How U.K. credit unions are gaining long-desired access to payments

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U.K. credit unions have traditionally been associated with loan and savings products, but the industry is eyeing a move into the payments markets to offer an alternative to traditional banking.

This has been made possible in recent years by numerous mergers — with some leading credit unions such as London Capital now made up of seven smaller organizations — giving more credit unions the customer base and financial capital to be able to invest in the technology required for digital payments.

In addition, the reforms surrounding the merging of the U.K.’s payments operators in 2018 has made it easier for challenger banks and fintechs to provide access to the payments infrastructure for non-banking institutions.

“Because credit unions are nonprofit institutions, provision of payments has always been quite challenging from a commercial perspective,” said Matt Bland, head of policy at the Association of British Credit Unions. “As a small player with only a few hundred thousand customers, the banks might not even have the meeting with you to discuss it. But some of the challenger banks and the regulatory changes around payments have created new possibilities. Banks like ClearBank and Starling are interested in acting as a sponsor for small institutions who want to get into payments, at viable transactional fee rates, which gives us real cause for optimism.”

Credit unions have long sought a route into payments via current accounts services for their members, enabling them to make and receive digital transactions. Their aim is to provide an alternative to major banks, generating revenue through a monthly upfront fee rather than penalty charges for users who become overdrawn.

So far London Mutual is the only U.K. credit union with the size and scale to make this possible, but fintechs such as Incuto are now working with Starling to develop solutions which could soon enable many more credit unions to offer this service.

“It’s still in the early stages, but Incuto are building a core platform for credit unions to plug into, which enables a full current accounts service,” Bland said. “They have a partnership with Starling to create the payments integration. The key thing is that they understand some of the financial constraints credit unions have in terms of their ability to invest up front, and they’ve created a model to work around that.”

In addition, credit union mergers have enabled some to put money into developing mobile payments technologies for their existing services. Last year, London Capital launched a mobile app which makes it faster and more accessible for members to pay into savings accounts, as well as enabling person-to-person payments.

“The key thing we’re trying to do is encouraging people to save rather than borrowing,” says Martin Groombridge, CEO of London Capital. “And the facility to transfer money to a savings account at any time means they’re more likely to do that. People can also use the app to transfer money between savings accounts, for example to their children for Christmas and birthdays. It’s proving very popular in terms of customer satisfaction. In the nine months since we launched, it’s already made up 30 percent of our business.”

One of the major ambitions for many credit unions is to be able to provide card payments services, along with current accounts. While some credit unions do offer prepaid cards in collaboration with a third party, fintech advances may soon allow them to offer debit and credit cards as well. Incuto has already formed a partnership with Optimus Cards, which could allow credit unions to access this market through its platform in coming years.

“Providers like Optimus have existing relationships with banks or Mastercard or Visa, and so they’re able to provide a solution which credit unions can access, which doesn’t require them to build those relationships directly,” Bland said. “It’s also done on a commercial basis, which is more accessible for credit unions. We’re seeing more and more of these partners who want to increase competition by enabling credit unions to access the payments market in a sustainable way. In the past, a lot of these services just haven’t been possible, but we’re now quite hopeful for the future.”

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