One of the more serious charges levelled at the short-term credit industry is that affordability – the measures put in place to establish whether somebody can afford to repay the loan they are about to take out – has sometimes been cursory. Stuart Howard, chief executive of Dollar UK, explains more
As with all things, the realities were more nuanced, but for those who had never had experience of a short-term lender, the idea that fast could also be rigorous was incomprehensible.
The algorithmic checks, credit scoring and cross-referencing should surely take time to be effective?
It was view rooted in an old-fashioned understanding of financial services, one of hushed banking halls, letters and memos and a slow, steady, pre-technology financial world.
The attractions of that somewhat nostalgic view are clear but overlook the obvious point that the essence of short-term credit is speed and access.
When people use services like ours, they tend to want the cash quickly, in response to unexpected need or circumstance.
Systems, however flawed, served that need and there’s often nothing more sinister than that.
But it must be conceded that between genuine rogue operators, the limitations of available technology, people’s willingness to share information truthfully and, yes, sometimes commercial imperatives trumping judgement, affordability was not the industry’s strong suit.
The FCA acknowledged that explicitly in its review of the sector and it asked for change.
This demand from the FCA seemed entirely reasonable. What we do is based on trust and our practices have to inspire a belief that we operate with the best interests of the customer at heart.
What that meant practically was stepping back and looking again at the definition of affordability; the customer’s ability to afford a loan rather than the company’s credit risk in lending in the first place.
That places the onus on lenders to look carefully at an applicant’s individual circumstances, assess their need and draw sensible conclusions about repayment.
Doing that relies on better data, particularly in relation to income, and we now place much greater emphasis on credit bureaux and third party information to validate what we are being told either online or at our stores.
We now bind in Office of National Statistics data to our decision-making to ensure we cast the broadest net for relevant information.
Overlooked and under-banked
We acknowledge that many - though by no means all - our customers lead lives where the solid and predictable regularity of a monthly pay check doesn’t always apply.
Others simply find bank processes lengthy or in some way judgmental, even if a bank was able to offer expedient small sum loans rather than long-term finance. So when we lend we bear in mind one overarching affordability principle ‘will this loan bring our customer peace of mind or a problem?’.
It addresses a simple point. Is taking out a loan needed and affordable not just immediately but several months further down the line? If there is anything that suggests that it is not, the loan may not be made.
That, I concede, is counter-intuitive. Businesses like ours exists in no small part to help people who are under-banked, unbanked, suspicious of mainstream finance or outright unwilling to take on long-term liability.
We are here to help in a way that is often overlooked in commentary but explicitly acknowledged in academic studies.
However, we do our customer base a disservice if that desire is confused with being irresponsible or encouraging irresponsibility. The sector must thrive. It is useful and it encourages financial inclusion - but it must do it right and be seen to do so if it is to be sufficiently trusted.
At the heart of that trust issue lies affordability.
The measures we have taken are the start not the end, but I have great confidence that they are a step forward.
That has to be a good thing for customers.