Chris Gorst, head of Better Markets at Nesta Challenges, explains how the UK’s world-class fintech sector can help the financially vulnerable
High cost credit has been on a rollercoaster ride in recent years. When the high street banks withdrew from higher risk personal lending following the financial crisis, the gap was filled by a new breed of tech and publicity-savvy lenders with extortionately high interest rates. Not so long ago, whimsical TV adverts for payday loans were hard to miss – indeed Ofcom estimated adults on average saw 152 such commercials in 2012, and children 70.
However, pushback eventually came in the form of new regulations from the Financial Conduct Authority (FCA) which clamped down on lenders’ practices and introduced an interest rate cap. Now, Wonga’s grannies have been replaced by Grant Thornton – the lender’s administrator – and high cost lenders’ revenues are half what they were before the regulations kicked in.
But the demand for high-cost, short-term credit has not gone away. The FCA estimates more than 3 million people use high-cost credit such as payday lenders, some guarantor loans, rent-to-own schemes, log-book loans and so on, with over 5.4 million high-cost credit loans made in the year to 30 June 2018. More worryingly, an estimated 310,000 people in the UK owe up to £700m to illegal money lenders.
Sadly, recent research by Nesta Challenges shows that 59 per cent of those that take on high-cost credit admit that they get caught in a cycle of borrowing money. 50 per cent struggled to pay back the loan on time with 49 per cent having to borrow more money to pay back the loan.
For those who are financially vulnerable – perhaps because they are on a low or unpredictable income, have limited savings, have a poor credit history or face a financial shock – accessing alternative sources of credit can be a necessity.
Fortunately there is an alternative to high-cost lenders – but they’re less well-known and often struggle to compete with highly visible, fast and tech-savvy lenders such as payday loans. They are the credit unions, Community Development Financial Institutions (CDFIs) and other community-based lenders who offer an affordable alternative for those with less access to mainstream credit. They are not-for-profit and exist to help people in their communities to thrive. Although 2 million people are members of credit unions in the UK, their total lending is much smaller than the high-cost credit sector.
One of the biggest issues these community lenders face is that they often lack the technological know-how of the high-cost credit providers. They typically have a physical presence in their community and emphasise personal relationships with their borrowers. But as consumers increasingly transact via their phones and other devices, few community lenders can match the speed and user experience of high-cost lenders’ digital offerings. The challenge for community lenders today is how to combine their strengths and the trust they enjoy in their communities with the best technology.
This comes at a time when the UK’s world class fintech sector continues to flourish, challenging traditional business models across banking to better serve customers.
That’s why the Affordable Credit Challenge has been launched. Backed by HM Treasury and delivered by Nesta Challenges, the initiative will support partnerships between UK community lenders and fintechs to develop innovative technological solutions that will increase access to affordable, responsible credit. By combining the values and reach of the community lending sector with the fresh perspectives and capabilities of the UK’s fintech sector, the aim is to create a better personal lending market.
There are a number of key areas that The Affordable Credit Challenge is seeking to address, including:
Connecting borrowers and community lenders – community lenders are keen to grow their lending, but there’s a lack of awareness on both sides of the market. Targeting and informing potential borrowers in a more meaningful and compelling way would help increase numbers of applications. Fintech innovations in the areas of SEO, online social marketing and branding systems, aggregation and analytics and smart referral networks are all opportunities for the sector.
Improved digital user experiences – the younger generations access high-cost credit such as payday lenders more than any other generation. For millennials and Generation Z raised on a diet of technology, their expectations for digital services are high. But very few community lenders have digital at their core and either lack mobile device presence or their online offering is outdated. By collaborating with new tech provides that improve the digital user experience this could significantly boost their success.
Complex customer journeys – the customer journey to join a credit union can sometimes be complicated and slow. If fintechs can help community lenders provide a more efficient and integrated application process for customers, they might offer more attractive alternative real-time application experiences for those who would otherwise turn to high-cost lenders.
Lack of data insights/customer data analysis – technology could help community lenders generate better real-time insights on member needs and behaviours. This would not only mitigate the risk of loan defaults but also inform new products and services. Additionally, if community lenders could improve the loan decision-making process, perhaps by accessing Open Banking data or non-traditional forms of credit scoring, lenders might be able to better manage risk while expediting loan decisions.
This list is obviously not exhaustive and we look forward to hearing from fintechs and community lenders who are partnering to resolve these, and other, issues – particularly if the idea can be rolled out across the wider market. If we uncover ideas which can help a wide range of community lenders, the Affordable Credit Challenge could substantially widen access to affordable, responsible credit across the UK.
We already know that fintechs can revolutionise lending – after all, Wonga was one of the original fintechs in the UK – but now we need to ensure this technological expertise is used for social good and not to take advantage of the financially vulnerable. We look forward to supporting UK fintechs to partner with community lenders to deliver the innovations which will make credit more affordable and accessible for all.
Development grants will be awarded to six partnerships seeking to develop the most impactful solutions, with three of these partnerships winning cash prizes in spring 2020. Interested fintech providers and community lenders are invited to register their interest at https://affordablecreditchallenge.com.