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Responsible payday lending is critical for consumer protection

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Sean Kulan

By Sean Kulan,Client Partner, Consumer Credit, Huntswood

There can be no denying that trust in the payday lending sector has been rocked in recent times.

Many firms providing a vital service to cash-flow challenged consumers have found themselves pulled into an industry crisis. This has been created by intense media criticism and an avalanche of complaints following on from regulatory reforms implemented early in 2015 aimed at curbing exploitative practices. This situation has been intensified by a small proportion of claims management companies (CMCs) that have proactively targeted firms in relation to compensation claims.

While reform is ongoing, the implementation of policies shaped around fairness for consumers and the protection of vulnerable customers must be central. Firms must also ensure that they are equipped with the capacity and expertise to handle future regulatory changes and spikes in complaints effectively. By acknowledging these challenges, addressing them quickly and compliantly and focusing on the solution, the payday lending sector can take a responsible approach that demonstrates leadership and highlights the important service it is providing to consumers in need of short-term finance.

However, the sector must move quickly to address fundamental shortcomings that remain. This is even more relevant considering recent warnings from the Consumer Credit Trade Association (CCTA) that cash-strapped consumers,without the backing of parents with savings, are increasingly at risk of turning to black market alternatives if the short-term loan sector becomes increasingly unstable. Providing loans through the lens of long-term customer well-being is crucial and has also been highlighted recently by the Church of England’s interest in purchasing pay-day lender debt to prevent it falling into unscrupulous hands.

Considering these trends, a key strategy to restore stability in the sector is to analyse the trajectory of regulatory reforms and implement mechanisms that respond to their evolution. The FCA’s cap on payday loan costs in January 2015 and the subsequent reform stimulated by the CMA’s investigation into the sector helped to promote competition and went some way to empowering consumers and ensuring they were being treated fairly.

The FCA has since been under mounting pressure to increase the scope and scale of regulatory reform and has continued to scrutinise high cost short-term loans ahead of the planned price cap review in 2020. This could mean a further tightening of the daily price cap of 0.8% and an additional reduction in the maximum one-off default fee of £15.And while FCA CEO Andrew Bailey has stated the organisation is “pleased to see clear evidence of improvement in the payday lending market”, he caveated this with an acknowledgment that there is still “more that we can do.”

If managed correctly, far from damaging sector firms, regulatory reform can be embraced and used to empower lenders to become trusted and transparent financial services providers. Firms must review operational processes and successfully adapt in order to be prepared and respond effectively to regulatory evolution. There are some important steps that can be taken to ensure business models are resilient and have fairness for customers at heart.

An extensive and in-depth analysis of customers in early arrears, as well as recoveries and collections policies, should become a fundamental part of ongoing management processes. In addition, it is vital for firms to conduct a robust assessment of customer communication channels and approaches. With the added pressure of high levels of complaints, exacerbated by the role of CMCs, effective customer engagement strategies have never been more important and getting to the heart of historic legacy issues in a timely and proactive fashion is now more important than ever.

Staff training should also include tactics for responsibly dealing with vulnerable customers and a clear understanding of the regulatory landscape and how this impacts borrowers. Moreover, there is a useful role for technology, which when used well can aid customers with debt management: for example, warning them via mobile alerts that payments are due. Outside of complaints handling, expertise is also valuable to help build internal capabilities or provide the capacity needed to quickly and efficiently deal with high levels of customer interactions before they become overwhelming.

There is little doubt that balancing the provision of an important financial service with an adequate response to regulatory reform and negative external scrutiny is a challenge. From Huntswood’s experience in sectors such as retail banking and utilities,where significant progress has been made in ensuring good outcomes for consumers, it is critical to create operational models that proactively build in compliance, expertise and capacity from the outset. This ensures that firms stay ahead of the curve and are resilient enough to withstand any unforeseen shocks or pressures.

By implementing pre-emptive business procedures and early intervention measures, and conducting long-term capacity and expertise planning, the result is that good outcomes can be secured for all consumers, complaints are managed effectively, and further escalation is contained.It is important to remember that payday lenders do have a critical role to play in protecting consumers, ensuring they are empowered while lending responsibly and ultimately providing consumers with safe routes to obtaining short-term finance.

Huntswood can relieve the pressure of handling large volumes of complaints and other forms of inbound customer contact and provide its clients with a wide range of services that deliver good customer outcomes and business efficiencies. 

Finance

Why You Should Take On Debt To Stop Dilution

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Why You Should Take On Debt To Stop Dilution 1

By Blair Silverberg, CEO of Capital

Imagine an exciting space dominated by two major companies, each growing and developing at about the same pace. To get ahead, they keep raising more money, but interest rates are low and the global stock of wealth is at an all-time high, so there is unlimited money to raise. Soon enough, their employees are dealing with substantial dilution because each round of equity wipes out the growth in valuation between rounds. Both companies become unicorns and announce their IPOs, but employees are hardly seeing the payoff.

