to High Street banks and building societies for savings accounts, loans and sometimes even mortgages and bank accounts. There are currently 385 active credit unions in the UK, according to the most recent Bank of England statistics (Q2 2022).

They specialise in offering these services to people who have, historically struggled to access these products or have found themselves locked out of the financial system. As such, they are an essential element of the UK financial system yet are often overlooked.

Credit unions have been established for use by members with something in common, for example, living in the same area, working in the same industry or belonging to the same trade union. Because they can be highly regionalised, they are sometimes called ‘community banks’.

While credit unions position themselves as an alternative to high street banks, offering access to those who have struggled to access banking services, they are still regulated entities and remain focused on lending responsibly.

They are known for promoting prudent financial management, encouraging members to save and only to take out loans or other forms of credit that they can comfortably repay while maintaining their existing standard of living.

For example, credit unions can help people better manage their money to avoid taking payday loans or even offer alternative loans. They also never offer loans the applicant can't afford to repay. Furthermore, all savings have the same protection as regular savings accounts through the Financial Services Compensation Scheme.

A final defining characteristic of these unions is that they are run as a not-for-profit, being owned and controlled by their members. They have no external shareholders, and any profits generated are returned to the business to develop the credit union and provide a return to savers.

As their members become increasingly used to digitally native services in every aspect of their lives, the expectations of their credit unions are evolving. If institutions fail to meet these, it can jeopardise their ability to keep members satisfied.

Further, the recent wave of digital neobanks that use new approaches such as Open Banking and alternative data sources to assess the eligibility of consumers, sometimes overlooked by incumbents, is another challenge facing credit unions as they compete for customers.

There are also critical logistical issues that need to be considered. While every bank claims to offer Faster Payments, the reality is that many incumbents do not provide processing outside of core business hours. That, however, doesn’t meet the needs of some credit union customers who may be in dire financial need – for example, on a Friday, they apply for and get an agreement on the same day and yet don't receive the funds until Monday.

How can credit unions compete with challenger banks and fintech firms looking to increase their market share by appealing to consumers with frictionless digital convenience? And how can they find a partner that understands the nuanced needs of their members?

Increasingly, they are turning to innovative partners, such as ClearBank, to help provide core services and enable them to focus on customer-facing operations and the digital member experience. We’re entering the age of the digital credit union.

"We are delighted to be working with such a modern, innovative and progressive bank. We frequently receive feedback on the efficient way our members receive their money. This is as a result of our relationship with ClearBank." explains Lynsey McWhinne, Deputy CEO, Scottish Police Credit Union Limited

We’re proud to support many credit unions that are focused on serving specific segments of society, including Manchester Credit Union and Scottish Police Credit Union Limited.

Through our partnership with incuto, members of credit unions and community banks benefit from faster and more efficient payments. Using ClearBank technology as part of incuto’s online Member’s Area and its app, credit union members have instant and accurate information about their finances, a clear benefit for developing skills in budgeting and managing personal finances.

“Instant access to funds, 24 hours a day, removes another barrier to their financial inclusion and is just one of the many digital innovations we are introducing this year to improve our service. It has been great to work with both incuto and ClearBank to pull this together.” comments David Batten, chief executive of Hoot.

The partnership reduces the cost of accessing Faster Payments for credit unions, enabling them to offer digital, real-time payments to members and supporting better financial education through instant and accurate account information. Direct access to Faster Payments via ClearBank and incuto means credit union payments are now processed and accessible to members within 15-20 minutes.

Alongside this, the partnership supports the collection of payments by direct debit and virtual banking services, allowing credit unions to issue bank accounts and sort code details to all members. Credit unions can also automatically and instantly reconcile payments made to member accounts 24/7 without manual processing. As a result, the partnership is significantly improving service levels by reducing manual processing and turn-around times for credit union payments across the UK.

The partnership is also built on shared values, not least being socially profitable – together making a positive social impact. We’re working with incuto to enable digital credit unions and create a financially inclusive future where faster, safer, ethical financial services are available to everyone.

Do these challenges facing credit unions resonate with you? To find out how ClearBank can support your credit union to compete with incumbent banks and new challengers, get in touch.

Jonathan Boon is Head of Mid-Market and Business Development Lead at ClearBank. His deep understanding of accounts and clearing enables him and the team to meet the needs of our start-up and scale-up client base effectively, across all stages of their relationship with ClearBank. Prior to joining ClearBank in 2019, Jonathan worked in J.P. Morgan's Transaction Services business, supporting global Broker Dealers and started his career in The Bank of England's Markets Division.