Credit Union Academic Paper

BA Business Studies (SW)
Honours Dissertation
SESSION 2015/6
Trimester One
TITLE
BARRIERS TO AUTOMATED LENDING

DECISIONS: A QUALITATIVE STUDY OF
SCOTTISH CREDIT UNIONS
AUTHOR
Nicola Catherine Dryburgh

40083058
Supervisor: Matthew Dutton

Declaration
I declare that the work undertaken for this BA Dissertation has been undertaken by
myself and the final Dissertation produced by me. The work has not been submitted
in part or in whole in regard to any other academic qualification.
Title of Dissertation:
BARRIESR TO AUTOMATED LENDING DECISIONS: A
QUALITATIVE STUDY OF SCOTTISH CREDIT UNIONS
Name (Print): NICOLA CATHERINE DRYBURGH
Signature: _____________________________________________
Date: 6th April 2016
I
Abstract
As credit union membership across Great Britain continues to grow there is an

increasing pressure for credit unions to change the way they make lending decisions
to meet the changing needs of their members. This study looks to examine the
opportunity for credit unions in Scotland to adopt an automated approach to lending
decisions to increase their success as mainstream lenders. It achieved this by
exploring the drivers and barriers of this opportunity and by analysing the opinions
of industry professionals.
Interviews and questionnaires were utilised by the researcher to gather the in-depth
thoughts of participants and to collect data which established the study size and
characteristics. The data was then analysed by text analysis to identify common
themes and issues across the entire study.
The findings of this study have identified that it is currently unsuitable for community
credit unions to adopt automated lending decisions. It recognised that although
there is a desire for credit unions to improve their lending decisions processes, their
current lack of knowledge of automated lending and member orientation limits their
ability to implement automated lending successfully without compromising their
founding beliefs.
II
Acknowledgements
I would like express my thanks and gratitude to my supervisor, Matthew Dutton, for
his support and involvement throughout this research. I would also like to extend my
appreciation to those who participated in the study and contributed to its findings.
Finally, I would like to acknowledge the unwavering support of my friends and family
throughout my time at university. Most importantly, I would like to mention my
mother, Susan Dryburgh, for going above and beyond anything I could have asked
for.
III
Table of Contents
1. Chapter 1 Introduction and Background ........................................................ 1
1.1 Introduction to Chapter .................................................................................. 1
1.2 What is a credit union? .................................................................................. 1
1.3 Alternative to Payday Lenders ....................................................................... 1
1.4 Credit Unions in Great Britain ........................................................................ 2
1.5 Research Aim and Objectives ....................................................................... 3
1.6 Conclusion of Chapter ................................................................................... 4
Chapter 2 Literature Review ................................................................................ 5
2.1 Introduction to Chapter .................................................................................. 5
2.2 Credit Union Strategy .................................................................................... 5
2.3 How Are Credit Unions Different? ................................................................. 6
2.4 Ferguson and McKillop’s Credit Union Typology Theory ............................... 6
2.5 Trends within the UK Credit Union Movement ............................................... 8
2.6 Restrictions Facing Credit Unions ................................................................. 9
2.7 Credit Scoring Within Credit Unions ............................................................ 10
2.8 Growth ......................................................................................................... 11
2.8 Conclusion to Chapter ................................................................................. 12
Chapter 3 Research Methods ............................................................................ 14
3.1 Introduction to Chapter ................................................................................ 14
3.2 Choice of Methods ...................................................................................... 14
3.2.1 Interviews ................................................................................................. 15
3.2.2 Advantages and Disadvantages of Interviews .......................................... 15
3.4 Questionnaires ............................................................................................ 16
3.5 Sampling ..................................................................................................... 16
3.5.1 Sample Type ............................................................................................ 17
IV
3.5.2 Sample Size ............................................................................................. 17
3.5.3 Sample Variety ......................................................................................... 17
3.6 Reliability, Validity and Generalisability ....................................................... 17
3.6.1 Reliability .................................................................................................. 17
3.6.2 Validity ...................................................................................................... 18
3.6.3 Generalisability ......................................................................................... 18
3.7 Analysis ....................................................................................................... 18
3.9 Limitations ................................................................................................... 18
3.10 Conclusion to Chapter ............................................................................... 18
Chapter 4 Data Description ............................................................................... 19
4.2 Interviews .................................................................................................... 19
4.3 Questionnaires ............................................................................................ 19
4.3.1 Common Bond Type................................................................................. 19
4.3.2 Age of Credit Unions in the Study ............................................................ 20
4.3.3 Average Bureau Usage of Participants..................................................... 21
4.3.4 Credit Union Membership Size and Loan Amounts .................................. 22
4.4 Limitations ................................................................................................... 22
Chapter 5 Discussion and Analysis .................................................................. 23
5.2 Is there a link between age and views on automation? ............................... 23
5.3 Is There a Link Between Common Type and Automated Lending Decisions?
.......................................................................................................................... 24
5.4 Restrictions of Automated Lending and Growth of Credit Unions ................ 26
5.4.1 Poor People’s Bank Perception ................................................................ 26
5.4.2 Lack of Awareness and Market Penetration ............................................. 28
5.4.3 Contradiction of Principles ........................................................................ 29
V
5.5 Drivers for Automated Lending Decisions ................................................... 30
5.5.1 Future Generations................................................................................... 30
5.5.2 The Credit Union Expansion Project......................................................... 31
5.5.3 UK Credit Union Statistics ........................................................................ 33
5.5.3.1 Arrears Analysis .................................................................................... 33
5.5 Conclusion to Chapter ................................................................................. 36
Chapter 6 Conclusions and Recommendations .............................................. 37
6.2 Overall Research Aim and Research Objectives ......................................... 37
6.3 Overall Findings .......................................................................................... 38
6.3 Recommendations ...................................................................................... 39
6.4 Further Research ........................................................................................ 40
7 References ....................................................................................................... 41
8 Appendices ...................................................................................................... 46
8.1 Appendix 1 Interview Consent Form ........................................................... 46
8.2 Appendix 2 Example of Interview Questions ............................................... 47
8.3 Appendix 3 Example of Questionnaire ........................................................ 48
8.4 Appendix 4 Participating Credit Union Questionnaire Data ......................... 51
VI
List of Tables and Figures
Table of Tables
Table 4.2.1 Abbreviation of Interview Participants …..19

Table 4.3.2.1 Year Established of Credit Unions in Study …..20
Table 4.3.4.1 Average Size of Participating Credit Unions …..22
Table 4.3.4.2 Average Loan Amount of Participating Credit Unions …..22
Table 5.5.3.1.1 Total Arrears for Scottish credit unions …..34
Table of Figures
Figure 4.3.3.1 Participants Bureau Data Usage …..21

Figure 5.3.1 Current and Future Use of Automated Lending
Decisions of Participating Credit Unions …..25
Figure 5.4.1.1 Credit Union Views on Their Perception as a
Poor Person’s Bank …..26
VII
1. Chapter 1 Introduction and Background
1.1 Introduction to Chapter
This chapter will give a detailed background to credit unions and their development
in Scotland before detailing the aim and objectives of this study. It will then discuss
the researcher’s approach to conducting the research and explain the structure of
the dissertation.
1.2 What is a credit union?

Credit unions are not-for-profit, member-owned, financial cooperatives which offer
a basic range of financial services to their members (WOCCU, 2016a). The
membership of a credit union is formed around the concept of a common bond,
where all members must have a shared connection, for example, a geographical
common bond would permit a membership where all members lived in the same
geographical area, stated by the common bond (Rubin et al., 2012). The common
bond is intended to ensure that members will strive to keep to credit union principles
and act reliably and responsibly (Fuller, 1998).
Internationally, the credit union movement has seen rapid growth throughout recent
years with 57,000 credit unions now lending more than $1.2 trillion worth of loans to
members at the end of December 2014 (WOCCU, 2016b).Unlike other financial
institutions, the key objective of a credit union is not to maximise profits but to
maximise member benefits (Taylor, 1971). This is achieved through profits being
utilised to offer lower loan rates, higher savings rates and improved customer
service (McKillop and Wilson, 2015).
1.3 Alternative to Payday Lenders

It is a credit union’s connection with social responsibility which sets credit unions
apart from other lenders and makes them an affordable alternative to payday
lending. Worldwide, credit unions are known for providing access to affordable credit
to millions to consumers (Power et al., 2012).
Credit unions collate their members' savings deposits to finance their own loan
portfolios rather than rely on outside capital. Members benefit from higher returns
on savings, lower rates on loans and fewer fees on average. They were originally,
depicted as:
1
“a means by which savings can be pooled and then distributed
in line with local need and may even help to stem the process of
financial dynamics which would otherwise recycle funds from
poorer to richer areas” - (Leyshon and Thrift, 1995, pg.335).
However, as a true alternative to payday lenders, the credit union model limits the
easy access to funds that payday alternatives can offer (Alexander, White and
Murphy, 2015). Members of credit unions are often required to deposit regular
savings with a credit union before they are eligible to apply for a loan. This limits the
appeal a credit union has to those most in need of credit who normally require funds
immediately. This was reinforced by a report by the Carnegie Trust who stated that
only 3% of households with lower incomes across the UK have a credit union
account (Alexander, White and Murphy, 2015).
Credit unions worldwide offer members from all walks of life much more than
financial services. They provide members the chance to own their own financial
institution and help them create opportunities such as starting small businesses,
growing farms, building family homes and educating their children.
1.4 Credit Unions in Great Britain

