Neil Munroe, External Affairs Director of leading UK credit reference agency, Equifax, looks at the opportunities that the rapidly growing payday lending sector offers to the traditional credit providers through the wider sharing of payment performance data on payday loan borrowers.
The payday lending sector has grown significantly in the last few years, perhaps as a direct result of the increased pressure on household incomes, in combination with greater caution by traditional lenders to extend new credit. Estimates currently put the market at being worth over £1.5bn, although there are no official figures. Volume of loans is probably around 5 million per year, averaging circa £300 per loan and involving maybe 1.5 – 2 million customers. And typical of a rapidly growing sector, there are a plethora of providers – perhaps as many as 200 brands offering payday loans generally for 7– 41 days in duration.
It is believed that the UK customer profile of payday loan borrowers is biased towards younger, male, and non-home owners, with bank accounts, in employment, but earning less than the national average, although generally it seems they are not credit-impaired. And, as the name suggests, this form of credit is mostly used to cover short-term cash constraints, unexpected financial demands, and emergencies.
Overall, we believe payday loans are not used as substitute for long term borrowing, but more a means of avoiding (unauthorised) overdrafts and failed Debit Card transactions. However, there have been recent reports that have suggested there is a growing use of payday loans for day to day living and clearly this isn’t what they are designed for.
As a result, currently there is much debate about the ethics of payday loans and certainly considerable UK media and regulatory attention. Indeed, earlier this year the Office of Fair Trading announced plans to investigate the payday loan industry. This was combined with a report on the sector published by the Business, Innovation and Skills Committee which stated that credit checking is a key factor in ensuring appropriate lending to consumers.
One particular point that was highlighted by the BIS committee was a concern that not all payday loan providers are recording all their transactions for the purposes of sharing that data with other lenders so that consumers’ credit histories can be accurately monitored and assessed. In response to this, the payday lending sector committed to wider data sharing from July this year. But what does this mean for traditional credit providers?
Giving financially excluded consumers access to the mainstream financial marketplace is, I believe, a key benefit that payday loan providers can deliver. But, to achieve that goal, these alternative lenders need to view data sharing as a positive act. Equifax has therefore created a team focused on working with lenders in the sector to improve their understanding of the benefits.
However, we also recognise the need to help the traditional lenders understand the benefits of data sharing by and with the payday lenders.
Full data sharing with all three UK credit bureaux is already subscribed to by numerous consumer lenders, from traditional credit providers to telecommunications companies and utilities. But now we believe that data sharing needs to go wider and this will play a vital role in helping traditional lenders adhere to government regulation to fully assess consumer affordability and indebtedness. Equally, we believe it can play a vital part in stimulating the UK economy.
There is no doubt that the continuing pressure on family finances means more individuals are suffering from financial hardship. Job loss or reduced income through pay freezes will result in some falling behind on payments, which will then be reflected on their credit file. However, it is also likely that many will address these difficulties relatively quickly, making them a reasonably good risk for lenders in the future.
But the challenge facing the credit industry is that any history of non payments will hamper future lending decisions. Clearly no lender wants to extend credit without having the confidence that an individual will be able to make repayments. However, the extraordinary circumstances of the last few years strongly suggest that other forms of data should be made available to enable lenders to effectively differentiate between the individuals that ‘couldn’t pay but can now’ and those that ‘will never pay’.
There are a number of extremely relevant untapped sources. For example, consider the wealth of information stored in non-consented portions of credit portfolios (c40m accounts), and performance data from water, electricity and gas utility suppliers. Not all of these sets of data are currently included on credit files, but every credit manager would agree that if they were included they would certainly be very useful in determining an individual’s ability to manage their finances by creating a more complete picture of their indebtedness.
The data on payment performance by payday loan borrowers would also add immense value to the decision making process of traditional lenders. But currently not all payday lenders are sharing their borrower data and there is a risk this will perpetuate the situation of consumers being financially excluded due to any good repayment history they have achieved on payday loans not being demonstrated to all lenders.
At Equifax we firmly believe that an inclusive attitude to data sharing needs to be cultivated. Payday lenders will be able to more thoroughly check that they are not lending irresponsibly to people who have multiple loans and are rolling over debt. As importantly, by that data becoming available to other lenders, this will help to rehabilitate the credit records of higher risk borrowers who repay their payday loans on time. And if alternative lenders can be seen to be assisting in financial inclusion, that has to be good news for all.
Can companies really afford to WFH?
By Carmen Ene, CEO of 3StepIT.
Firms scrambled to enable Working from Home (WFH) at the beginning of the Covid crisis, but ten months on, corporate IT strategies are becoming far more challenging as new work patterns emerge.
Recent research from 3stepIT confirms that technology investment over the next 12 months will be heavily influenced by the changes required to manage the Covid-19 pandemic and support a new-look mobile workforce.
