The digital lifeline for UK credit unions

Financial inclusion is one of the main pillars of the digital economy, where most goods and services can be accessed through digital payment methods and identity verification systems that depend heavily on bank accounts.

  

Although HM Treasury’s financial inclusion strategy document describes itself as the “first step” towards greater financial inclusion in the UK, the country’s move to greater inclusivity has already been underway for almost a decade.

 

The first major milestone goes back to 2016, when the nine largest banks were mandated to offer fee-free basic bank accounts to eligible customers.

 

This requirement stemmed from the EU Payment Accounts Directive (PAD), originally intended to give legally resident consumers across Europe access to basic accounts even if they had low credit scores.

 

However, when implemented into UK law, PAD also ensured that UK citizens had a right to a bank account with basic features at little or low cost.

 

But another development that year had a much more far-reaching impact on financial inclusivity. In August 2016, the Competition and Markets Authority (CMA) published its final report on retail banking, ordering the UK’s nine largest banks to implement common Open Banking standards by early 2018.

 

Designed to give consumers greater control over their financial data and to encourage competition, Open Banking enabled account holders to share their financial data securely with third-party providers to get more personalised services and access to modern payment methods.

 

Open Banking, also referenced in the Treasury’s strategy as an enabler, is the framework and technology behind real-time affordability assessment, which has revolutionised lending.

 

Unlike static credit scores, this new form of checking creditworthiness leverages borrowers’ live financial data via secure, financial-grade APIs and analyses it through automated data analytics to make a decision on loan approval in minutes rather than days.

 

The versatility of data and the incorporation of spending patterns, existing liabilities and behavioural signals into decisioning may result in more favourable outcomes for the self-employed, gig workers and thin-file clients.

 

Credit unions

 

Yet the roots of financial inclusivity reach back further than the mid-2010s.

 

In the absence of a legal framework, credit unions only emerged in the UK in the mid-1960s – a century later than their counterparts in Germany, Belgium or Italy.

 

But their domestic equivalents – loan societies – had already served similar functions: they were not-for-profit, member-owned groups pooling savings to offer fair loans to individuals excluded from mainstream banking.

 

Credit unions must be organised around a “common bond”, whether based on locality, trade or church membership. Some, such as the credit unions of Leeds, Glasgow or North Wales, serve local populations. Others follow professional links, such as First Rate Credit Union (FRCU), which supports current and retired BAE Systems employees nationwide, or the Transport Credit Union, serving workers across the sector. Newer entrants, such as the Churches Mutual Credit Union (CMCU), were formed to counter the spiralling interest rates some church community members faced from payday lenders.

 

Following a decade of growth at 15-20 per cent per year between the late 1980s and 2000, a period fraught with financial difficulties and leading to consolidation followed. Between 2000 and 2017, around 400 of the UK’s 700 credit unions either became insolvent or merged to form a smaller number of larger entities.

 

Being digitally much less mature than legacy banks, and with face-to-face communication at their heart, credit unions underwent frantic transformation journeys during Covid to be able to serve their members remotely.

Some, such as FRCU, became fully digital; others adopted mobile banking, virtual branches and online workflows alongside physical operations.

 

Fintechs: friend or foe?

 

As digital banking experiences became the norm after Covid, credit unions found their traditionally loyal membership jumping ship to incumbent banks and fintechs.

 

Several fintechs even positioned financial inclusivity – the core ethos of credit unions – as their unique selling point, delivered through cutting-edge technology rather than community-based cooperation.

 

While traditional in-person service may still appeal to older generations, the more promiscuous Gen Z will simply leave the community spirit behind for better digital experiences and convenience.

 

Unless they provide the table stakes of digital banking services – digital onboarding, mobile banking, real time transaction updates and intuitive self-service tools – credit unions risk irrelevance.

 

To stay in the game, they must also leverage open banking to enable digital loan application and automated loan assessment. More enterprising unions deploy virtual assistants too to make their services available for members 24/7.

 

Although launching sleek, cloud-native services supported by analytics and AI may seem at odds with the founding ideals – personalised attention, community spirit and member well-being – of credit unions, digital tools can actually reinforce these values.  

 

Engagement platforms can offer personalised, real-time experiences that echo the familiarity of walking into a branch and speaking with someone who understands your circumstances.  Some platforms also integrate financial education modules, delivered through course-based content or gamification, strengthening credit unions’ long-standing commitment to improving financial literacy.

 

Members of credit unions that have integrated Open Banking can also have access to personal finance management and budgeting apps, enabling them to gain control over their day-to-day finances in ways traditional credit unions could never have offered.

 

Still, as Magda Niemeczyk points out in an online panel discussion, finding the right fintech partners to deliver these advanced digital technologies remains a challenge.

 

As some international instances of fintechs failing their credit union partners demonstrate, organisations collaborating  with technology partners who underperform risk reputational damage and the erosion of trust – one of their greatest assets. Niemczyk’s view is that credit unions should set higher entry standards for technology partners to avoid these pitfalls.

 

Fortunately, strong examples of well-orchestrated ecosystems are emerging too.

 

For instance, OnePay, a provider of digital accounts and a prepaid Mastercard debit card, which can be topped up automatically from payslips, offers integrated services with Incuto’s end-to-end banking platform, offering digital banking, loan management and Open Banking capabilities for credit unions and community lenders.   

 

What a financial inclusion strategy can bring to the table

 

Credit unions themselves are also finding ways to future-proof through collective action. In recent years, they have been increasingly relying on credit union service organisations (CUSOs in) – a well-established model in the US but a recent development in the UK.

 

CUSOs pool resources across member credit unions to share back-office functions including IT support, accounting, compliance, cyber-security and even core banking platforms or payment systems to reap the benefits of the economies of scale they originally lack.

 

Government initiatives also play a role. Programmes such as Fair4All Finance – a financial inclusivity scheme funded by £65 million of dormant assets – help credit unions expand affordable credit and upgrade technology through grants and investment.

 

While funding injections provide a lifeline for credit unions, what they need most are modernised regulatory frameworks that accommodating their unique operating model by removing unnecessary legislative constraints.

Encouragingly, the FCA and Prudential Regulation Authority (PRA) have recently signalled support for reforms aimed at boosting credit union competitiveness and simplifying consolidation. Both regulators recognise the importance of CUSOs and the pressures currently facing the sector.

 

With thoughtful regulation, strong technology partnerships and continued investment in digital transformation, 2026 could finally be the year when credit unions, once hamstrung by limited resources and outdated legislation, can finally start a journey to reach their full potential while staying truthful to their original mission.