community lenders, credit
© Tara Golden

Chris Gorst, Head of Better Markets, Nesta Challenges discusses the struggles of credit unions and other community lenders

Credit unions and other community lenders exist to help under-served communities, providing finance on fair and equitable terms, without profiting from getting people into debt. However with a relatively low market share, they’ve struggled to really break into the mainstream loans market in recent years.

COVID and the future

With UK government budget forecasters saying that unemployment could rise as high as 10% thanks to COVID-19 and the associated lockdown, with an extra two million people losing their jobs, they’re going to be needed. Technology is transforming how we all manage our money, and it’s important to ensure that these vital community institutions don’t fall behind. They need to embrace the latest technology to reach more customers and to compete with the speed and convenience offered by the plethora of high-cost lenders.
Research conducted to mark the launch of the Affordable Credit Challenge (ACC), run by Nesta and HM Treasury, revealed that eight in ten (82%) people agree that more needs to be done to ensure there are viable alternatives to high-cost lenders, and 75% believe that not-for-profit, community lenders need more support to succeed.

The UK’s fintechs can help. Strategic partnerships between community lenders and agile fintechs can unlock more support for people really struggling to get by in these difficult times. The technology that fintechs draw on has the potential to help community lenders to provide a much-needed alternative to high-cost lenders by improving the digital user experience and analysing open banking data to inform better affordability decisions.

Serving the under-served

There are some fantastic innovations amongst the solutions being developed by the ACC finalists. One example is Fair for You and EML & Lending Metrics, who have collaborated to create a new revolving loan facility that provides buffer credit specifically for additional frozen food shops, vital at a time when millions of children from low-income families need to be fed at home rather than at school.

There is also a tie-up between Capital Credit Union and Soar, an app using the latest digital financial technology to make it easier for people to join and engage with a credit union, giving new audiences – particularly the financially excluded and younger people – the opportunity to save and gain access to affordable credit.

Credit Kudos, in the news recently for its £5million Series A funding, has teamed up with Police Credit Union Ltd to create a reward loan solution that uses open banking data to monitor a borrower’s behaviour and reduce the interest rate that they pay over time, as they develop healthier financial habits.

This solution is geared towards helping those in the police, armed forces and other protective services with a poor credit rating to access affordable credit. Typically, a Police Credit Union member is required to complete a number of checks prior to being granted a loan. Many members have a poor or limited credit history, having lived in barracks for significant periods. As a result, around 40% of Ministry of Defence applicants return little or no information from traditional credit reference sources. Credit Kudos, by tapping into the rich data available in the open banking environment, can now provide a clearer, more accurate picture of affordability.

It’s very encouraging to see fintechs and community lenders uniting to develop innovative ideas to transform the personal lending market for the better, making it easier for people to access affordable, responsible credit when they need it. There is a very real need for affordable credit for people who struggle to smooth the peaks and troughs of their financial lives, and this has only been exacerbated by the coronavirus pandemic. It’s going to be interesting to see how these partnerships develop.


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