Open Banking, the data revolution, fintech innovation and smart phone penetration are all changing the way customers interact with financial services. Responsible finance providers are innovating, and want to innovate further. We are calling on FinTech’s to partner with the responsible finance industry on the government’s £2 million affordable credit challenge fund.
Across the UK, wealth-draining firms continue to exploit people on low and precarious incomes who can’t access the financial services they need. 8 million people rely on high cost credit to pay essential household bills[1], and 22% of UK adults have less than £100 in savings[2]. Payday lenders, rent-to-own firms and home credit providers prey on people in need of credit. This has detrimental economic and personal outcomes, compounded by cuts to welfare, stagnant wages and the effects of the gig economy.
However, a combination of economic, social and technological changes have the potential to disrupt the financial services system as it is.
The Financial Conduct Authority has been cracking down on exploitative practices since it took over regulation of consumer credit in 2014. Most recently it has imposed a price-cap on the rent-to-own sector; an unprecedented move since it is the first time that the FCA has been involved in the pricing of consumer goods. In addition, Open Banking, the data revolution, fintech innovation and smart phone penetration are all changing the way customers interact with financial services. Despite this, technology is often designed for the mass market, rather than for people on low incomes or with limited savings.
More needs to be done to ensure sub-prime and near-prime consumers have access to an appropriate offering of financial services.
Is one solution investment in community finance innovation?
Responsible finance providers are community based loan funds that lend to consumers, small businesses and social enterprises that cannot access finance elsewhere. They are unique and diverse in structure and product offering, but all place their customers at the heart of what they do. Responsible finance providers tend to serve relatively high-risk customers and must price to cover the risk of bad debt, which often leaves little money left over for innovation. Despite this, some are making headway. Examples include Moneyline, Creditspring and Scotcash.
Moneyline is using its bank of customer data to design intelligent products that mould around the cash flows of its consumers. Its recent product pilot pre-empted the peak in arrears it usually sees around Christmas. By building payment holidays into contracts, it was able to take the pressure off its customers and reduce arrears. It is a paradigm shift from typical lending contracts which centre around a firms preferred cash flow, rather than that of the borrower.
Creditspring is a new type of credit product designed for people with limited savings specifically for unexpected expenses; a typical reason that people turn to payday lenders. It charges its members £6 a month which enables them to draw 2 advances of £250 when they need them, repayable within 4 months. Each advance is interest free and you only repay what you borrow, along with the monthly membership fee. They describe it as a ‘back-up plan’ insurance product to be bought in advance. You can listen to our latest podcast with Neil Kadagathur, It’s CEO and co-founder here.
Others, such as Scotcash, are embracing Open Banking to extend access to credit to customers who would otherwise be shut out by mainstream credit scoring methods which treat customers as commodities rather than real people.
Shared learning, partnerships, and investment are essential to continue along this positive trajectory. The government’s recently announced £2 million affordable credit challenge fund is an exciting opportunity for the sector. We are calling on the UK’s world leading Fintech industry to work in partnership with responsible finance providers to innovate together.
[1] Money Advice Service (2018) Mapping the unmet demand for debt advice in the UK, https://masassets.blob.core.windows.net/cms/files/000/001/064/original/Mapping_the_unmet_demand_for_debt_advice_in_the_UK.pdf /
[2] Step Change (2017) The High Cost of Credit. Available: https://www.stepchange.org/Portals/0/documents/Reports/stepchange-affordable-credit-discussion-paper-july2017.pdf