Affordable Credit in Covid-19: Community Development Finance Institutions (CDFIs) are social enterprises providing affordable loans, money management and budgeting advice to households excluded from mainstream finance. They help people avoid exploitative, high cost and illegal credit providers, while improving the financial wellbeing of their customers. Since the onset of the Covid-19 crisis, millions more people have become financially vulnerable. CDFIs’ proactive and innovative response has been a lifeline for people facing financial hardship. This series of case studies shows how.
London-based Fair Finance has saved people £13m through refinancing out of high-cost credit in its 15-year history, advancing £30m to people excluded from mainstream finance. Its debt, money management and other advice has been a lifeline to close to 100,000 people. It has sustained or created thousands of jobs and contributed over £99m in Gross Value Added to communities through supporting local businesses.
Wider than ‘financial inclusion’
The numbers are impressive but it’s the long-term impact Fair Finance makes on people’s lives which really makes founder and CEO, Faisel Rahman proud. Helping people to repair or build up their credit rating, so they have access to better housing and better deals for services many of us take for granted. Thinking wider than ‘financial inclusion’ to address multiple, overlapping, systemic issues such as welfare rights, advocacy, legal support, employment, and access to healthcare. And creating products which people choose because they suit their needs and help to make their lives better, not products which feel like a poor relation to mainstream finance.
Fair Finance’s response to COVID-19 was led by this commitment to address these multiple, overlapping issues and offer products not just fit for purpose, but best-in-class.
It’s been vital to understand the specific requirements of different customer segments
Rahman’s seen an evolution in the community development finance provider’s client base over the past 15 years. This context helps understand how Fair Finance adapted to support people impacted by the coronavirus.
When he launched Fair Finance its typical customer was often female, not working, living on a low but stable and regular income from benefits, with limited economic mobility:
“These early clients were often Bengali, Somali, Vietnamese or Afro-Caribbean – they were from well-established immigrant communities, geographically concentrated and local to our branches. It was easy to reach out to them. They had almost no digital footprint and they needed finance for school uniforms, funerals, Christmas presents, emergencies or quite often for furniture if they were moving into unfurnished council accommodation.”
From 2009-13 Fair Finance’ client base changed rapidly. Rahman noticed numerous applications from people affected by the impact of the global financial crisis, who had previously had access to mainstream finance. Now they earned less, worked part-time or in multiple jobs, often with zero-hours contracts. Neither their lives nor their incomes were stable, and if they missed any payments their credit histories were damaged – pushing them away from many mainstream products. “New lenders entered this market and took advantage of high-waged workers struggling to balance their finances,” says Rahman.
New digitally-comfortable customers needed to repair credit scores
“These customers were digitally comfortable and desperately trying to repair their credit profiles. Only a few needed advice; most just had a really bad set of options in front of them. I remember making a loan to someone earning around £50,000 each year as a shift worker, who had eight payday loans and was paying £2,000 in interest every month. He turned up with a spreadsheet showing how a small loan from Fair Finance would save him tens of thousands in interest and it was a no-brainer to make a loan to him.”
Working with these customers led Fair Finance to move many services online: “If we weren’t digitally engaged and plugged into all these data streams we would have been left behind.”
From 2014 Fair Finance has served a third and different group of customers. Rahman describes them:
“Aspirational, hard-working and risk-taking immigrants, working in the UK and sending money home to families they’ve left behind. Most have only been in the UK for a few years and live in shared housing. They are digitally savvy. Their information and support networks are off the radar and not funded by the state so it can be hard to reach them.
“They live in trust-based communities where people listen to each other for advice – which can often perpetuate some choices which have a negative impact. When they arrive in the UK they have no credit history and their circumstances and the high cost of services keep them financially vulnerable.”
In these communities, remittance is crucial, he adds. “Every month they must send a fixed payment to their families. It’s not discretionary: it’s probably to pay for their kids’ food or rent, or for care or medical bills. So with variable incomes, this can drive a need to borrow to smooth income cycles.”
Don’t just condemn high-cost lenders: compete and offer a better service
Understanding its various customer groups means Fair Finance can properly compete with sub-prime and illegal lenders charging far higher rates.
“All the alternative lenders in this market are really accessible” says Rahman, “Some of the sub-prime lenders run some of the best community outreach you have ever seen. They know they have to be in your community. They go to places where you are. They employ people like you who understand the difficult choices you make. And they offer simple, easy to understand products which people like.”
It’s easy to condemn the high cost lenders, he adds, but their customers find them both authentic and trustworthy. “If you’re a sub-prime, high cost lender and someone doesn’t make a payment, what are you going to do – make their credit history worse? That’s impossible. The high-interest lenders which people love to hate actually gave people exactly what they wanted: choice, flexibility, a bespoke product for people on very variable incomes for whom a standard monthly product doesn’t work, transparency over what they are paying, whatever the rate – and speed.”
