Mark Whitehead 24 September 2018

Payday loans or credit unions?

Payday loans or credit unions? image

A call for local authorities and other public bodies to provide payday loans to their staff seems like common sense. Councils, by virtue of their status and stability, have access to low interest rates which employees could take advantage of when they find themselves strapped for cash.

The average town hall would have no difficulty setting up a mechanism for collecting the payments through its payroll system. And the recent demise of Wonga amid a welter of accusations over its exorbitant interest rates mean there may be a gap in the market that can be filled by altogether more beneficent local authorities.

The think tank ResPublica says residents of the most deprived communities suffer from the worst credit ratings and could be those who benefit most from a council-run scheme.

Moving just 5% of the UK’s current consumer debt from the most expensive loans to salary-linked lending would reduce debt servicing costs by around £2bn, it says.

ResPublica's report has won backing from the highest levels - the UK government's minister for pensions and inclusion Guy Opperman, no less, says it 'unveils an exciting and interesting new set of ideas to lessen debt and the cost of debt' - and promises he will discuss its ideas with his ministerial colleagues.

So what's not to like?

The think tank's report Credit Emancipation: How salary-linked lending can turn around disadvantaged places, heavily promotes a company called Salary Finance, listed as a partner of ResPublica and describing itself as 'a business with a social purpose, bringing together expertise in financial technology with a desire to do good'.

Salary Finance, it transpires, is a commercial US and UK-based operation which is part of Blenheim Chalcot, a venture capital company which has backing from the Legal & General.

For all its high-sounding ideals - it proclaims it is 'on a mission to improve the lives of working people in the UK & US' - it is looking, quite rightly as a commercial business, to make a profit.

Local authorities looking to set up a salary-linked employee loan scheme could consider Salary Finance as a partner.

Or they could look to existing schemes that offer a range of services, including short-term loans, which are community-based, employee-owned and run, which are non-profit and put the welfare of their members as one of their explicit objectives.

These are the credit unions, already well-established, properly regulated and respected throughout the UK and elsewhere. They are run independently but often link with public sector bodies which run salary-linked schemes on their behalf.

Many local authorities are linked with credit unions along with the NHS and other major organisations.

ResPublica and Salary Finance make a good pitch, but it is far from clear that they can offer anything the tried-and-tested credit unions cannot. Whatever Mr Opperman says.

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