The vision of affordable lenders is that everyone should have access to affordable and appropriate credit, delivered in a fair, respectful and responsible way. Affordable lenders are social purpose lenders, such as responsible finance providers and credit unions. Their vision is gaining traction as levels of problem debt as a result of borrowing from high cost lenders persist. The debt charity StepChange estimates that problem debt costs the UK £8.3 billion through its impact on productivity, physical and mental health and employment potential.
The policy response to problem debt has identified the key role of affordable alternatives to high cost credit in tackling financial exclusion; the Department for Culture, Media and Sport (DCMS) allocated £55 million of dormant account funds to financial inclusion and the Financial Conduct Authority (FCA) has engaged affordable lenders as part of their work on the high cost credit market. In addition actor and activist Michael Sheen brought together industry bodies under the End High Cost Credit Alliance to improve the market for fair alternatives to high cost credit.
These initiatives are all considering how to sustainably scale solutions to problem debt from high cost lenders, given the substantial size of the market. Funded by the Oak Foundation, Responsible Finance undertook a research programme to advance the supply of affordable credit to UK consumers. The latest and final report looks in depth at case studies of how existing affordable lenders have scaled. Previous reports included a review of the high cost and affordable credit markets and an exploration of the link between credit scoring and financial exclusion. The latest report on case studies is timely as policymakers, regulators and the social sectors consider the levers that will catalyse prevalent access to affordable credit across the UK.
The new report presents five case studies of predominantly responsible finance providers’ pathways to scale (Five Lamps, Scotcash, Fair for You, Just Finance Foundation and Affordable Lending Portal). The five organisations highlighted are very different in terms of their histories, size and lifecycle stage. However the commonalities in their journeys point to the keys to unlock scale for the affordable credit sector:
- The need for the right capital at the right time. Affordable lenders typically require seed capital to get started, operational funding to create the breathing space to become sustainable over time, and patient capital to grow their loan books. This funding at different stages has been critical for each of the organisations profiled in this report to reach scale and sustainability. Lack of appropriate funding has also proven a factor in delaying that journey. In comparison, commercial fintech companies raise tens of millions of pounds in investment to launch new products and services which enables them to reach significant market penetration; for affordable lenders to scale the resource needs are no different from the private sector.
- Realistic understanding of the time and resources it takes for an affordable lender to reach scale and become sustainable. The affordable lending case studies demonstrate success, however their journeys underscore the fact that building a high impact and self-sufficient lender takes time and investment. This is driven by factors such as the regulatory authorisation process, building customer trust and thus building the brand, developing fruitful local and national partnerships and establishing a lending track record. However this long-term timeline is often mismatched with funders’ and stakeholders’ expectations for short-term results. It is important for expectations to be aligned with the reality of delivering an affordable lending project. For example at their peak, the five largest payday lenders spent a collective £36.3 million in a single year; it is unrealistic to expect the affordable lending sector to gain market share when competing with commercial branding when its own marketing budget is a fraction of this.
- Partnership working is key for realising new growth opportunities. Launching new products or entering new markets requires significant market research and investment. For relatively small organisations such as affordable lenders, a lack of investment can be a barrier to entry, so partnerships can play an important role reducing those barriers. Most of the organisations presented in this report benefited from partnerships with other organisations in the sector and took risks in participating in partnership-based projects. These partnerships proved valuable in accessing new markets through a partner’s existing brand and reach, co-branding products to offer customers greater choice and consolidating on shared back office costs.
- Making use of new technology to meet consumers’ needs. The unique value of affordable lenders is the customer service aspect which considers a broad range of data points when determining creditworthiness and offers access to advice when credit is not right for the customer. Many of the case studies showcased in this report demonstrate how new technology can be deployed to augment this high quality of customer service. However there is a careful balance between using technology to improve the customer journey and replacing relational parts of the loan lifecycle to reduce costs. So while technology can indeed play an important role, it is not always the silver bullet to scale and sustainability for affordable lenders.
- Due to the locally focused and dynamic nature of the operating environment, there is no one-size-fits-all approach to scale and sustainability for affordable lenders. A multiple-support systems approach creates the most healthy market, so that affordable lenders can use the tools that are best fitted to their needs. This includes access to unrestricted grant for capacity building projects, tax reliefs and guarantees, as well as appropriate capital to on-lend from a diverse range of sources.
When thinking about what scale means for the affordable lending sector and how to do it sustainably, these lessons provide a useful compass to policymakers, regulators, investors and practitioners. The numerous initiatives currently in development all have the promise to advance the affordable credit market in the UK and increase consumer benefit. Responsible Finance’s programme of research on scaling alternatives most importantly shows that the expertise of what works lies within the sector itself. Let’s leverage that to tackle problem debt and financial exclusion head on.
Scaling Up Affordable Lending: Case Studies was produced by Responsible Finance and Centre for Business in Society, Coventry University. We are hugely grateful to Oak Foundation for funding this important work.
The report is available here:
Affordable Lending Case Studies Report, 2018
June 2018
The vision of affordable lenders is that everyone should have access to affordable and appropriate credit, delivered in a fair, respectful and responsible way. Affordable lenders are typically social purpose lenders, such as responsible finance providers and credit unions.
Reliance on high cost credit continues to grow and the consumer detriment caused by unsustainable debt is now well documented. Affordable lenders such as responsible finance providers and credit unions are long-standing lenders in this market, providing an ethical alternative to high cost credit, that is both lower cost and provides wrap-around services that supports consumers’ financial capability. Whilst they are effective interventions, these affordable lenders are small scale and look different from one another as they are locally focused. Therefore when looking at the problem at a national scale it can be challenging to draw common themes from the affordable credit sector.
As policymakers, regulators and practitioners search for a scalable solution for the provision of affordable credit, this report provides a spotlight on five organisations and their pathways to scale. The five organisations highlighted are very different in terms of their histories, size and lifecycle stage. However the commonalities in their journeys point to the keys to unlock scale for the affordable credit sector.
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