Almost a quarter (24%) of 2019’s annual IT budget is set to be swallowed up by remote working demands. At the same time, with 29% of desktops sitting unused in deserted offices, companies are having to accelerate the retirement of IT equipment, raising serious questions regarding the security and legitimacy of asset disposal strategies.
The implications are stark: in a bid to support the requirement for flexible working, companies risk jeopardising other strategic IT investments that could be key to delivering the agility required to survive the pandemic.
As Carmen Ene, CEO at 3stepIT insists, a more affordable and sustainable technology acquisition model is required.
New Working Environment
Covid-19 has driven an acknowledged shift to WFH, but the new working environment is far more nuanced. Government policy continues to shift. Working in the office was encouraged for a few months in the bid to reinvigorate the urban economy; now we are back to WFH. The day-to-day experience for the majority of working adults continues to chop and change.
The business implication is also varied, with companies enjoying different levels of employee productivity. According to the Office for National Statistics (ONS), while around half of companies have seen no difference in productivity, nearly a quarter said it had fallen.
Just 12% have seen an increase in productivity. The Bank of England’s Chief Economist has recently commented that WFH risks stifling creativity and cuts people off from new experiences.
Despite the challenges for businesses and employees alike, the WFH trend is set to continue. A survey from the Institute of Directors confirmed nearly three quarters (74%) of company directors plan to retain increased home-working post-coronavirus – whenever that may be.
This attitude is confirmed by research from 3stepIT which reveals 60% plan to allow employees/more employees to work from home and 56% to offer more flexible working hours.
The question for businesses then is how best to achieve this new flexible employment model, especially given the continued economic uncertainty and the many demands on the corporate budget?
The initial response from many companies to enable WFH was impressive – companies of every shape and size closed the doors and embraced remote interaction. Hastily allocated laptops and video calls addressed the immediate challenge.
As the pandemic rolls into month ten and many nations enter lockdown two, organisations are facing up to the reality of increased investment needed to fuel a mobile workforce for the long-term, as well as an urgent review of the temporary and emergency technology packages that were put in place to enable home working.
For many companies, this will demand a significant and unplanned upfront cost, potentially draining company cash reserves when they can least afford it.
Almost half (47%) of businesses in Europe expect to increase investment in remote working over the next 12 months, with IT strategies becoming increasingly focused on facilitating social distancing (47%) and increased home working (46%) to reflect the changing needs of employees.
The need to allocate investment to support a remote workforce is unquestionable. Yet there are many other immediate priorities facing IT budgets as businesses work hard to adapt to extraordinary change.
From the physical events that have gone virtual to supply chain challenges and the sheer uncertainty of demand in every market, technology has a vital role to play in enabling agile business.
The majority (61%) of IT decision-makers expect IT budgets to rise next year but with the shift to home working demanding nearly a quarter of annual budgets, funds will have to go much further than before.
How can companies support the investment in technology required to enable secure and productive remote working without compromising on short-term capital investment in essential digital transformation projects?
New thinking is required, however the value of financing rather than purchasing IT equipment outright has been proven over the past few months.
89% of companies already using finance to acquire some or all of their assets have been able to make investments in additional IT hardware to enable employees to work from home, and over half (54%) are more likely to use finance to acquire assets over the next two years.
A growing number of companies are starting to realise that access to technology is more important than ownership.
Technology Lifecycle Management
It is important to recognise, however, that finance is just part of this equation. The pandemic may have forced companies to accept flexible working on a scale previously deemed impossible, but there are still significant challenges for IT management to address.
The initial equipment acquisition is, in many ways, the easy bit. What is the strategy for remote support, which is critical if employees are to be productive? How will aged equipment be securely retired and disposed of when employees rarely, if ever, come to the office? How do you keep track of where devices are and if they’re in health?
Effective remote working requires a comprehensive Technology Lifecycle Management model that supports the business from acquisition through support to disposal.
With flexible working here to stay, IT managers have an ever increasing list of demands – and a need to demonstrate the value of every expense. The widespread adoption of WFH is not the only dramatic shift in strategic approach precipitated by Covid-19 – there has also been a change in attitude towards IT device ownership.
Focusing on providing employees with secure, effective access to technology rather than owning it, provides IT managers with a chance to not only release essential capital budget but also manage the IT lifecycle more efficiently and sustainably.
FICO UK Credit Market Report September 2020 Shows Card Spend Rise Stalling
Analysis based on UK card issuers’ data also shows high level of unused credit could be a risk as festive spending may be an antidote to a year of woes
- Average spending on UK credit cards levelled after previous months’ increases; rates of one missed payment fell
- Rate of two missed payments continued to grow and September saw first increase in three missed payments since April 2020
- September was second consecutive month to see increase in average interest charged
- Percentage of payments to balance exceeded September 2019 rates
- Cash usage continued to increase
London, November 19 2020 – Global analytics software provider FICO today released its analysis of UK card trends for September 2020, which shows the continuing impact of COVID-19 on household finances even while furlough and payment holidays remained in place during the month.
