Revelations that the Church of England's pension fund had a
stake in a North American venture capital firm that in turn invested in
Wonga has certainly done some damage, writes academic.
The Archbishop of Canterbury Justin Welby has become increasingly involved in debates about the British financial sector. He was a vocal member of the recent United Kingdom Parliamentary Committee on Standards on Banking. When this report was being drafted, the Archbishop pushed for a consideration of the bottom end of the banking market.
This meant the report did not just focus on making the big banks safer. There is also a call to ensuring the poor have access to finance at rates similar to the middle classes. The recommendations for reforming the bottom end of the financial market has largely overlooked in the wake of the report.
But the Archbishop has launched his own mission to take on the financial bottom-feeders.
He has become an outspoken critic of payday lenders. This industry offers short-term loans to often poor consumers at levels of interest that would make a mob boss blush – up to 5,000 per cent.
It uses complex consumer surveillance techniques to offer loans quickly. As the recession has pushed many people to the financial brink, they have turned to loans from these lenders.
The result has been a rapid growth in the industry - from £900m in 2008 to £2.2bn in 2012. This might sounds like a nice growth story in these dark economic times. But there is increasing evidence it has come with significant social costs.
A recent survey by the Citizens Advice Bureau found evidence of offering loans to underage people, inadequate checks on borrowers, taking more than is owed, harassing borrowers, draining bank accounts and refusing to agree repayment plans.
In addition, a charity advising indebted people has found there was a 300 per cent rise in people approaching them with problems with payday loans. But the Archbishop is more than just an ecclesiastical malcontent.
After all, he has a background as an oil executive. In a recent wide-ranging interview, the Archbishop announced he hoped to compete payday lenders out of existence.
This does not mean the church setting up its own bank. It does mean the bank will help to support credit co-ops. They will provide these community organisations with access to expertise lurking among the parishioners, the space of churches across the country and a big potential pool of customers sitting in the pews.
The hope is this support will help to build the strength of these co-ops that provide finance to poorer borrowers at far lower interest rates - a maximum rate of 42 per cent.
Taking on payday lenders addresses an important tension in the government's new banking policies. The recent report produced by the Parliamentary Committee on Banking Standards contained an important paradox. It pointed out banks need to become safer.
This means holding more capital and having larger risk functions. This can only be done by large banks. The cost is often lending to more risky clients – like individuals and small businesses.
This often pushes these risky borrowers into the arms of payday lenders. Welby's proposal to support credit co-ops will help to create more credible alternatives to pay day lenders. There is no doubt that alternatives are lacking in the industry.
The last decade has seen the increasing consolidation of a few large banks, which the public appears to mistrust. At the same time there have been significant advances in technology that allow us to use money in a different way.
Taken together, these trends have created very fertile ground for innovative business models. But what is surprising is that so few people have taken up the challenge. And many these innovations have come from the margins – a retailer who started Metrobank, the faceless hackers who launched Bitcoin, the social activists experimenting with crowd-sourced funding and of the technology entrepreneurs involved in online pay-day lenders.
With the appearance of these alternatives, some claim that banking is about to face an 'iTunes moment'. This will involve companies adapting digital business models to do the same thing a large established business was already doing – but more conveniently and at a fraction of the cost.
Just like the entry of Apple into the recording industry, digital challengers are likely to change the way banking works. But what remains to be seen is how these would-be digital challengers might offer a product that is hip and cheap but also ethical and safe.
Perhaps this is where the church's support of credit co-ops comes in. It could harness its reach into community coupled with its own expertise to support real credible alternatives. This might seem like a radical move to come. But in reality, there has been a long relationship between the church and financial innovation.
For instance, the Quakers played a vital role in establishing the modern banking system in the UK. The Catholic Church in Ireland has supported the credit co-op movement. Many religious communities help to finance small businesses.
During the Occupy protests, we saw St Paul's became a centre of debate about the future of finance and the creation of alternatives. This reminds us that faith groups can be just as important as entrepreneurs for creating responsible financial innovation.
However, wading into the world of finance does not come without its risks. The problem of reputation risk has already become apparent. Revelations that the Church of England's pension fund had a stake in a North American venture capital firm that in turn invested in Wonga has certainly done some damage.
The amount involved in is small – £75,000 compared with an overall fund of £5.2bn. But the potential reputation damage this might cause to the Archbishop's campaign as well as the church could be larger.
Indeed, it has already highlighted important gaps in the church's ethical investment policy. Probably the most surprising was the under this policy, the church's fund can invest in a company which holds up to 25 per cent investment in the sin industries - porn, gambling and pay-day lending as well as 10 per cent in weapons.
These revelations will spur change in the policy.
Although they could mean the church loses some of the moral authority, which it's leader is currently trading on in his mission to reform the industry.