Ten years ago I ran a focus group of low income borrowers to understand the impact the Government’s Growth Fund initiative had on credit union members. What suprised me was how much borrowers were willing to pay for convenience of service.
I’d assumed that lower interest rates and weekly payments were enough. Removing friction in digital application processes is something often discussed, but we weren’t even meeting expectations in analogue.
The Growth Fund was a £120m investment in community finance increasing competition into the home credit market. The Competition and Markets Authority had found that a lack of competition meant for every £100 lent by doorstep lenders, £7 was being spent by borrowers in excessive interest payments.
Enter the ‘doorstep lenders’
Provident Personal Credit, a subprime lender specialising in doorstep loans and credit cards, had 60% market share, selling loans at over 250% APR. S&U plc and Morses were also prevalent. One thing connected these lenders – longevity. Doorstep lenders had been trading on the UK’s housing estates since before the second world war. They ‘Knew Their Customer’.
Notably, home collected credit cost 10 times more than a credit union loan, but all of the people interviewed maintained a line of credit with a doorstep lender. Members often chose the high cost lender over the credit union.
However it wasn’t about cost. Interestingly, one common reason emerged for sticking with a higher cost lender: convenience.
An agent collected payments on the same day, each week from the borrower’s home. The application process was simple:
- The collector built up a rapport and understood your needs.
- Doorstep lenders did not require bank statements.
- Decisions were immediate.
- The agent handed the cash over straight away.
Provident have now embraced the digital revolution, launching Satsuma Loans in 2013. Convenience underpins their offer.
Applications are made online, proof of income is required only once and can be uploaded via a mobile phone. If an application is received and accepted between 6am and 11pm, the money is sent within the hour.
Convenience can come at a cost
Although Satsuma use sophisticated decisioning methods, they got the risk / reward balance wrong. Losses are mounting. There’s a big increase in collections staff.
People might find it easy to apply, but they can’t afford the loan. In the context of cuts to welfare and the introduction of Universal Credit, the 40% of Provident borrowers who are out of work simply can’t make the payments on a £1,000 loan.
Balancing risk and ease of access
There are lessons to learn from Satsuma.
Although they have successfully carved out a position of convenience amongst low income borrowers, making it easy to apply has resulted in a high rate of first payment defaulters.
Whilst online might be convenient, for applicants with thin credit profiles or little paperwork a face-to-face interview might be a better option.
As a result, your ability to get across the educational aspect of a credit union can help cement a relationship, increasing the likelihood of getting repaid.
Credit unions can learn from Satsuma on how to avoid going pear-shaped:
- Undertake a soft credit check, providing a credit score. Invite applicants into the office if their score is low.
- Use this information to tailor the application to the risk profile of the borrower, e.g. ask fewer questions or request less paperwork for those with higher credit scores.
- Use fraud prevention techniques when online, including methods to spot borrowers who take the money and run.
- You can segment existing members so that borrowers with good repayment histories can be introduced to more streamlined application processes, including online.