Worldwide credit union growth has also been mirrored in Great Britain where credit
unions are now offering a wider range of services to their members. In the ten years,
ending September 2012, the credit union sector in Great Britain more than doubled
its membership and loans totals and trebled savings deposits and assets (Cooper
and Purcell, 2013). Despite this rapid growth, the size of the Credit Union industry
is a meagre 10% of the size of the commercial high cost credit market, creating
significant challenges for credit unions in Credit Britain (Alexander, White and
Murphy, 2015).
Growth aside, Credit Unions in Great Britain have failed to achieve a broad income
and wealth mix on borrowing and saving members. This has resulted in Credit Union
across Great Britain being branded a poor person’s bank, which has, in turn,
hindered the overall development of the industry within Great Britain (McKillop and
Wilson, 2011).
2
1.5 Research Aim and Objectives
The overall aim of this study is to identify whether or not there is a beneficial
opportunity for credit unions in Scotland to automate their lending decisions in an
attempt to continue their development. As academic research in the area of credit
union lending has been restricted to a small group of researchers the importance of
this study will be to provide a modern analysis of the credit union lending strategies
in Scotland.
“The task that credit unions face today is in the creation of a sustainable
business model, from the basis of a varied membership, by offering a compelling
offer for the customer” (Alexander, White and Murphy, 2015).
The above quote highlights that there is an increasing pressure for credit unions to
appeal to a different customer base who borrow larger amounts and are typically
more affluent.
The following research objectives were set to be achieved by this research:
1. To define Ferguson and McKillop’s Credit Union Industry Theory and apply it
to Scotland’s credit union industry.
The researcher will define and critically analyse the theory in the literature review
before applying it to the Scottish credit union industry in the concluding chapter.
2. To examine the main constraints and opportunities that credit unions face in
relation to their ability to extend lending and automate their lending decisions.
The researcher will interview credit union managers to gather their opinions on the
research topic and the direct impact of automating lending decision to their credit
union.
3. To collect relevant information surrounding thoughts and opinions of

automated lending decisions across Scottish credit unions through
appropriate data collection methods.
3
This will be carried out by a series of interviews with industry professionals and the
collection of primary data from credit unions across Scotland. A full explanation of
data collection and analysis is provided in Research Methods chapter of this paper.
4. Provide a recommendation for credit unions in Scotland as to the benefits

and threats that the adoption of automated lending decisions can bring.
This objective will be met by a combination of the analysis of the data collected by
the third objective of this research being applied to views identified in literature
review section.
1.6 Conclusion of Chapter
The value of this research will be to explore the effectiveness of the processes which
Scottish credit unions use to decide who to lend to. It will aim to identify the
opportunity to automate lending decisions in order to modernise and improve their
performances in response to pressures, such as the Credit Union Expansion Project
and rising provision requirements. This research will benefit credit unions throughout
Scotland, England and Wales who are all directly impacted by changes of the
expansion project and its’ findings can be applied as a way of improving their long
term sustainability.
This research commenced by examining the background of the topic in question

and explaining the significance of conducting this research. It also set out the aims
and objectives that the researcher has set out to achieve. Chapter Two is a
literature review that critically analyses Ferguson and McKillops’s typology theory
and explores the key issues surrounding credit union development across Great
Britain. The next chapter, chapter three, comprises of the research methods
employed by the researcher in order to conduct the study. The fourth chapter then
proceeds to explain what data was collected before chapter five addresses the
findings of the primary research and delivers an analysis. To conclude, chapter six
offers a final conclusion of the findings in relation to the viewpoints identified in the
literature review before providing recommendations based on the discoveries of
Chapter Five.
4
Chapter 2 Literature Review
In this section of the project, an exploration of the previous research of credit union
strategy will be undertaken. Firstly, the concept of a credit union will be defined
along with an analysis of their formation in Great Britain. The different perspectives
of how credit unions differ from other retail lenders are then explored. The review
will then proceed to explain the trends of the UK credit union movement identified in
academic literature before examining the concept of credit scoring and its limited
use within credit unions in the UK. At the end of this chapter, the tone is established
for the remaining project by identifying the important gap within current literature.
2.2 Credit Union Strategy

Credit Unions are self-help cooperative financial institutions which provide basic
financial facilities to the financially excluded in order to attain the economic and
social goals of their members (McKillop et al., 2010). The Credit Union industry was
not established in Great Britain until 1964, and the movement which drove the
growth of credit unions followed in 1979 when the Credit Unions Act was passed
(McKillop et al., 2005).
The neoclassical theory of the firm, based on an assumption of profit maximisation,

is inadequate for understanding the economic behaviour of cooperative
organisations, which embody multiple values and objectives (McKillop and Wilson,
2015). As not-for-profit lenders, credit unions promote the benefits that small,
appropriate credit can bring to financially excluded households (McKillop and
Wilson, 2008). Run and owned by their members, credit unions are viewed as
philanthropic organisations which exist to serve their communities. Early research
into credit unions throughout Great Britain by Jones (1999) identified their strong
social purpose, with 83% of credit unions being formed as public development
projects or as a service for underprivileged people.
It is, therefore, the purpose of serving their members above all else that is central to
a credit union’s lending strategy.
5
2.3 How Are Credit Unions Different?
The values upon which credit unions are formed can be said to be the main factor
in distinguishing the differences in strategies used by credit unions and other retail
lenders. Their principles include:
“Open membership, democracy, a limited interest on share capital, and the

return on member’s interests being in proportion to the member’s patronage” -
(Ryder, 2007).
The focus of credit unions within the United Kingdom is driven by a social
mission which is influenced by local governments, creating a mass of credit unions
with a community focus, foregoing a more commercial, business-like outlook (Jones,
2005).
In comparison, it has been argued by Jones (1999) that credit unions are most
efficient and beneficial to society when they identify themselves primarily as a
business. He states that by functioning in such a way, they experience growth faster
and produce larger economic benefits and social goals. This view is mirrored by the
Irish League of Credit Unions which stated that credit unions should “not run for
profit or as a charity, but for service” (McDonnell, 1996). The traditional community-
based view of credit unions is changing in today’s society with recent research
highlighting a need for credit unions to become more attractive to a wider range of
customers in order to enhance the platforms used by credit unions and to increase
the range of services they provide (Ryder, 2003).
It is this change that brings this research into question. If credit unions are needing
to provide a larger range of enhanced products, it can be questioned if there is an
opportunity for automated lending decisions to be employed.
2.4 Ferguson and McKillop’s Credit Union Typology Theory

Ferguson and McKillop designed a classification system to understand the
development of credit unions worldwide. The framework identifies the factors that
influence the progression of credit unions through the various stages of
development and provides a framework through which the characteristics of mature
operations may be harnessed by transitional movements (Ferguson and McKillop,
2000).
6
They identified three stages of development throughout credit union industries in
their typology theory; nascent, transition and mature. The organisational life-cycle
methodology defines the key features of each industry type which is used to identify
the evolutionary linkage between the industries. The first stage of development is
the nascent stage where many credit unions operate solely through volunteer efforts
and through the support of local governments. The focus of lending at this stage is
often to disadvantaged communities where residents have difficulty gaining access
to retail credit (Sibbald et al., 2002).
They identified that the credit union industry within the UK was classified as a
transition industry. The transition stage places a larger importance on growth and
efficiency within the industry and creates an environment where credit unions can
begin to consider changing the way they operate (Ferguson and McKillop, 2000).
This stage follows the nascent stage and is achieved as membership and capital
increases. The government in the United Kingdom has previously supported credit
unions through a range of funding initiatives and this has resulted in a top-down
approach to credit union development (McKillop and Wilson, 2015). However, it is
not until the final maturity stage of development where the priority of a credit union
changes to operating more like a business, where becoming an efficient provider of
a wide range of financial services is desired (Ferguson and McKillop, 2000).
Behavioural research carried out identified that high-cost efficiency is often achieved
by larger credit unions who have a low level of operating expenses. (Railiene and
SinevicieneAim, 2015).
Richardson (2000) builds on this theory by providing further characteristics which

define each development phase. He reasons that the initial formative stage of credit
union development is synonymous with their dependence and poor person’s image.
He then states that the transition phase is recognised by a credit union's
independence and good image before the characteristics of interdependence and
excellent image occur in the final phase of development.
It can be criticised that this evolutionary theory suggests that the natural progression
for credit unions is linear, with the idea of them continuing to expand membership in
order to remain successful. It also does not consider alternative options for growth
7
but does support the idea that the development of a credit union should be towards
increasing efficiently through growth.
2.5 Trends within the UK Credit Union Movement