“The big challenge for credit providers right now is understanding the true level of financial difficulty consumers are facing because of the support being provided by furlough and payment holidays,” explained Stacey West, principal consultant for FICO® Advisors. “Our UK card data suggest that many people are becoming more prudent and reducing their card balances, but those who can’t reduce their card use are increasingly struggling.
“The recent announcement concerning the furlough extension and increase in percentage paid, along with the extended payment holidays, will result in increased debt levels being delayed until further into 2021. Christmas spending is likely to add to that longer-term debt burden. Of particular concern is that average balances on accounts missing two or more payments is higher and growing. Cash usage on cards has also increased month on month.”
Spend on UK cards increases marginally
Average spending on UK credit cards increased by only £1 in September to £640. Average spend is now only 2.9 percent lower than a year ago.
“Regional lockdowns and the end of the school holidays appears to have curbed the increase in spend seen over the previous three months,” said Stacey West. “With the introduction of the tier system, with stricter regulations reducing spending opportunities, October could see this stabilisation continue. The early part of November could well reflect extra spending ahead of the month-long national lockdown.”
Monthly payments continue to increase
The percentage of payments to balance increased for the third consecutive month; it is now 2.9 percent above September 2019. This is the first time since April that payments have exceeded those of 2019. The percentage of cardholders paying less than the full balance fell and the proportion paying the full balance increased and is now 8.4 percent higher than a year ago.
“The higher proportion of payments to balance is, of course, good news. Even if it’s a direct consequence of lower balances and the furlough and forbearance arrangements, it is encouraging to see consumers trying to manage their debts responsibly,” adds West.
Two and three month missed payments increase
The one missed payment rates decreased in September after two months of growth. But the average balance on accounts missing two payments is 9 percent higher than a year ago and the three missed payment rates increased for the first time since May, with the average balance 11.3 percent higher year-on-year. There is a segment of customers who could not afford to make their payment in July who continued to miss payments into September. The October data will show if this impacts 4+ missed payment rates.
West added: “Whilst it is positive to see the one missed payment rates falling, the true scale of the debt at risk of being unpaid will continue to be masked for many months due to the announcement of the continued support, extended payment deferrals and the introduction of more forbearance measures by issuers. Enhancing analytics by using better tools and increasing the data available will help issuers effectively identify the customers that need support so that they can communicate appropriately. Open banking transactional data will remain an important source and it is anticipated its use will expand in 2021.”
Unused credit a risk as Christmas approaches
The percentage of the card limit utilised on active accounts reached another over two-year low. September saw a second consecutive decrease in the average card limit to £5,404. While the highest proportion of accounts, 29.3 percent, have a limit in the range of £5,001 to £10,000, the average balance for these accounts is only £1,242. Those with limits of more than £10,000 have an average balance of £2,366.
Exposure on inactive accounts is at 34 percent and 72.3 percent of exposure on active accounts is unused.
“These figures clearly show the level of unused credit in the market. Despite the lockdown Christmas is expected to push spend up and a large proportion of consumers will have existing credit available to use without checks being in place to determine if the extra spend is affordable,” West adds. “Up to 80% furlough payments until at least the end of March, the Job Support Scheme and the extension of mortgage, loan and credit card payment holidays will give some consumers confidence to continue to spend in the short term.
“Higher card debt levels in 2021 is, therefore, a risk and issuers will be taking proactive steps to address this with increased customer interaction to understand the true existing and delayed financial impact. It is likely that digital communication will come more into play as a result. It is potentially easier to ask personal questions and for consumers to respond via digital channels. But this puts the onus on lenders to ensure they have the systems and contact details in place now.” A recent FICO survey showed that nearly one in five Britons say their bank doesn’t have their mobile number.
Accounts over their limit remain stable
September saw a decrease in the proportion of accounts exceeding their limit and this number is 42.9 percent lower year-on-year. However, the average amount over limit started to increase again and is 30 percent higher than September 2019.
Cash spend on cards continues to increase
The percentage of consumers using credit cards to get cash increased for the second consecutive month, after a significant fall during the first national lockdown. Although increasing 2.8 percent, levels are still 53.8 percent lower than a year ago.
This has resulted in a 2.6 percent increase in cash as a percentage of total spend. Both monthly increases were higher than those seen in 2019. However, it may be many months until we see the levels of cash usage reach pre-pandemic levels, and they may not rise that high again.
Bounce back loans will cause bounce in alternative finance
Bounce Back Loan Scheme (BBLS) losses and fraud will see more SMEs turned away from banks, says Steve Richardson, Sales Director at Reparo Finance.
