DWP Growth Fund Evaluation Credit Union Expansion Project Feasibility Study

Growth Fund Evaluation Growth Fund began in July 2006 and ended in March 2011 £101.35m invested in loans, delivery costs, training and infrastructure £175 million of loans has saved over £140 million in interest payments – compared to higher cost loans Delivery costs have come down BUT most lenders still do not cover costs The Feasibility Study is testing the opportunity for balanced expansion that can lead to sustainability The Financial Inclusion Fund which ended March 2011 paid for the Department for Work and Pensions Growth Fund and the Financial Inclusion Champions initiative. It also paid for a national money advice service managed by the Department for Business and a Ministry of Justice debt advice project in prisons. Debt Advice will continue to be provided by Citizens Advice Bureau and other independent advice agencies across England and Wales following the announcement of funding of £27 million from the Department for Business and Innovation (BIS) for 2011-12. Additionally the Money Advice Service, will deliver a free national financial advice service. Through over 150 credit unions and community financial institutions outlets since July 2006: Total loans made 388,868 Total value of loans £168,060,601.

Growth Fund Evaluation Benefits of Growth Fund for Customers Analysis of Growth Fund borrowers (compared to matched groups in deprived non GF areas) estimated total interest savings per borrower at between £377 and £425 over the lifetime of their current credit obligations 50% of borrowers had another form of borrowing as well as a GF loan, although some of the most common types of borrowing did not incur interest charges (e.g. Social Fund and friends and family) 32% considered that they had borrowed less from any other source since first taking out a loan with a GF lender

Growth Fund Evaluation Benefits of Growth Fund for Customers 87% attributed this change in borrowing behaviour directly to their contact with a GF lender 29% had savings in a savings account, whereas previously they had none 39% felt their money management skills were better since they had started using a credit union 41% felt they were more in control of their finances, and 39% were less worried about money generally

Growth Fund Evaluation Benefits of Growth Fund for Credit Unions All GF credit unions reported they had considerably increased membership and GF, and non GF, lending levels 80% reported their organisation had improved its working practices as a result of GF and now operated in a more business-like way FSA data records an increase of 226K in credit union adult membership from 554K in 2006 to 780K in 2010. We estimate that c.165K of this was generated by GF Latest CU adult membership stands at more than 900K

Universal Credit - Credit Unions Serve People A key aspect of Universal Credit is that it should mimic work and receipt of a salary Government wants to place responsibility for household budgeting with the household Research suggests that Government interference in household budgeting undermines individual responsibility (Wikeley, Ogus and Barendt’s - The Law of Social Security) Universal Credit replaces means tested benefits and tax credits Credit unions help people manage money better and feel in control

Credit Union Expansion Project Credit Unions and DWP achieved a lot through the GF, but more needs to be done to secure expansion and cost reduction through modernisation for them to become sustainable Building on GF, DWP is continuing to support credit unions for four more years through the CU Expansion Fund of £73M A Feasibility Study will report to Ministers in October on the best ways to fund to secure sustainable expansion and modernisation Ministers and PSC are positive that change can be achieved The ambition is that with DWP support credit unions will be serving a million more people within five years. The assumption is that the majority of these new customers will be on low incomes. Some will have been financially excluded; others will simply have been on a lower income and joined for the bill payments service and/or the affordable credit service. The assumptions also support credit unions developing a broader customer base to achieve the balanced business portfolio they need to become financially sustainable. Department for Work and Pensions will work with the banking sector and professional advisers to identify how the credit union sector can best make the necessary progress to offer services that will include a full banking platform, transactional bank accounts, a bill payments service, regulated savings accounts capable of receiving automated deposit payments, and also able to accept the small sum cash deposits that some people will wish to make.

Credit Union Expansion Project - the first 6 months DWP is managing a feasibility study to find and test solutions to the issues of expansion and modernisation The study is led by a Project Steering Group (PSC) that will report to Lord Freud (Minister for Welfare Reform) in early October PSC is chaired by Deanna Oppenheimer, CEO Barclay’s Bank Western Europe. Experian has been appointed to support the study Credit Unions and CDFIs that held a DWP contract and met our performance requirements continue to deliver financial services on our behalf whilst the study is being conducted The study will look at a range of options including those proposals made by ABCUL. However it must be noted that all available options and opportunities are open for consideration by DWP and our partners.

Credit Union Expansion Project - the first 6 months DWP credit unions and CDFIs are making good progress while the feasibility study progresses From April to June 45,000 loans worth £20m have been made Exceeding targets by 5000 loans and £2.5m

PSC Terms of Reference To advise on the objectives of the project To advise on the specification of the feasibility study DWP manages the commercial relationship with the contractor PSC advises on the challenges and opportunities to be studied PSC will advise Lord Freud whether the evidence of the study supports the investment of £73m in a longer term project

Feasibility Study Objectives To create access to a common range of financial services for a million more people on lower incomes To offer modern financial services through credit unions, customer service centres, and ideally across Post Office counters To expand and modernise credit unions capable of delivering these services so they may become sustainable within 5 years The study recognises the need for minimum standards of customer service to attract a balanced portfolio of credit union members to support the drive for sustainability DWP will work with the banking sector and professional advisers to identify how the credit union sector can best make the necessary progress which will include how the credit union sector can: increase efficiency: i.e. reduce costs of banking, saving and loans activity to levels where services can be delivered sustainably increase scale: i.e. increase customer banking, saving and borrowing volumes to levels where, when delivered at reduced costs, credit unions can become sustainable without further government support increase customer service delivery: i.e. offer financial products that potential customers want at prices they will pay, and enable access across Post Office counters, through a customer service centre, and on the internet.

Challenges Facing the Sector Significant expansion will be achieved through better products, improved services, and improved processes and systems These will create expansion and drive down costs if implemented in harmony and carefully managed New products are needed by more people: budgeting accounts, fairer short term/payday loans, cheaper pre paid cards as a step towards banking for those who find accounts hard to manage A wider range of customers is needed to support sustainability New products and improved services will attract people in employment for whom the banks offer few attractive services

The cost of serving CU members in GB is high Low value loans and savings in GB are a major challenge High volume low value transactions are costly In contrast, the loans to savings ratio is much less of an issue for successful CUs worldwide The case for action is clear 13

What’s Happening Now and Next ? Consumer research: how many need the services, what priority do they attach to the different services, what income levels ? Credit union consultation Process engineering: how loans are made, the cost of making and recovering loans, whether systems can reduce costs Systems design: what products and services delivered by which systems ? The cost of systems ? Compatibility with ‘as is’ ? Stake holder consultation: appetite for corporate membership, support, deposits and investment post LRO ?