In recent years, a new approach to the management of credit unions is increasing
the pressure for credit unions to provide services traditionally provided by for-profit
lenders. The industry’s global trade association and development agency, The
World Council of Credit Unions, is actively promoting the adoption of a new
management model which is encouraging for-profit financial management practices
within credit unions (Forker et al., 2013). This adds to the research question as to
whether or not automating credit union lending decisions is beneficial. It highlights
that there is a favourable change in the way credit unions operate that could
accommodate automated processes. However, it has been criticised that the ‘new
model’ approach will diminish the community involvement of credit unions.
Amberley and Dacin (1993) reported that older credit unions are more likely to fail
or merge and are less successful at changing their operations than younger credit
unions. Barron et al. (1994) suggest that this is because older organisations become
more vulnerable to competition as they stop developing, making it more difficult to
make and carry out decisions in a timely manner thereby missing opportunities.
A significant turning point within the Credit Union movement in the UK was the
inclusion of credit unions within the Financial Services and Markets Act 2000. By
bringing the credit union’s under the remit of the Financial Services Authority, there
was a shift towards stronger regulation of credit unions which, in turn, saw the
implementation of the Credit Union Source Book (McKillop, Glass and Ward, 2005).
The Sourcebook divided credit unions into two versions, which face different lending
regulations depending on their size. It is larger, version 2, credit unions that have
been identified as pivotal to a long-term self-sustainable credit union movement with
their ability to offer loans larger than £10,000 or at a maximum value of 1,5% of their
shares (Baker, 2008).
The progression brought on by the introduction of the sourcebook have vastly

improved the landscape for credit unions to enhance their lending decisions by
increasing their lending power to rival other lenders. This is reinforced by the view
that stated that credit unions “can become more effective in pursuing goals, if they
8
are managed on a more business-like footing” (Ryder, 2003) and again reinforces
the importance of the examination of the modernisation of credit union lending
decisions.
2.6 Restrictions Facing Credit Unions

A prominent factor limiting a credit union’s expansion identified in the literature was
the common bond restriction which credit unions are founded upon. Member entry
into a credit union is constrained by the common bond specified in the credit union’s
charter. These are usually occupational or residential in nature (Smith, 1984). This
limits the income available to individual credit unions as well as confining their
customer base to those that fall within the common bond. It was originally thought
by Black and Duggar (1981) that the restriction placed on a credit union’s
membership, reduced the need and cost of gathering credit information, therefore
minimising the exposure of individual credit unions to bad debt losses. However, it
has been countered that as a credit union grows, the common bond places a
constraint on the operational efficiency gains that it can gain through economies of
scale (McKillop and Wilson, 2015).
McKillop (2005) identified that successful credit union development was dependent
on the “common bond type, size and the deprivation of the area from which the
credit union obtains its members”. He reasons that larger credit unions, occupational
founded credit unions and those which have a diverse income membership are more
successful. The case study prepared by the Research Excellence Framework
reinforces this argument by concluding that both occupational, larger and highly
capitalised credit unions tend to operate more efficiently than those which are
smaller and community-based (Alexander, White and Murphy, 2015).
Ferguson and McKillop (2008) also argue that the restrictive interpretation of the
common bond requirement has limited the development of Credit Unions throughout
Great Britain. (McKillop and Wilson (2003) and Ryder (2002) suggest that the long-
term success of credit unions requires that they attract a wider cross section of
people from local communities; therefore, the deprivation of a credit union’s location
may impact on its success.
9
The common bond restriction can, therefore, be seen as a crucial factor in the lack
of development of credit unions in Great Britain and a significant barrier to credit
unions changing the way in which they make lending decisions.
2.7 Credit Scoring Within Credit Unions

Credit scoring can be defined as the:
“Use of statistical models to transform relevant data into numerical measures

that guide credit decisions” - (Anderson, 2007, pg.6).
It is the main determinant used by creditors to decide whether or not they

will extend credit to consumers. In recent years, it has become standard practice for
lenders to use credit scoring along with automated decision processes in a market
which is driven by large volumes of applicants (Anderson, 2007). The data used
within these models is obtained from Credit Reference Agencies and is incorporated
into a lender’s decision-making process. Credit Reference Agencies are the firms
from which creditors, such as banks, purchase data from to determine a consumer’s
credit-worthiness (Mason, 2014).
The Credit Union Expansion Project Feasibility Study reported that the
implementation of automated loan decision-making processes is a key aspect to the
growth and modernisation of credit unions in the United Kingdom (Wright, 2013).
This would align the credit union industry with the modern development of statistical
methods that are currently used within the retail industry to monitor and predict
aspects of consumer behaviour; from the risk of defaults to the risk of early
repayment (Hand, 2001). The automation of lending decisions began in 1966 after
the introduction of the credit card in the UK. Following legislation that prevented
subjective decisions being made on the basis of factors such as gender, automated
lending processes became increasingly popular and recent technology has
intensified its use (Consoli, 2005).
The HM Treasury identified that a lack of available credit reference data on

applicants is a growing concern for credit unions in England, Wales and Scotland
(HM Treasury, 2014). As they grow and provide more financial services, they
expose themselves to the increased risk of a higher number of customers defaulting
for higher values as they extend their lending facilities. This directly influences credit
10
lending strategies of credit unions and their ability to credit score consumers. This
recent finding contradicts the initial belief of Black and Duggar (1981) who stated
that “the common bond restriction on credit union membership is assumed to reduce
the cost of gathering credit information, reducing bad debt losses”.
It is the above change of thought that this research wishes to explore. As more credit
unions expand the parameters of their common bond, will utilising credit bureaux
data provide an opportunity for Scottish credit unions to improve lending decisions
and reduce bad debt or will it create a barrier to credit unions performing their social
aim of aiding those financially excluded in their communities?
2.8 Growth
In Scotland, there are currently one hundred and four credit unions, with 362,034
members, a significantly low penetration across the country (Bank of England,
2015). Ryder (2007) attributes the slow growth of the credit union movement in the
United Kingdom to several factors from the youth of individual credit unions,
inappropriate development models to the over-reliance on external funding and
ineffective financial legislation.
From the period of 2001 to 2006 England, Scotland and Wales saw an overall
reduction of over 140 credit unions. However, total credit union membership and
loan amounts continue to show strong growth according to Baker (2008). He also
argues that the principal reason driving this trend is the outcome of an increase in
mergers and consolidations between existing credit unions. Goth, McKillop and
Ferguson (2006) stated that this trend emerged in order to tackle volunteer burnout
and increased regulatory commitments, whilst promoting growth, scale economies
and professionalism. McKillop and Wilson (2003) commented that the new regime
is placing an increased strain on the smaller, volunteer dependent, credit unions and
as a result credit unions are integrating in order to combine resources, forming larger
entities.
More recent figures highlight that the decrease in the number of credit unions is a
continuing trend in today’s society. According to the CarnegieUK Trust, there are
now around 400 credit unions throughout England, Wales and Scotland which
provide a total of £690 million in loans (Alexander, White and Murphy, 2015). The
growth and development of larger credit unions is argued to bring substantial
11
economies of scale benefits to the credit union movement in the United Kingdom
(Sibbald et al, 2002).
They also believe that these benefits will be more advantageous to larger credit
unions which will, in turn, be able to provide a greater range of services and employ
professional personnel. They will, in theory, begin to operate and provide services
in a similar way to retail banks. This development and increase in the number of
larger, more advanced types of credit unions are those which could benefit from the
automation of lending decisions proposed by this research. Although it can be
argued that for them to be successful in the implementation of automated lending
decisions, they will have to remove their dependence on government support and
intervention.
The pressure for credit unions to merge in order to be successful has been said to
threaten the vitality of smaller credit unions and contradict the self-help ethos which
credit unions are founded upon (Baker, 2008). By becoming a professionally
managed institution, a credit union can be said to be going against their founding
principles. The introduction of professional management and new processes might
drive out the volunteers who have been crucial to the credit union movement to date.
This dilemma faced by credit unions is described below:
“Maintaining competitiveness with much larger rival’s demands

that credit unions focus on both efficiency and customer/member
service satisfaction. While mergers can potentially increase
efficiency, they can also reduce member satisfaction through
rationalisation of staff and/or branches and from problems in the
integration of systems, procedures and technologies”
- (Ralston, Wright and Garden, 2001).
2.8 Conclusion to Chapter