This is happening right now in SaaS, meal delivery, ridesharing, and dozens of other spaces that you and their employees might not even realize.

What if it didn’t have to be like this? What if one company could get ahead without diluting their employees’ shares?

This is why most companies raise debt — and it’s only a matter of time until venture-backed companies do, too.

Why Dilution is Bad for Your Company

When the venture industry was small and companies like Google and Amazon went public after raising less than $50M, dilution was miniscule and thus not often a top concern for executives. The world has changed, with some companies raising billions before ever going public, but mindsets haven’t caught up.

The impact dilution can have on employee morale and retention can be substantial. When employees are first hired, they’re often excited to receive shares as part of their employment. But after repeated dilution, they’ll be asking HR, “Why aren’t my shares worth as much as they used to be? When will I get more?” Some companies start giving out bonuses and extra shares to placate everyone, but this can only go on for so long. Giving out more shares to combat dilution leads to more issues; those shares have to come from somewhere. Usually, these shares come from the founders, who eventually give up so many that they might only own 1% of their own company. That’s a major blow to those who worked so hard to get the company off the ground.

For employees, dilution means they may leave the company if they decide their shares are worth too little, especially if the competition can offer them a better deal. And if employees determine that this problem is industry-wide, they might leave the space entirely. The downside to tech becoming mainstream is that dilution has become unsustainable to employees and founders alike.

The Solution: Raise Debt

Companies are generally funded in one of two ways: equity financing or debt financing. Equity requires giving up a share of the company in exchange for capital. The biggest benefit is that this money doesn’t have to be repaid. Debt, on the other hand, does have to be repaid with interest. But while debt comes with a repayment obligation, it doesn’t come with dilution. Once the debt is repaid, the lender has no further involvement in your business. You aren’t selling a part of your business to get funding.

Understanding your capitalization options can be essential to getting ahead of the competition. When your competitors are raising equity to finance their business, they’re giving employees one fewer reason to stick around. If you raised debt instead, you could still offer employees valuable shares while receiving much-needed financing. You could also stand out from the pack by creating a candidate-friendly brand around prudent wealth creation. Once you start using debt intelligently, your access to credit capital expands, giving you a permanent head start over the competition.

Why don’t more companies raise debt?

Outside of tech, most companies do. It’s normal to raise debt once a company has a working concept. But the tech space hasn’t always looked the way it does today. Early on, it was so inexpensive to start technology companies that raising debt wasn’t necessary; equity financing was miniscule compared to the ultimate market value of these companies at liquidity events. Over the years, it’s become ingrained in tech culture to pursue equity funding, with such a heavy focus on raising the next round that many founders forget you even can raise debt.

But times have changed, and financing will, too. We saw this shift before with Mike Milken, who was a major player in the development of the high-yield bond market. In the early 1970’s, Milken noticed that risky turnaround businesses could be financed with “junk bonds” — bonds with higher interest rates than those offered to more creditworthy borrowers. He famously calculated that despite their higher default rates, the higher interest rates on these bonds produced sufficient compensation for the higher risk. This opened up financial capital to a group of companies previously financed only by equity and created a market that today is worth more than $2T. From the emergence of the high-yield bond market, we know how powerful access to debt financing can be. It gave rise to legendary investors and operators from Carl Icahn to T. Boone Pickens as well as iconic companies from Time Warner to Hilton Hotels and Safeway. For companies who have a kernel of a working business model, the benefits of debt financing are massive. Eventually, tech will go the way of all other industries, leaning on debt as a major source of financing.

Final Thoughts

Debt financing is one of the best alternatives to taking on equity, especially when trying to mitigate dilution. If you want to attract and retain top talent, then ensuring you don’t dilute their shares will go a long way.  The transition to debt financing is coming. Soon, it’ll be common practice across the entire tech space. If you start using debt intelligently now, you’ll have a competitive advantage. You’ll be able to get one step ahead of the competition with access to capital that others refuse to utilize. This not only benefits your employees today, but also your entire organization in the long run.

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Britain to publish new weekly consumer spending data

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Britain to publish new weekly consumer spending data 2

LONDON (Reuters) – Britain’s statistics office said it would publish new weekly consumer spending data from Thursday, based on credit and debit card payments information collected by the Bank of England.

The figures come from Britain’s CHAPS high-value payments data and cover the proceeds of recent credit and debit card payments made by payments processors to around 100 major retailers.

The ONS said the figures would provide greater insight into spending on social activities and other consumer services that are not captured by its monthly retail sales data.

(Reporting by David Milliken, editing by Elizabeth Piper)

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Kenya slum dwellers battle COVID-19 downturn with virtual currency

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Kenya slum dwellers battle COVID-19 downturn with virtual currency 3

By Kagondu Njagi

NAIROBI (Thomson Reuters Foundation) – Sitting on a low bench at her shop in a Nairobi slum, Grace Wangari sifted through a handful of grains that a waiting customer had just ordered.

