Daniel O’Boyle is Director of risk analytics and decisioning solutions provider Provenir
Payday loan complaints are up, we found out from the Financial Ombudsman’s annual complaints report last month.The rise was seized upon by news reports, which pointed out that the increase was despite tighter measures having been introduced to regulate short term loans.
The ombudsman said the increase, “reflected people’s growing awareness of their rights when things go wrong”. This raises an interesting point about the level of influence that collective consumer awareness can have on businesses and industries in general.
Online sites that provide guidance to consumers on how to get a good deal have existed for some time for a range of products and services. Some sites provide an overview of how to take action if a consumer feels they have cause to make a complaint. Some even provide template letters to make it quick and easy for them to start a claim.
It’s a positive thing that consumers are more aware of the obligations of financial service providers. It helps customers to understand the two-way contract they are entering into when they take out a loan, and the responsibilities that exist on both sides during such an arrangement.
Impersonal template-based complaints however, tend not to provide individual details about a case that the lender can use to determine what might have gone wrong and, if relevant what they might need to improve. A blanket approach to consumer empowerment can lead to an almost automation of the complaints process where providers respond with templates of their own.
Measurement is important for industry progress, butjust as important is an understanding of the nature of complaints if genuine bad practice is to be addressed.
Less than one per cent of new complaints investigated by the ombudsman in 2015-16 were about payday loans – 3,216 out of 340,899. PPI was still the most complained about product, but with payday loan complaints up from 1,157 the previous year, a 178 per cent increase made for a compelling story.
Undoubtedly the industry has its critics. Reports of irresponsible lending practices and heavy-handed debt collection procedures have made for negative headlines in recent years. Many practitioners are burdened with a negative industry reputation that they would wish to shake.
No doubt, there have been instances of undesirable practice in payday lending, although this is surely the case in most industries.
Once a case is taken on by the ombudsman, the provider is charged a case fee. Not all cases are upheld, in which event it’s hard to understand why the business should incur expense when they have acted appropriately. It’s a cost of legitimacy incurred by all operators, but frustrating when those firms could be putting that investment into customer service.
The worry for payday lenders is if the complaints process becomes open to abuse. If sound, legitimate loans – perhaps ones that have in fact already been paid back – are called into question. With responsibilities on the side of both the borrower and the lender, there needs to be a balance between corporate and personal responsibility.
Tighter regulations and controls around payday lending promote transparency and customer affordability. These include the Financial Conduct Authority’s cap on interest charges and fees, introduced in January 2015.
Companies with a business model that doesn’t support responsible lending are hindered by the enforcement of such measures. This should mean fewer future claims against loans claimed to have been unaffordable.
The short-term loan market has evolved during its relatively short history, and not just as a result of regulation. Lenders themselves have been quick to recognise that they can’t risk lending to customers who can’t repay their debts if they are to be a sustainable, long-term business.
It would be regrettable if payday loan providers, running scared from the potential for PPI-sized claims volumes, withdrew their services. Payday lenders fill a gap that existed in the market to provide a means of accessing credit to consumers who – for a broad range of reasons – don’t fit the ideal credit score profile.
Alternative lenders have developed product portfolios and business models designed to meet the particular needs of this segment. Short term lenders are among the industry disruptors that are bringing about change in financial services. Their business model is built around returning rapid credit decisions on individuals who may not meet the prerequisites of traditional models largely used by established lenders.
Without alternative lending services, borrowers denied credit elsewhere may instead turn to undesirable, unregulated options. These, unfortunately will always exist for those determined enough to find them.