In conclusion, this chapter has identified that academic research in the area of credit
union development and lending has been minimal and current available literature is
limited. This highlights the importance of this research which will provide a modern
analysis of the credit union lending decisions in Scotland.
12
The review of previous literature has defined what a credit union is and examined
the recent trends of development and growth of them throughout the United
Kingdom. The increase in credit union membership, reduction of smaller credit
unions and increasing lending power has identified a change in direction of the credit
union industry. This has stemmed from previous research identifying a need for
credit unions to operate similarly to for-profit lenders if they are to remain viable.
The remainder of this study will look to identify if the problems and opportunities
identified in the chapter are relevant to the Scottish credit union industry and if there
is an opportunity for credit unions to improve their lending decisions by adopting
automated lending decisions.
13
Chapter 3 Research Methods
As stated in the introductory chapter, this study aims to provide a more up to date
investigation of the credit union industry in Scotland and determine whether or not
credit unions should adopt a more automated approach to lending decisions. The
key issue identified within previous literature which this research looks to build on is
the barriers and opportunities to automated lending decisions that the development
of the Scottish credit union industry has created.
This chapter will detail the data collection methods utilised by the researcher and
discuss their benefits and potential limitations to the research. It will then explain the
researcher’s approach to sampling before covering the important concepts of
validity, reliability and generalisability in relation to this study. The chapter will end
with an explanation of how the data collected will be analysed to derive overall
findings.
3.2 Choice of Methods
In order to conclude whether or not it would be beneficial for credit unions in
Scotland to automate their lending decisions, the researcher utilised both primary
and secondary data. According to Rabianski (2003), in order to ensure that
appropriate assumptions and conclusions are reached, both primary and secondary
data should be reliable, precise, impartial, valid, suitable and timely. This view was
embodied by the researcher in an attempt to meet the third research objective of
this study.
The principal data source that was utilised by the researcher to answer the research
aim was primary data obtained through interviews and questionnaires. Greetham
(2009) defines primary data as information that’s does not contain personal beliefs
or opinions and comes from the original researcher, who collected the information
and presented it.
To supplement the primary data, secondary data from the Bank of England statistic
and articles from academic journals were gathered to provide further insight into the
credit union industry throughout Great Britain. Secondary data can be argued to be
any data taken from a previously published source. The data is then reused and
reinterpreted by the researcher (Greetham, 2009). Although this created the
14
possibility for the data to be misinterpreted by the researcher, it incorporated a
comparative element into the research design, creating the opportunity to further
explore how the theoretical underpinning applies to practice.
3.2.1 Interviews
Semi-structured interviews were used as the principal collection method for primary
data. This allowed for the specific topics identified above to be addressed whilst
giving the respondents flexibility in the way they answer (Bryman and Bell, 2007).
Collecting qualitative data from interviews is a flexible and powerful tool to capture
the opinions and the ways people make meaning of their experience. This method
also provided the opportunity for additional follow up questions to be asked to
explore areas in greater depth.
Within the interviews, indirect questions were largely used in an effort to establish
the interviewees own views on the various topics explored by the study (Bryman
and Bell, 2007).
The interviews were conducted with the management of various credit unions and
trade bodies across Scotland. To increase the quality of the respondent’s answers,
the interviews were held out with organisational time in an attempt to reduce work
interruptions and increase the quality. By interviewing individuals from different
areas of the industry the likelihood of bias was mitigated in the research (Ghauri and
Grønhaug, 2002).
3.2.2 Advantages and Disadvantages of Interviews

There are various benefits to utilising semi-structured interviews. Firstly, semi-
structured interviews provide a flexible and assessable method of data collection
(Qu and Dumay, 2011). They allowed the interviewee to disclose more qualitative
information than a structured interview would permit by allowing the interviewer to
alter the style, pace and order of questions to receive the fullest responses from the
interviewee. It also permitted participants to provide responses in their own terms
and in the way that they think and in their own words. This has been proven to be
particularly valuable in enabling the researcher to understand the way the
interviewees perceive the issues in the context of the study (Qu and Dumay, 2011)
Drawbacks were also experienced when using this data collection method.
Transcribing interviews is a time-consuming process which, given the time-
15
constraints of this study, proved to be a substantial task the researcher had to
undertake. As a result, only one full transcript was completed and detailed notes
from the others.
Another disadvantage experienced by the researcher was that the interview

answers were challenging to interpret and evaluate. Ghauri and Grønhaug (2002)
note how a researcher’s background may significantly influence the interpretations,
thereby creating difficulties of objectivity. It was therefore down to the research to
clarify responses and the meaning behind them in order to reduce any errors in
understanding.
3.4 Questionnaires
Due to time constraints, a questionnaire was developed in order to obtain
information from credit unions who were unfeasible to interview. This allowed for a
larger sample of credit unions to participate in the research, aiding the reliability of
the data collected.
A Likert scale question was included in the questionnaire to gather the respondent’s
feelings on the various areas surrounding the lending decisions of credit unions
whereas open-ended questions were used to gain the respondents thoughts on a
topic or area.
The questionnaire was not pre-tested and therefore the information gathered by this
study was not consistent across respondents. If it had been tested prior to the study
the researcher would have had a better comprehension of the understanding and
level of difficulty of the questions asked (Bryman and Bell, 2007).
3.5 Sampling
Ghauri and Grønhaug (2002) state that a population is not only the individuals
identified within the scope of the research but also the companies, products and
other outcomes of the research question. As a result, the full population of a
research area can become too large to analyse. Sampling can therefore be used as
a way to reduce the size of the population to a manageable size. However, the
sample selected must be both small enough for the researcher to manage, whilst,
being large enough to generalise and construct reliable results from (Greetham,
2009).
16
3.5.1 Sample Type
A convenience sample was used by the researcher in this exploration of the credit
union industry in Scotland. Also known as an accidental sample, this sampling
procedure was selected due to its ease of access (Bryman and Bell, 2007). The
researcher had personal contacts within the industry and utilised these relationships
in order to access data and further contacts that could be beneficial to the research.
This method of sampling was chosen due to the time constraints and its ability to
gain a greater insight into the qualitative data. Ghauri and Grønhaug (2002) argued
that interviewing individuals from different areas of the industry the likelihood of bias
is hopefully mitigated in the research. The inclusion of interviews from different
professions across the industry in the research will then reduce this probability of
biasness further.
3.5.2 Sample Size

Once a convenience sample of around five managers from different credit unions
and trade associations in the industry was identified to be interviewed to provide a
range of qualitative information surrounding the lending processes.
3.5.3 Sample Variety

It was noted that there would be a need for variety between the respondents
participating in the research. In order to close this gap, theoretical sampling was
then used to obtain a broader range of opinions from those across the credit union
industry. Theoretical sampling is concerned with identifying a research population
based on the review of previous literature (Ghauri and Grønhaug, 2002). Both credit
unions who used automated decision making tools and those who did not were then
invited to participate in the research to increase the diversity of participants included
in the research.
3.6 Reliability, Validity and Generalisability

3.6.1 Reliability
In order to increase the trustworthiness of the research undertaken, the process of
triangulating was implemented. Triangulating is the collection of data from a wide
range of sources related to the same incident or situation (Greetham, 2009). Credit
unions from across Scotland were invited to participate in the research, regardless
of their involvement with automated lending decision and their current development
17
stage. Individuals not associated with a particular credit union but a trade body were
also invited to participate and contribute their personal thoughts on the industry and
the automation of lending decisions.
3.6.2 Validity
Saunders et al. (2012) noted that validity in semi-structured interviews tends to be
high, as the researcher can clarify questions, enquire and explore answers further
to gain a fuller understanding. The opportunity to clarify answers was used by both
the participant and interviewer when unclear.
3.6.3 Generalisability
Due to the difficulty of gathering a large number of responses, this research may not
be generalised and the findings might be limited.
3.7 Analysis
The impact that barriers have on credit unions modernising and automating their
process will be analysed in conjunction with Ferguson and McKillop’s typology
theory (Ferguson and McKillop, 2000). It has been argued that it is difficult to collect
data in a unified manner during qualitative research due to the volume and variation
in user functional aspects (Gururajan et al., 2014). Text analysis will then be used
by the researcher in an attempt identify similarities and themes across the interviews
and questionnaires.
3.9 Limitations
Limitations were observed throughout this study and are fully explained in the
subsequent chapters.

In conclusion, this chapter has detailed the research methodologies that the author
employed. It also highlighted the potential restrictions with the methods and the
overall validity, reliability and generalisability of the study.
18
Chapter 4 Data Description
In this chapter, the researcher will discuss the characteristics of the data gathered
in the interview and questionnaire stages before moving on to conduct a more
detailed analysis of the Scottish credit union industry.
4.2 Interviews
It was initially the researcher’s aim to conduct five face-to-face interviews to gain a
wide range of perspectives on the questions asked. However, due to time
constraints, the researcher was only able to successfully conduct three interviews.
The first interview was held with the Chief Executive Officer of one of the industry’s
largest credit unions. The second interview participant was the Chief Executive
Officer of one of the industry’s trade bodies. The last interview was conducted with
a Scottish credit union manager.
Table 4.2.1 Abbreviation of Interview Participants

Participant Referred to as
CEO of large credit union Interviewee One
CEO of trade body Interviewee Two
Credit union manager Interviewee Three
4.3 Questionnaires
In total, there were 16 credit unions who responded to the questionnaire which was
emailed out. The data can be broken down and filtered by the age, size, and use of
automated processes of each credit union. The breakdown of respondents by these
categories is shown below.
4.3.1 Common Bond Type

This research includes 14 credit unions with a geographical common bond and 2
with an occupational common bond. A geographical common bond is one which
depicts a membership of those who live or work within a specific area. An
occupational common bond is one which depicts a membership of those belonging
to the same employer or group or industry of employers.
19
4.3.2 Age of Credit Unions in the Study
The below table contains a list of the years the participating credit unions were
established.
Table 4.3.2.1 Year Established of Credit Unions in Study