As she poured them into a shopping bag, the customer scrolled through her phone to pay for the purchase.

Normally, Wangari would have been paid in shilling notes, Kenya’s hard currency, but in some ways she preferred the digital payment that was instantly transferred to her phone.

“I am happy with this transaction because there is no risk of losing my stock to conmen or people who have come to take goods on credit,” said Wangari, a middle-aged trader in Mukuru Kayiaba, one of the city’s poorest slums.

The transaction happened through Sarafu, a blockchain-based community currency that is helping thousands of Kenyan slum dwellers pay for food, water and sanitary items as they battle through the COVID-19 economic downturn.

Each week, families are issued with virtual vouchers worth 400 Kenyan shillings ($4), which they can use to buy essential goods, said Roy Odhiambo, an innovation officer at Kenya Red Cross Society (KRCS), one of the groups behind the project.

Vendors can then send the vouchers to Grassroots Economics, the Nairobi-based social enterprise that co-developed Sarafu (“coins” in English) with U.S.-based engineering firm BlockScience, and redeem them for cash.

Odhiambo said more than a third of the vendors in Mukuru are already signed up to the project, which launched in 2019 with the aim of helping struggling families get hold of everyday basics without worrying about having cash on hand.

Now the project is providing a lifeline for families trying to cope with the financial pain of the pandemic, he noted.

Antony Ngoka, a field coordinator with Grassroots Economics, said thousands of slum residents, who are mostly casual workers, have lost their jobs during the pandemic.

Unable to get loans from traditional banks, many become easy prey for loan sharks, he added.

But, blockchain can help poor Kenyans avoid economic exploitation, said Nelson Ochieng’, a rights activist and social worker in Kibera, Nairobi’s largest slum.

“Blockchain can foster local trade by tapping resources that are ignored by mainstream businesses. It also increases levels of trust among struggling communities,” he said.

SECURE AND TRANSPARENT

In Mukuru Kayiaba slum, about 5.5 miles (9 kilometres) away from Nairobi city centre, some 4,000 residents have registered with Sarafu, according to Odhiambo of KRCS.

Developed with funding from global government donors, the platform can make an average of up to 1 million Kenyan shillings ($9,0000) in daily transactions, Odhiambo said.

Unlike cash aid, which can be spent on anything, Sarafu can only be used to pay for essentials such as food, health supplies and educational resources, he explained.

And, he added, because the platform runs on blockchain, meaning all transactions are tracked and transparent, that ensures people are spending the money only on necessities.

Odhiambo said KRCS is currently working with the Danish Red Cross and Innovation Norway, the government’s business development agency, to roll out Sarafu across Kenya.

But, seeing the platform as a threat, loan sharks are using political and financial manipulation to lure Kenyans away from it, said Ochieng’, the rights activist.

Informal lenders recruit people to spread rumours that blockchain is a Ponzi scheme with no backing from local leaders, a tactic that has successfully stifled the uptake of other blockchain-based projects in the past, he explained.

“The aim of loan sharks is to divert people from innovations that are helping them access basic services in the slums without having to pay interest,” Ochieng’ said.

They also pull in customers by offering much higher sums than they can get through Sarafu, with exorbitant interest rates, he added.

Violet Muraya, who sells water in Mukuru slum, said informal lenders can offer loans up to 10 times larger than anything available through the community currency.

“When people have emergencies and need huge amounts of money, they cannot use Sarafu. So, they go to loan sharks for help and end up being trapped in financial slavery,” said Muraya.

Odhiambo said the Kenya Red Cross Society is running education and awareness-raising campaigns in areas where the project has been rolled out, to reassure users that the platform is safe and fair.

“At first there was resistance … because of the propaganda. But the community has accepted this cashless transaction because they know it is not some type of betting or loan facility,” he said.

‘NO ONE IS GOING TO SLEEP HUNGRY’

At Isaac Makavu’s food kiosk in Mukuru, customers lined up to order his steaming rolls of baked flat bread, chatting about an upcoming Premier League football game and sharing funny stories about their day.

Makavu said Sarafu has helped people in his community avoid eviction during the pandemic by allowing them to save their cash.

Some come together to pay each other’s rent through table banking, a form of savings scheme where a group contributes a set amount of money every month and then uses that money to help members who need it.

Charities say evictions have been rife in parts of East Africa during the pandemic. In one instance in May 2020, Human Rights Watch reported more than 8,000 people living in two Nairobi slums were evicted from their homes.

“But there have been no evictions in areas where Sarafu is being used by slum communities because they were able to pay their rent on time,” Makavu said.

“No one is going to sleep hungry here because they have community currency.”

($1 = 109.9000 Kenyan shillings)

(Reporting by Kagondu Njagi, Editing by Jumana Farouky and Zoe Tabary. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)

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