THE BLOG

Can Credit Unions Really Compete With the Profits of Wonga?

05/09/2013 12:41 BST | Updated 03/11/2013 10:12 GMT

Wonga has just announced that it makes over £1million profit every week. It made almost four million loans last year and is now the UK's joint 14th biggest lender. Can anyone really compete them out of business? I believe that community finance could and should do just that.

Payday lenders use a business model based on charging cripplingly high interest rates and profiting from those who don't repay on time. Payday lenders are sucking money out of our working class communities. Pushing people further into debt and taking more and more of their income.

Wonga is the biggest payday lender, not necessarily the worse but the recent Office of Fair Trading review found widespread irresponsible and illegal practices in the industry.

Working people, unemployed people, single parents and disabled people are all using payday loans. It's becoming all too commonplace. It's easy to get a loan and it's easy to find a lender on the high street and online.

Payday lenders are profiting from the vulnerable. At this time of austerity the vulnerable need our help, not a payday loan.

Like many, I think there has to be another way.

But can payday lenders really be competed out of business by credit unions as the Archbishop of Canterbury recently proclaimed?

As things currently stand I fear not. Credit unions are a small tightly regulated sector, restricted in the way it can lend and the interest rate it charges. Credit unions generally can only lend to members who already have some savings, and for many who urgently need credit this isn't a realistic option.

But if credit unions teamed up with other community organisations trying to tackle the menace of payday lenders, including community development finance institutions (CDFIs) - providing affordable loans - and debt advice agencies they could be a powerful force.

By working in partnership these bodies can provide a range of advice, support and financial services to vulnerable members of the community - families who may need help with budgeting, managing their bills and paying off payday loans to get their household finances in order.

Organisations like CDFIs have a strong social mission, they are not going to make £1million a week, but they are going to be sustainable and they could help millions of people. In order to step up and deliver a comprehensive nationwide service, community lenders need significant investment - from the public and private sectors.

Lenders need to operate at scale with efficient systems, charging realistic but affordable interest rates, and consumers need to know who they are. Getting to this point isn't going to be cheap, but in the long run the returns are huge. The economy will benefit. As will families. The payday lenders hopefully will not.

Access to appropriate finance Is, I believe, a human right. If we leave this in the hands of payday lenders it is only their shareholders who will benefit. .