Recent headlines have focused on how payment defaults and fraudulent borrowing through the Government’s BBLS scheme could amount to anywhere between £15bn and £26bn.
The immediate reaction has been that these eye-watering figures, released by the National Audit Office (NAO), will ultimately end-up costing tax-payers. While this is true, SMEs will also pay a high price for this situation.
The SME Funding Gap is Set to Widen
After the financial crash in 2008 and the subsequent recession, we saw a trend of banks restricting lending to small and medium-sized businesses. SMEs were either considered too high risk or low value by traditional lenders. These businesses became the ‘unborrowables’, which has contributed to an ever-growing funding gap when it comes to SME financing requirements. The SME Finance Forum estimated this gap to be around £3.8 trillion globally in 2018.
This funding gap will be accelerated by rock-bottom interest rates, economic uncertainty and high corporate debt. Add to this the costs of unpaid Government bounce-back loans and fraudsters exploiting a lending system more focused on emergency access rather than proper due diligence, and you have a perfect storm that penalises SMEs.
Banks will now make SME borrowing even more rigid as they become increasingly risk-averse towards SMEs. With the ever-changing coronavirus policy, we’re no closer to ‘normality’. In these circumstances, it is much easier for banks to strike a line through SME lending, rather than build a risk-weighted lending model.
Bank Lending May Become a Box Ticking Exercise
Many banks will ignore SME funding requirements by dressing up rejection in the niceties of the Bank Referral Scheme. This redirects SMEs to other lenders with no real appreciation of why the SME applied in the first place.
Perhaps banks will entertain some low level of SME lending as a box-ticking, reputation management exercise. This is likely to be a slow and painful application process for SMEs, which is more concerned with filling out the right forms rather than the lender understanding the people and company seeking finance.
Alongside the banks’ reluctance to lend, there are likely to be logistical challenges. Banks are stretched at the moment, partly from processing government loan schemes and due to other challenges the pandemic has presented. Many banks may not have the resources to dedicate to the tricky business of SME lending.
A Bounce in the Alternative Lending Market
With the backdrop of even less engagement from traditional lenders plus the increased need for funding, SMEs are turning to alternative lenders.
Lending to SMEs is complicated; when financing these businesses, it’s harder to value risk and make lending decisions. Many of the companies have limited financial information, atypical cash flow or operate in verticals that lenders don’t understand.
In many circumstances, the alternative finance market can provide viable alternatives to SMEs. There are an array of lenders that specialise in different products and sectors.
Accessing Alternative Finance
When SMEs start to access alternative lenders, they stand a good chance of finding a lender that will have a product that fits. They will undoubtedly find lenders willing to have a conversation to understand their circumstances.
Whereas once SMEs weren’t clear on the options outside the banks, they’re becoming increasingly savvy about their range of lending options. This has led to the bounce in demand for alternative lenders, which is likely to grow as the pandemic decreases SME lending from banks.
With so many options, an excellent place to start is a commercial finance broker or your accountant. These professionals have access to the alternative lending market and can help you find the right lender.
In a world where traditional lenders may be seeing SMEs as even higher risk, it will be alternative lenders with their broad range of products and willingness to listen that will fill the gap.
Who Needs an Offshore Bank Account?
By Luigi Wewege is the Senior Vice President, and Head of Private Banking of Belize based Caye International Bank Even today,...
Why insurance needs Tesla’s autopilot too
By Christian Wiens, CEO of Getsafe Digitization is the industrial revolution of the 21st century. What does this mean for...
What The Pandemic Has Taught Us About Remote Work
By Anthony Lamoureux, Strategy and Development Director at Velocity Smart Technology Before the turn of the decade – which already feels like...
The art of change management for finance and accounting teams
By Magali Michael, Director at Yooz The Covid-19 crisis has had a dual impact on businesses across the world. On one...
Humans vs Robots: Which Is Better for Managing Investments?
By Anton Altement, CEO of Polybius and OSOM Finance, In an era of technological advancement, innovation, and fear-mongering sci-fi programs,...
Why content should be at the heart of successful agile marketing
By Yogesh Shah, CEO, iResearch. During this time of unprecedented business change, campaigns today need to be agile, flexible and responsive and companies...
Can companies really afford to WFH?
By Carmen Ene, CEO of 3StepIT. Firms scrambled to enable Working from Home (WFH) at the beginning of the Covid...
FICO UK Credit Market Report September 2020 Shows Card Spend Rise Stalling
Analysis based on UK card issuers’ data also shows high level of unused credit could be a risk as festive...
Investors’ growing appetite for private markets means firms must improve their regulatory governance
· Both large and small firms are struggling to meet regulatory demands due to poor governance of deal distribution, inaccurate investor...
Covid heightens need for cybersecurity in digital world says hampleton partners’ m&a report
While the world is focused on the health and economic threats posed by Covid, cyber criminals are capitalising on this...