As the UK assesses the new government in place, the UK’s Payments Association, an influential community in payments, is the government to consider greater emphasis on financial inclusion.
This is with the aim of ensuring greater financial literacy as well as more intuitive access to financial services for everyone.
This process would include increased support for community finance providers like credit unions. The Association’s new report “Redefining Community Finance: Unlocking Pathways to Financial Inclusion” highlights the potential of these organizations to help the millions of Britons struggling financially, but also identifies barriers like negative perceptions and regulations designed for larger institutions.
Neil Harris, Chair of The Payments Association’s Advisory Board tells Digital Journal about the proposals.
How do we define ‘community finance’ and do we need to think differently about it?
Neil Harris: The UK could benefit enormously from investment and education in community finance as a huge number struggle financially. A staggering 12.9 million UK adults (one in four) have low financial resilience, and a record 6.7 million face severe financial difficulty. Financial resilience refers to a person’s ability to cope with financial shock or recover from financial difficulties.”
Increased public understanding of the options offered by community finance (such as credit unions) could be a game-changer, but it needs support. In community finance, lending decisions are made in the interests of individuals, non-profits and social enterprises, and ultimately for the benefit of their community. In practice, it can mean low-interest or interest-free loans can be given to people or companies that would have difficulty securing financing otherwise. Credit unions are closely related to this concept.
So why aren’t community finance organisations more prominent? It may be that there is a lack of education about the field throughout society, including people with poor credit scores or inability to access credit. In fact, few in the UK can define what a credit union is, or why it’s different from a standard bank. However, in Germany, credit unions are known as ‘people’s banks,’ removing some associated stigma and making their function and intended users clear. Looking differently at community finance might be a way to increase recognition and ultimately benefit people.
What are the current and long-term barriers to community finance solutions becoming commercially sustainable, scalable, and mainstream?
Harris: Community finance options including credit unions have the potential to be a lifeline for millions in the UK. They can empower individuals with minimal disposable income to start businesses and support community organisations. However, significant structural barriers prevent them from reaching their full potential.
The Payments Association’s whitepaper, “Redefining Community Finance: Unlocking Pathways to Financial Inclusion,” sheds light on the barriers to effective community finance including the narrow definition of “community” used by some institutions. Traditionally, this has limited their reach to geographically defined areas. The paper proposes broadening the definition to encompass shared values or experiences, allowing them to connect with a wider range of underserved consumers.
Furthermore, regulations that intentionally limit the reach and profitability of the institutions, burden community finance providers with unnecessary complexity. . These limitations have long-term consequences. They prevent community finance from reaching millions who could benefit from their services, hindering financial inclusion and economic growth in underserved areas.
The paper proposes several solutions to overcome these challenges. One recommendation is to establish a ‘sandbox’ environment where community lenders and technology providers can collaborate and develop innovative solutions. Additionally, policymakers can learn from successful initiatives in other countries, like Credit Union Service Organisations (CUSOs) in the US, which offer support services to smaller credit unions. The report also calls for a fairer regulatory framework that acknowledges the unique mission of community finance organisations. This could be coupled with business rate relief and a kitemark system to signify trust and quality.
Finally, targeted investments, levies, mentorship programs, and improved signposting initiatives could be explored to encourage collaboration. By implementing these recommendations, community finance can be empowered to unlock its potential and serve the millions currently struggling with financial difficulties.
How can we make community finance more accessible to financially underserved and excluded people? Is the solution more than just awareness?
Harris: Community finance has the potential to bring about radically positive change for millions of financially excluded people in the UK. These institutions, like credit unions, can offer zero or low-interest loans that empower people to start businesses or expand charities. However, under-utilisation and limitations on investment hinder their ability to serve and reach the wider population of the financially excluded.
One of the biggest barriers is awareness. A large portion of the population is unfamiliar with community finance options. A well-funded community finance sector, coupled with government initiatives promoting financial literacy, could bridge this gap. Imagine the possibilities if everyone knew about the financial tools available to them. FinTech innovation can also be used to extend the capabilities of community finance companies, allowing them to do more with less. Open banking, for example, can be used to make instant decisions on lending without going through traditional channels by linking directly to a borrower’s bank account.
Investment is also vitally important to community finance companies, yet current laws make them a poor prospect for investment. Loosening rules that penalise them for making profits or offering incentives to invest could facilitate more investment into the sector, which could help these companies to expand.
By addressing this challenge, we can make community finance a powerful tool for financial inclusion. When these institutions have the resources and reach those in need, they can empower countless individuals to become financially secure and contribute to the economic health of their communities.