Credit Union Year Established
Credit Union A 1974

Credit Union B 1982
Credit Union C 1984
Credit Union D 1988
Credit Union E 1989
Credit Union F 1990
Credit Union G 1994
Credit Union H 1994
Credit Union I 1995
Credit Union J 1995
Credit Union K 1996
Credit Union L 1997
Credit Union M 1998
Credit Union N 2003
Credit Union O 2004
Credit Union P 2011
The above table states that the average age of a credit union participating in this
research is 21. This is similar to that of the average age of a credit union in Scotland
at 22 years. This, therefore, indicates a sample which is similar to the overall
population of the sample.
20
4.3.3 Average Bureau Usage of Participants
The below chart displays the responses of the participating credit unions in
regards to the usage of bureau data within lending decisions.
Figure 4.3.3.1 Participants Bureau Data Usage
Response
The above chart highlights that the majority of participating credit unions have little
or no involvement with the use of bureau data, a significant factor in automated
decision making. A credit bureau, or credit reference agency, is an organisation that
gathers information from credit grantors and other sources concerning customers’
credit applications and previous payment behaviour (Experian, 2016). This data is
used within lending decisions to determine a customer’s creditworthiness. This may
impact the overall conclusion of this study as to whether or not credit unions should
automate their lending decisions.
21
4.3.4 Credit Union Membership Size and Loan Amounts
Table 4.3.4.1 Average Size of Participating Credit Unions
Smallest Member Size Largest Member Size Average Member Size
151 22,000 4,266
Table 4.3.4.2 Average Loan Amount of Participating Credit Unions

Smallest Average Loan Largest Average Loan Average Loan Amount
Amount Amount
£476.82 £2,933.33 £1,362
The above data identifies that the average participant in this research is larger than
the UK average. As noted by the Bank of England (2015) the average credit union
across England, Wales, Scotland and Northern Ireland has 3,652 members. Similar
to the findings of McKillop, Glass and Ward (2005), a pattern was identified within
the sample. It includes a small number of very large credit unions whose
membership size is more than double the average participants. This may have
produced a biassed sample where views are influenced by the larger credit unions.
4.4 Limitations
After the data collection, several limitations of the research were identified. Firstly,
a lack of knowledge around automated lending by respondents proved to be
challenging. There were minimal detailed responses to the open-ended questions
due to this lack of understanding around the topic. This can be attributed to the
restricted information available on the Credit Union Expansion Project to those not
involved in the scheme. This impacted the quality of answers and, therefore, the
conclusions drawn from this research may lack a variety of detailed industry views.
A further limitation of this study was the type of questions used in the
questionnaire. The open-ended questions failed to produce in-depth,
comprehensive answers from which themes and conclusions could be derived.
This restricted the overall findings of the research and reduced the diversity of
issues and opportunities identified.
22
Chapter 5 Discussion and Analysis

This chapter takes the theory and concepts acknowledged in the literature review
and applies them to the data collected and relates them to the Scottish credit union
industry.
5.2 Is there a link between age and views on automation?

A fundamental aspect of this research surrounds the willingness of credit unions to
adopt enhanced automated processes. This section looks to establish whether or
not there is a relationship between the age of a credit union and their views on
automating their lending decisions.
The original idea that older credit unions are less likely to adopt change successfully
(Barron et al, 1994), explored in the literature review, was explored by this research
in an attempt to determine whether or not the age of a credit union influences its
willingness to adopt a more modern approach to lending. As discussed in the
literature review chapter, credit unions are said to be more efficient when they
operate primarily as a profit-driven business and according to a report by Deloitte,
decision processes within retail lending are becoming more automated, increasing
the number of automated decision processes within the industry (Deloitte, 2012).
This raises the idea that there is a need for credit unions to automate their lending
decisions in order to compete with other retail lenders in today’s competitive market.
In relation to this study, only one of the participating credit unions currently utilise an
automated lending decision tool as identified in the previous chapter. Also, only 15%
of participants responded that they were “looking to implement automated decision
processes, but currently do not have an automated decision-making process”. This
identifies a clear lack of desire to automate lending decisions within Scottish credit
unions, regardless of their age as the organisations were established in 1996 and
1982 and can be categorised as average age credit unions within this research.
To summarise, from the limited number of credit unions involved in this research
there does not seem to appear to be a link between the age of a credit union and
their views on automating lending decisions. This can be seen to be misaligned with
the findings of previous researchers who have noted a recognition of a growing
23
pressure for credit unions to improve the efficiency of their processes to stay
competitive in a society where access to finance is increasingly becoming instant
(Wright, 2013).
5.3 Is There a Link Between Common Bond Type and Automated Lending
Decisions?
The idea of a connection between a credit union’s common bond and suitability to
adopt automated lending decisions was identified. Interviewee three suggested that
automated lending decisions would be more beneficial for credit unions with an
occupational common bond. They stated:
“Most [credit unions] currently believe that an automated tool would

decline a lot of loan applications and need to be manually
overridden. Automated lending tools would probably be more useful
for employee based credit unions.”
The reasoning given behind this was that credit unions whose membership is made
up of a group of employees increases the likelihood of a greater proportion of loan
applicants being accepted. This is attributed to them having a stable income, being
on the voters roll and, therefore, more likely to have a better credit score.
In relation to the study sample, the two occupational credit unions involved gave
different opinions on automated lending decisions. One responded that they were
‘looking to implemented automated decision processes, but currently do not have
an automated decision-making process’ and the other specified that they ‘do not
use or plan to use automated decision processes to assess loan applications’. A full
breakdown of responses from the credit unions in the study and their current and
future use of automated lending decisions is shown below.
The below chart contains the responses of the credit unions in this study in regards
to their current and future of automated lending decisions. An explanation to each
repose is provided below.
A- We already use automated decision processes to assess applicants

B- We are looking to implement automated decision processes, but currently
do not have an automated decision-making process.
24
C- We do not use or plan to use automated decision processes to assess loan
applications.
Figure 5.3.1 Current and Future Use of Automated Lending Decisions of

Participating Credit Unions
Response
The above chart shows that the majority of the credit unions in this sample do not
and do not plan to implement automated lending decisions. The one credit union
which does currently utilise automated lending decision, credit union H, has a lower
than average loan amount in comparisons to the rest of the sample. Based on the
limited information available, it can be suggested that credit unions who use
automated lending decisions are more likely to loan to a higher number of less
affluent customers. However, this view does not support with the opinions of the
interviewees who believed automated lending decisions would be best suited to
payroll deduction members who are more likely to have a stable income and can,
therefore, afford larger loans.
Another finding of this research was that credit unions with higher membership
volumes are more inclined to use bureau data within decision making. As figure
4.3.3.1 in the previous chapter displays, larger credit unions are utilising bureau data
more often. This suggests that automated lending tools are more likely to be
adopted by larger credit unions compared to smaller credit unions.
25
To summarise, this research has identified, within the constraints of its samples, that
automated lending decisions can be said to be more suitable for credit unions with
a high number of employed members or have an occupational common bond. This
matches the opinion of McKillop (2005) who reasoned occupational founded credit
unions and those which have a diverse income membership are more successful
and therefore more capable of implementing new systems and processes. It has
also been deemed an improper choice for financially excluded members who are
more likely to be declined by an automated decision rather than one undertaken by
a loans officer.
5.4 Restrictions of Automated Lending and Growth of Credit Unions

In order to meet the second research objective of this study, an examination of the
restrictions facing credit unions and the automation of lending decisions.
5.4.1 Poor People’s Bank Perception

The concept of the ‘poor people’s bank’ perception of credit unions was examined
as a potential factor which may limit a credit union’s ability to grow and automate
lending decisions. The findings are displayed in the chart below.
Figure 5.4.1.1 Credit Union Views on Their Perception as a Poor Person’s Bank
Number of Credit Unions
Response
The five ‘Other’ responses included a range of personal viewpoints on the topic and
included the opinion that the common bond type determined the membership mix of
certain credit unions and that the ‘poor people’s bank’ perception was perpetuated
26
by the government and the media who see it is a “panacea for the wrong doings of
the Government and its lack of ability to cap exorbitant interest rates.”
The above chart indicates that Scottish credit unions do believe that the perception
of them as a poor person’s bank influences the type of people they attract. One
participant noting that they:
“Can’t get the message out to employed people that our loans
at least up to £7500 will be cheaper than banks as they believe the
credit union is only for poor people.”
This opinion was mirrored by interviewee 2, who provided the anecdote of:
“If I’m a middle earner and my only exposure to credit unions is in

the Guardian where credit unions are discussed as for poor
people or financially excluded people, or credit unions are an
alternative for affordable credit. I might see credit unions as a
good thing for “those people” not myself.”
This emphasises that if people do not relate to a credit union and its purpose, they
are unlikely to save and borrow from one. This perception originates from credit
unions in Great Britain primarily being established as social projects by the
government. This perception was noted to be a characteristic of a nascent credit
union industry in the typology theory defined in the literature review.
It can, therefore, be determined that the ‘poor people’s bank’ perception of credit
unions, within the constraints of this study, appears to limit the diversity of a credit
union’s membership and its appeal to more affluent members. This echoes the
perspective of McKillop and Wilson (2011), stated in the literature review, that this
perception is a result of the failure of credit unions to attain a diverse membership
mix.
27
5.4.2 Lack of Awareness and Market Penetration
The lack of awareness is another barrier identified during the research as a barrier
to automated lending. It was noted in an interview that:
“The main barrier to credit union lending in Scotland is access to