So if you are truly serious about helping people whose employment or housing status makes them vulnerable then you need to compete with the products and services offered by the sub-prime sector, says Rahman:
“An accessible product that is flexible, highly bespoke, relationship based and authentic. It’s the holy grail of financial services and means the poorest are actually demanding, and receiving, the same kind of service as the very rich. They are making informed decisions and a very sensible choice. They think about what they are borrowing for and who they borrow it from.”
Adapt to maximise impact
This determination to understand the lived experience of its customers has driven Rahman and his 38-strong team to continue to innovate and develop, ensuring Fair Finance focuses on where it can make the maximum impact.
“At the start of the pandemic we decided to end the leases for three of our four branches,” he says. “We’d already ensured services were available remotely and invested in online access to our products over the past three years, and as soon as the probable impact of COVID-19 became apparent we replaced an in-branch service with a telephone service in multiple languages: French, Spanish, Romanian, Polish and Russian.”
Investment in fintech and research
“We’d already been investing heavily into technology last year, partnering with a credit scoring organisation and fintechs to develop our lending decision-engine tool and online customer portals. Together this technology gives our telephone agents access to quicker, more consistent decision-making without losing our customer engagement. It’s enabled us to continue to serve our specific market but make decisions faster, deal with more customers, and has helped us to reduce defaults.”
Fair Finance increased its investment in this technology as a response to COVID-19 – and demand for its finance remained strong. Where was that demand coming from? How did it fit with Fair Finance’s previous customer profiles?
Rahman commissioned research from Shift Design, a charity which helps to tackle social problems through the power of design thinking, in May 2020. It swiftly classified Fair Finance’s customers into three distinct groups. Rahman describes them:
“The first group of customers are people predominantly already living on benefits. They have a low but stable income. The second are people in jobs who had been furloughed. Although their income decreased, it was stable for the furlough period and in many cases their living costs reduced too as they were not traveling to work. Some were even able to save for the first time. But the third group of customers were people whose income or work had been variable before Covid, in zero-hours jobs or unstable self-employment and whose finances were suddenly put under major stress.”
Another major pivot
“This understanding meant we made another major pivot to ensure we offered the right product to people who needed it the most. And we decided to invest more in providing advice. It isn’t about education, it’s actually about helping people to navigate the complexities of what’s available to them, and identify advice, products and solutions which really will make them better off. So we’ve developed a new advice tool using decision logic to help our customers and potential customers then get bespoke advice.”
Two key pivots then, one operational and one strategic. But these aren’t the only developments at Fair Finance. The initial findings from other research have major implications, not only for Fair Finance but the sector as a whole. “This is based on a Randomised Controlled Trial of around 20,000 applications for credit,” adds Rahman, “and the behavioural insights will be game-changing for Fair Finance and the fair and affordable credit sector.” Watch this space!
Clearly things are never static at Fair Finance. Through flexibility, investment, partnership, commissioning research and pivoting, it has boosted its services to financially vulnerable people. It’s been there for people whose already unstable income has plummeted, helping them avoid a cycle of expensive or even illegal high-cost lenders. It is adaptive and focused on its customers, with a determination to offer solutions which benefit their lives rather than products which extract from them. To create permanent and systemic change. Rahman finishes with a story:
“One of our earliest clients had borrowed £250 for a headstone for her husband’s grave from a lender we’ll call ‘loan man Dave.’ She’d paid him back over £2,500 and she still owed him £250 when we refinanced her loan. Within four months she was debt-free. But a few years later, loan man Dave approached us and asked for a job because we’d put him out of business – his clients were choosing Fair Finance. And that’s one of the successes we are most proud of, making a permanent change so people choose us.”
Fair Finance facts and figures
- Launched in London in 2005.
- Now operating nationally, with 75% of its work focused in the 30% most deprived communities in the UK.
- Clients are 63% women, reflecting the higher level of exclusion faced by women in accessing finance.
- Is an accredited London Living Wage employer.
- Founder Faisel Rahman awarded an OBE for services to Community Finance in 2014 and an honorary fellowship from Social Enterprise UK in 2020 for his contribution to supporting the social enterprise movement.
- Winner of the Resilience Award in the 2020 Citi Micro-entrepreneurship Awards.
What next?
- In 2019, personal lending CDFIs including Fair Finance lent £24 million in 35,000 loans to individuals, helping them save over £7.5 million in interest payments compared to if they had gone to a high-cost lender. They engage with their customers meaningfully to give them access to products and services designed around what they need; to meet both their short-term needs and build their long-term wellbeing.
- We can supply journalists and media with a wide variety of case studies about how people, businesses and social enterprises have been supported thanks to Responsible Finance providers (community development finance institutions). We are also able to comment about access to finance, for businesses, social enterprises and households.