the marketplace that is looking to borrow. The main barrier is the
lack of penetration of the marketplace. So whilst common bond
relates to that, it’s not that the common bond is restrictive in itself.”
Credit unions in Scotland are struggling to service the needs of their target market
and are therefore missing out on the opportunity to capitalise on larger market share
due to their community nature. A significant finding that opposed the view of the
common bond being a restring factor to credit unions in the literature was argued by
interviewee two. It was found that it is not the legislation surrounding the common
bond that is restricting credit union growth; it is a result of the lack of awareness of
credit unions which subsequently causes their small market share. Factors
prohibiting market penetration include short opening hours, branch locations and
restrictive loan policies.
It was also noted in an interview that:
“Every single credit union has a common bond, and that common
bond is representative of the people that use the service of that credit
union, they should be different as they serve different groups of people.”
This suggests that as credit unions operate as individual institutions, meeting

different customer needs, they offer different services and, therefore, working
together nationally on issues, such as marketing, is not an option for credit unions.
This creates prohibitive costs for credit unions who are unable to benefit from the
awareness or activities of other credit unions.
A report by the Department of Work and Pensions (2011) emphasises the lack of
awareness of credit unions further. It discovered that only 13% of consumers
interviewed have heard of credit unions and only 8% think they could benefit from a
credit union service. It did, however, identify a potential appetite for credit union
services across the UK when a further explanation of credit unions was provided.
28
They noted that up to 60% of consumers interviewed thought they may be able to
help them.
This indicates that credit unions are not seen as part of the mainstream financial
services sector by many consumers. However, it has been argued that if this
perception and awareness gap can be dismissed, then consumers are likely to see
credit unions as trusted finance providers, who offer services at affordable prices
(DWP, 2011).
In the United States, there was a reported 7.4% increase in new auto loans offered
by credit unions in the first quarter of 2015, whereas the rest of the industry only
saw a 2.1% increase in the same period (TransUnion, 2015). This highlights the
significance of the development of credit unions processes and their ability to
provide faster loans in a mature credit union industry. In order to increase their
market share, credit unions in Scotland will need to improve the accessibility to the
services if the industry is to move from transitional to mature.
To summarise, the increase in the demand for instant borrowing is a driver for credit
unions to automate their lending decisions. In order to facilitate this, the above data
suggests that credit unions in Scotland will need to increase their market share if
they are to be successful.
5.4.3 Contradiction of Principles

The interview with interviewee 1 allowed for the topic of automated lending decisions
to be discussed at length and further emphasised the hesitation for credit unions to
automate their lending decisions. They expressed concerns that if credit unions
automate decisions in an attempt to speed up lending processes they risk losing the
unique personal relationship members have with their credit unions.
A key theme identified throughout all three interviews was the idea of keeping the
customer at the heart of the decision. All interviewees stressed the importance of
the human element of the decision-making process and noted that an automated
lending decision would only be viable if it could encompass this element. It was said
that:
“If credit unions move away from people centric decision making,
and move towards automated decision making, then they just
29
become another vendor of money. What makes us different from
everyone else?”
Not only would automating decisions reduce a credit union's acceptance rate, it
would contradict their fundamental purpose as a provider of low-cost finance to their
communities and main source of competitive advantage. Keeping the member at
the heart of the decision relates with the arguments of Jones (1999) who on how
credit unions in Great Britain were established with a strong social purpose and
which subsequently impacts their decisional mind set.
Interviewee 3 also provided an explanation as to why automated lending would not

be suitable for credit unions in Scotland:
“Prior to CUEP, the UK Government funded credit unions through the DWP
with a Growth Fund. This fund was paid based on the number of loans made to
financially excluded people. This fund increased the percentage financially excluded
members of these credit unions. I believe that many of those members who have
been borrowing and repaying loans over the years since growth fund would probably
not pass the automated lending tool criteria.”
The above quote suggests that an increase in lending to the financially excluded by
credit unions, driven by the Growth Fund, creates a membership of a credit union
who are more likely to suffer, rather than benefit from automated lending decisions.
5.5 Drivers for Automated Lending Decisions

This section will examine the factors that highlight a need for credit unions to adopt
more modern, automated lending decision that was identified in this research.
5.5.1 Future Generations

It was also noted that the success of automating lending decisions would be
determined by the wants of future generations. Interviewee 2 expressed their view
that younger generations are less likely to place importance on the quality of
relationship they have with their credit union and more on the accessibility of a loan:
“There has to be modernisation but I don’t necessarily think that

automating lending decisions provide more benefit than improving
other processes.”
30
The lengthy time taken by a credit union to make lending decisions was
highlighted by interviewee 3 who stated that:
“In smaller credit unions a credit committee meets once or

twice a week to make decisions on loans so this could take a
week. Our credit union now has 2 full time paid loans officers who
process over 150 loans per week, from receipt of application
decisions are usually made within 3 days and emergency loans
can be turned round within a day.”
As access to instant finance becomes easier there will be a greater pressure placed
on credit unions to reduce the overall loan approval time. Instead of a loan’s officer
spending a week manually working all applications before coming to a decision, a
process needs to be implemented which can replicate the speed of other retail
lenders that almost instantly makes a decision and has the funds in a customer’s
account the same day.
There is, however, a conflict of interest that arises as a result of adapting to meet
consumer demands. The human aspect taken into consideration throughout the
decision-making process is compromised as a result of automating lending
decisions. As identified by interviewee 3, the human element at the heart of the
lending decisions in a credit union is one of the main sources of differentiation that
credit unions have that sets them apart from other lenders.
If they lose the human aspect in an attempt to grow and increase market penetration,
it can be argued that they would be compromising their integrity and sole purpose
as a not-for-profit organisation.
5.5.2 The Credit Union Expansion Project

The Credit Union Expansion Project (CUEP) is a scheme developed by the
Department for Work and Pensions in 2013 to invest £38 million in an attempt to
modernise and grow the credit union industry (Department for Work and Pensions
and HM Treasury, 2013). The Association of British Credit Unions (ABCUL), one of
the industry’s largest trade bodies won the bid to deliver the project which aims to
meet the growing demand for modern banking products for people on low incomes.
The project was given the green light after a feasibility study showed that improving
the industry and helping it become financially self-sustainable would enable credit
unions to provide access to banking services, products and debt advice to up to
31
one million more people(Department for Work and Pensions and HM Treasury,
2013). The project can, therefore, be seen as a fundamental driver for credit unions
across Scotland to automate their lending decisions.
Criticism of CUEP was however acknowledged in the interview with the CEO of the
industry trade body who commented that:
“The direction of travel for CUEP is towards the financial services space
and I would suggest that community credit unions don’t see themselves as
financial service providers but as cooperatives.”
This indicates that although the project can be deemed a driver for automated
lending within credit unions, there is a strong probability that Scottish credit unions
do not associate themselves as mainstream financial lenders.
Interviewee three also heightened the dilemma of CUEP:
“There is very little information available to the majority of credit

unions in Scotland on how the Automated Lending Decision Tool
works. This has been developed by Cornerstone which is
managing the Credit Union Expansion Fund. Initially, only a
selected few credit unions were invited to take part in this project,
this has been expanded over the years to 76 out of the 350 credit
unions in the UK 6 of which are in Scotland. Most currently
believe that an automated tool would decline a large amount of
loan application and need to be manually overridden. This would
probably be useful employee based credit unions. Until further
information is made available decisions on whether to make use
of this will not be made.”
The minimal involvement of Scottish Credit Unions in CUEP noted above potentially
highlights the hesitance of Scottish credit unions to adopt more automated and
modern decision-making process. Using the figures provided by interviewees, it was
established that only 5.7% of Scottish credit union are part of CUEP, whereas 28%
of English and Welsh credit unions are participants.
A key theme identified throughout the interviews was the idea of the lack information
surrounding the topic of automated lending decision. As the automated lending tool
32
currently being used in the credit union industry is part of CUEP, Scottish credit
unions have limited access to the information which will allow them to determine
whether or not automation will benefit their customers. If more information was
available to credit unions out with CUEP it can be determined that, based on the
views of the industry professionals involved in this study, there would be greater
willingness for Scottish credit unions to consider and adopt automated lending tools.
5.5.3 UK Credit Union Statistics

An analysis of the statistics produced by the Bank of England will be used to analyse
the recent development of Scottish credit union industry before concluding if the
trends identified are drivers for automated lending within Scottish credit unions.
5.5.3.1 Arrears Analysis

This section will look to explore whether or not the arrears balance of credit unions
in Scotland indicate that there is a need for the credit unions in Scotland to improve
their lending decisions.
The table below shows the total net liabilities of loans, at least, three months in
arrears of Scottish credit unions from 2004 to 2015 (Figures are £thousands).
33
Table 5.5.3.1.1 Total Arrears for Scottish credit unions
Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Loan
131,487 141,171 149,302 162,243 179,874 193,316 208,240 231,231 240,545 266,980 270,595 275,011
Amount
Arrears 2,126 2,373 3,046 3,440 4,424 4,493 4,183 5,195 5,040 6,545 6,329 6,803
Percentage 1.62 1.68 2.04 2.12 2.46 2.32 2.01 2.25 2.10 2.45 2.34 2.47
The above table shows an increasing trend of arrears within Scottish credit unions. Their bad debt levels are now almost similar to
that of retail lenders at 2.8% (Treanor, 2015). As credit unions grow and lend more, they are exposing themselves to higher bad debt
levels which they will be required to hold more provision for. This inherent risk brings increased costs and can therefore be seen as
a driver for credit unions to improve the way in which they make lending decision,
To build on this concept, interviewee three presented the idea that the lack of communities in today’s society is a prominent factor
behind this trend. They believed that the notion of borrowing from your neighbours and community, associated with borrowing from a
credit union, is no longer a prevailing factor in encouraging members to repay loans. This was attributed to individuals no longer
associating themselves as part of their community anymore.
35
In conclusion, this chapter has presented the overall findings of the study with
respect to the opportunities and barriers of the adoption of automated lending
decision within the Scottish credit union industry. It has identified that although there
is no link between the age of a credit union and their views on automated lending
there is a consensus that the automated lending would be more beneficial to credit
unions with a more affluent membership. The ‘poor people’s perception’ of credit
unions and the lack of awareness were identified as significant obstacles that
continue to hinder a credit union’s ability to grow and attract a diverse membership,
which subsequently diminishes the probability of them implementing automated
lending decisions.
It was however discovered by this study that there is a demand for credit unions to
improve their lending decision due to an increase in the arrears levels and a
necessity to meet the changing needs of future members.
36
Chapter 6 Conclusions and Recommendations
This chapter will pull together the findings of the research in relation to the initial
research aim and objectives. It will then subsequently provide a recommendation as
to whether or not automated lending decisions should be further employed by
Scottish credit unions. It will conclude with the final thoughts of the researcher on
the overall study and propose ideas for further research on the area.
6.2 Overall Research Aim and Research Objectives

The overall research aim of this research was to establish if the automation of the
lending decisions by credit unions in Scotland would be suitable for Scottish credit
union members.
The research topic was selected and deemed important due to an interest in the
recent development of credit unions across the UK with regard to Credit Union
Expansion Project and an increase in consumer demand for instant finance.
In order to achieve this aim a series of research objective were set by the author.
The objectives set out by this research are listed below and a summary of the
findings for each objective follows.
The following research objectives that were set to be achieved by this research
were:
i. To define Ferguson and McKillop’s Credit Union Typology Theory and apply
it to Scotland’s credit union industry.
ii. To examine the main constraints and opportunities that credit unions face in
relation to their ability to extend lending and automate their lending decisions.
iii. To collect relevant information surrounding thoughts and opinions of
automated lending decisions across Scottish credit unions through
appropriate data collection methods.
iv. Provide a recommendation for credit unions in Scotland as to the benefits
and threats that the adoption of automated lending decisions can bring.
37
6.3 Overall Findings
Within the literature review in Chapter 2, Ferguson and McKillop’s credit union
typology theory was critically analysed and after an analysis of the Scottish credit
union industry through the study sample, it can be determined that the Scottish
credit union industry is a transition industry. Although Scottish credit union growth
has been substantial in recent years, the industry still shares some characteristics
with the nascent stage of development. The ‘poor people’s bank’ perception was the
primary concern, identified by this research that hinders a credit union’s ability to
adopt automated lending decisions. This perception reduces the diversity and
wealth of Scottish credit union membership which would be adversely affected by
the automation of lending decisions. This meets the first learning objective set out
by the researcher.
In an attempt to meet the second learning objective. Primary research in the form of
interviews and questionnaires were undertaken to identify factors which both
promote and restrict automated lending decisions within the Scottish credit union
industry. The main drivers identified in this study for automated lending were:
i. Changing customer needs

ii. Increasing arrears levels
iii. The Credit Union Expansion Project
iv. The lack of communities in today’s society
The research notes that there is demand for credit unions to improve and speed up
their decisions making processes due to the changing nature of member needs. In
today’s society consumers are becoming less inclined to visit a bank branch to apply
for a loan. Online applications are offering instant decisions and therefore credit
unions must be responsive to this need if they wish to increase their market
penetration.
As noted by the interviewee 3, but unanswered by this research, is the idea of

tightknit communities no longer existing. If credit unions members no longer feel
they are borrowing money from their community and neighbours, they are more
likely to default on repayments. This is another fundamental reason as to why
Scottish credit unions need to improve their decisions and reduce their increasing
arrears levels.
38
It can be argued that the third learning objective, ‘to collect relevant information
surrounding thoughts and opinions of automated lending decisions across Scottish
credit unions through appropriate data collection methods’, was only partially met
by the researcher. Although there was sufficient data collected to meet the overall
research aim, the findings and recommendations could have been enhanced if more
in-depth interviews were carried out with credit union employees instead of
questionnaires.
The fifth and final learning objective is covered in section 6.3.
On the contrary, several constraints facing the further implementation of automated

lending decisions within the credit union industry were also identified. These were:
i. Automation’s inability to incorporate human aspect into decision

ii. Costly to implement
iii. Unsuitable for financially excluded members
iv. Current lack of information
Most noticeably it was discovered that there is a significant importance placed on

keeping the interest of the members at the heart of every decision within credit
unions. As the members own the credit union, the board of directors are elected
from the membership, all decisions are therefore made by and in the interest of the
members of that credit union. It can, therefore, be established that in order for any
automated lending decision tool to benefit a credit union and not contradict their
purpose as a financial cooperative, an automated lending decision must replicate
that of a loans officer.
6.3 Recommendations
After analysing the data and findings of this research, it can be recommended that
it would be unsuitable for Scottish credit unions to adopt automated lending
decisions. Current automated lending tools fail to serve the needs of a credit union
membership by excluding the principle factor within a credit union’s decision to lend
to a member: the individual’s circumstance and relationship with the credit union.
Unless this factor can be incorporated into the decision making process, it is not
deemed to be a viable option by the author. It can also be stated that the greatest
success of automated lending decisions will be experienced by larger, occupational
39
founded credit unions. This is down to the nature of their membership being
recognised as more diverse and affluent, therefore, more making them likely to
benefit from automated decisions.
It is however recommended that Scottish credit unions improve the efficiency of their
lending processes if they wish to appeal to the future needs of younger members.
This would involve increasing the speed of decision, access to credit union facilities
and an increase in the provision of online services. Due to the limitations of this
study, specific examples of how credit unions can achieve this is unknown.
It must be noted this recommendation, and the overall findings of this research, are
considerably influenced by the views of smaller, community credit unions. Combined
with the small sample size, this can call into question the overarching
generalisability, validity and reliability of the study although great care was taken by
the researcher to remove biasness.
6.4 Further Research

As a result of this research’s findings, there are several areas of further research
that have been identified. An exploration into the other ways in which credit unions
can modernise their decision making processes is an area which could build on this
research and provide Scottish credit unions with a more suitable way to meet the
individual needs of their members.
As previously acknowledged, every credit union must operate as a single entity in

order to service the needs of their individual memberships. Therefore, it can be
proposed that it may be of benefit for this research to be undertaken again on a
case-study basis with either a single credit union or a smaller region of credit unions
and to incorporate the members view within the study. This would hypothetically
allow for more unique and individual opportunities to be identified for participating
credit unions.
WORD COUNT: 11,600
40
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8 Appendices
8.1 Appendix 1 Interview Consent Form
Consent Form
Title of Dissertation: An examination of the processes used by Scottish credit unions to

make lending decisions
Please read the following statements, and delete any you are not happy with:
 I agree to take part in the above study.
 The aims of this research have been explained to me. I have had the opportunity to ask
questions and have had these answered satisfactorily.
 I understand that my participation is voluntary and I may decline to answer any question, or
end the interview, at any time.
 I agree to the audio recording of this interview.
 I understand that the data collected in this interview will be used only for the research identified
above.
 I understand that the audio recordings and transcripts will only be accessed by the interviewer
and academic supervisor of the research.
 I agree for my job title to be identified in the dissertation mentioned above.
 I agree for the name of my credit union to be identified in the dissertation mentioned above.
Further Contact
 I would like a copy of the final dissertation that you are going to write.
 I agree to be contacted by the research team to take part in further interviews for this
project. The information may be stored in electronic form in a secure environment
within the university in accordance with the Data protection Act.
Name of Participant Date Signature
Name of Interviewer Date Signature
46
8.2 Appendix 2 Example of Interview Questions
1. What are the main barriers to credit unions lending in Scotland? Common Bond,
Legislation etc.
2. Do you feel that the “Poor People’s Bank” perception influences the membership
makeup of credit unions?
3. Do you feel that the restriction around common bond legislation has hindered the
growth of credit unions in Scotland and the UK?
4. Do you feel that automating lending decisions would be suitable for financially
excluded members?
5. Why do you think there is so few credit unions part of the CUEP? 7 out of 100 CUs
in Scotland.
6. What are your views on the modernisation of Credit Unions and the involvement of
the Department for Work and Pensions?
7. Do you feel that the consolidation in the number of credit unions will help or hinder
the Credit Union industry?
8. What impact do you think automating the lending decisions of credit unions in
Scotland will have?
47
8.3 Appendix 3 Example of Questionnaire
Participant Information
Dissertation Title: An examination of the processes used by Scottish credit unions to make
lending decisions
Research Aim: To establish if the automation of the lending decision processes employed by
credit unions in Scotland will improve their overall effectiveness.
Researcher: Nicola Dryburgh Dissertation Supervisor: Matthew Dutton
What will I have to do?
You will be asked questions about the credit union you work for, the processes and tools used to
make lending decisions, and your thoughts on how the automation of lending decisions would
impact credit unions.
How will confidentiality be assured and who will have access to the information
that I provide?
If you, the participant or the credit union you are affiliated with, do not wish to be identified in
the final write up of the dissertation please tick the appropriate boxes below.
I do not want to be personally identified in the final write up of the dissertation.
I do not want the name of the credit union I represent to identified in the final
write up of the dissertation.
All data will be stored on a secure server to which only the main researchers will have access. All
data will be stored and treated in accordance with the Data Protection Act.
Will I receive any financial rewards for taking part?
No financial rewards will be given for completing the survey.
If I require further information who should I contact and how?
If you wish to find out any further information about the research or wish to know the results you
can contact the researcher by email at: ndryburgh@googlemail.com
Participant Consent
I agree to take part in the research titled above.
Name Signature Date
48
1. Name of Credit Union
_______________________________________________________________________________
2. In what year was the credit union opened?

_______________________________________________________________________________
3. How many members do you currently have?

_______________________________________________________________________________
4. Which trade body are you associated with?

_______________________________________________________________________________
5. Which best describes your type of common bond?

Geographical Occupational Other
If Other, Please Specify

_______________________________________________________________
6. What is the value of your outstanding loan book?

_______________________________________________________________________________
7. How many outstanding loans do you currently have?

_______________________________________________________________________________
8. When assessing a loan application, how important do you rate the following factors in
determining the credit worthiness of the applicant? (1 being not important and 5 being
very important)
Income 1 2 3 4 5
Loan History within the CU 1 2 3 4 5
External Debt 1 2 3 4 5
Job Security 1 2 3 4 5
Internal Delinquencies 1 2 3 4 5
External Delinquencies 1 2 3 4 5
Residential Status 1 2 3 4 5
Expenditure 1 2 3 4 5
49
9. Which of the following statements best describes your organisation’s current status in
regards to the use of automated decision processes when assessing loan applications?
Automated Decision Process refers to a computerised decision being generated rather
than a subjective decision being made manually by a member of staff/volunteer.
a. We already use automated decision processes to assess applicants
b. We are looking to implemented automated decision processes, but

currently do not have an automated decision making process.
c. We do not use or plan to use automated decision processes to assess loan

applications.
10. What benefits or drawbacks have you experienced when using automated decision
processes?
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
11. What impact do you think that automating your lending decision would have on your
accept rate?
a. Increase
b. Decrease
c. No Impact
12. To what extent do you use bureau data to make lending decisions? E.g. Data from Equifax
or Experian.
a. Almost Always
b. Somewhat
c. Rarely
d. Never
50
8.4 Appendix 4 Participating Credit Union Questionnaire Data
Participating Year Number Outstanding Number of Average Common Age Automated Bureau
Credit Union Established of Loan Book Outstanding Loan Bond Lending Usage
Members Loans Amount Decisions
Credit Union A 1974 376 £149,900 130 £1,153.08 Occupational 42 C Almost
Always
Credit Union B 1982 5836 £3,911,721 2573 £1,520.30 Geographical 34 C Rarely
Credit Union C 1984 6020 £1,426,593 1175 £1,214.12 Geographical 32 C Somewhat
Credit Union D 1988 3,950 £1,700,000 1850 £918.92 Geographical 28 C Almost
Always
Credit Union E 1989 1895 £614,938 319 £1,927.71 Geographical 27 C Never
Credit Union F 1990 3400 £2,612,354 1376 £1,898.51 Geographical 26 B Somewhat
Credit Union 1994 2620 £797,000 551 £1,446.46 Geographical 22 C Somewhat
G
Credit Union H 1994 1800 £400,000 425 £941.18 Geographical 22 A Almost
Always
Credit Union I 1995 1650 £323,586 232 £1,394.77 Geographical 21 C Never
Credit Union J 1995 1800 £700,000 700 £1,000.00 Geographical 21 C Never
Credit Union K 1996 151 £72,000 151 £476.82 Geographical 20 C Never
Credit Union L 1997 5000 £5,000,000 2400 £2,083.33 Geographical 19 B Never
Credit Union 1998 3911 £1,249,000 791 £1,579.01 Occupational 18 B Almost
M Always
Credit Union N 2003 5869 £1,725,500 2983 £578.44 Geographical 13 C Rarely
Credit Union 2004 700 £228,400 151 £1,512.58 Geographical 12 C Never
O
Credit Union P 2011 350 £88,000 30 £2,933.33 Geographical 5 C Rarely
51

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BA Business Studies (SW)

BARRIERS TO AUTOMATED LENDING

Nicola Catherine Dryburgh

Supervisor: Matthew Dutton

BARRIESR TO AUTOMATED LENDING DECISIONS: A

QUALITATIVE STUDY OF SCOTTISH CREDIT UNIONS

Name (Print): NICOLA CATHERINE DRYBURGH

Date: 6th April 2016

As credit union membership across Great Britain continues to grow there is an

1. Chapter 1 Introduction and Background ........................................................ 1

1.1 Introduction to Chapter .................................................................................. 1

1.2 What is a credit union? .................................................................................. 1

1.3 Alternative to Payday Lenders ....................................................................... 1

1.4 Credit Unions in Great Britain ........................................................................ 2

1.5 Research Aim and Objectives ....................................................................... 3

1.6 Conclusion of Chapter ................................................................................... 4

Chapter 2 Literature Review ................................................................................ 5

2.1 Introduction to Chapter .................................................................................. 5

2.2 Credit Union Strategy .................................................................................... 5

2.3 How Are Credit Unions Different? ................................................................. 6

2.4 Ferguson and McKillop’s Credit Union Typology Theory ............................... 6

2.5 Trends within the UK Credit Union Movement ............................................... 8

2.6 Restrictions Facing Credit Unions ................................................................. 9

2.7 Credit Scoring Within Credit Unions ............................................................ 10

2.8 Growth ......................................................................................................... 11

2.8 Conclusion to Chapter ................................................................................. 12

Chapter 3 Research Methods ............................................................................ 14

3.1 Introduction to Chapter ................................................................................ 14

3.2 Choice of Methods ...................................................................................... 14

3.2.1 Interviews ................................................................................................. 15

3.2.2 Advantages and Disadvantages of Interviews .......................................... 15

3.4 Questionnaires ............................................................................................ 16

3.5 Sampling ..................................................................................................... 16

3.5.1 Sample Type ............................................................................................ 17

3.5.3 Sample Variety ......................................................................................... 17

3.6 Reliability, Validity and Generalisability ....................................................... 17

3.6.1 Reliability .................................................................................................. 17

3.6.2 Validity ...................................................................................................... 18

3.6.3 Generalisability ......................................................................................... 18

3.7 Analysis ....................................................................................................... 18

3.9 Limitations ................................................................................................... 18

3.10 Conclusion to Chapter ............................................................................... 18

Chapter 4 Data Description ............................................................................... 19

4.1 Introduction to Chapter ................................................................................ 19

4.2 Interviews .................................................................................................... 19

4.3 Questionnaires ............................................................................................ 19

4.3.1 Common Bond Type................................................................................. 19

4.3.2 Age of Credit Unions in the Study ............................................................ 20

4.3.3 Average Bureau Usage of Participants..................................................... 21

4.3.4 Credit Union Membership Size and Loan Amounts .................................. 22

4.4 Limitations ................................................................................................... 22

Chapter 5 Discussion and Analysis .................................................................. 23

5.1 Introduction to Chapter ................................................................................ 23

5.2 Is there a link between age and views on automation? ............................... 23

5.4 Restrictions of Automated Lending and Growth of Credit Unions ................ 26

5.4.1 Poor People’s Bank Perception ................................................................ 26

5.4.2 Lack of Awareness and Market Penetration ............................................. 28

5.4.3 Contradiction of Principles ........................................................................ 29

5.5.1 Future Generations................................................................................... 30

5.5.2 The Credit Union Expansion Project......................................................... 31

5.5.3 UK Credit Union Statistics ........................................................................ 33

5.5.3.1 Arrears Analysis .................................................................................... 33

5.5 Conclusion to Chapter ................................................................................. 36