Note of the APPG on Alternate Lending’s Roundtable on ‘de-risked credit models,’ 28 February 2018.
Chairman: Lee Rowley MP
Other Parliamentarians in attendance: Julian Knight MP, Lord Kirkwood
- Monica Kalia, Chief of Strategy and co-founder of Neyber, the leading payroll lending service offered by large employers to their employees as an employee benefit.
- Rob Ashton, CEO of Safety Net Credit, one of the first credit businesses to get an Open Banking permission.
- Mohsin Mehdi, CEO of CU Loans, a modern, state-of-the-art online credit union loans portal.
Lee Rowley MP gave introductory Chairman’s remarks where he said this topic was particularly relevant because it is so directly applicable to people’s lives. The availability of credit is a major question.
Rob Ashton presented on safety net credit.
- The business model emerged at first as a bid to break the link between overdrafts and overdraft charges. They saw that there need not be such high charges.
- They linked up with the American tech firm Yodelie who specialize in “screen scraping.”
- He explained that safety net credit measures people’s income and expenditure using this screen scraping technology, and pumps money into their accounts when it is apparent they are going to go into an unauthorized overdraft.
- He also emphasized the importance of the data element for deciding whether it is possible to lend money to people. Because they have access to so much of people’s financial data, they are less reliant on simpler tools such as credit reference agency schools. It means that 30% of the people they lend are people who would not have access to credit with any other company.
Monica Kalia presented on Neyber:
- Having worked with major banks during the financial crisis, she saw firsthand how risk averse they became during the credit crunch. They greatly reduced the number of people they were willing to provide credit to. She and her co-founders wanted to make a difference and boost financial inclusion.
- It was apparent that to do this it would be necessary to reduce the risk of lending to consumers. Data was the key to this; with more data they had more information and thus could make better judgements.
- Neyber works with employers. It has a dual de-risking impact. Because they lend through payroll, they can verify the existence of every applicant via their employee status. Secondly, they lend directly into someone’s salaries and people pay them back directly from their salaries; there is far less scope for missed payments.
- They work with over 100 employers, covering over 1 million employees.
- She suggested that they help to drive productivity and this makes them attractive to employers. Financial wellbeing is a key part of employee wellbeing, and when they are healthy and well they are more productive.
Mohsin Mehdi presented on CU Loans:
- He is also the CEO of My Community Bank, a credit union.
- He wanted to set up a Credit union both to drive financial inclusion.
- It became apparent to him once he had set up a credit union that common bond restrictions were greatly limiting the number of people they could provide credit to. As such he set up the CULoans portal because it gives consumers a single place to access every potential credit union that could lend to them.
Lee Rowley MP asked what main driver is of the need for alternative credit?
- Mehdi suggested that it is bank’s lack of willingness to lend to sub-prime consumers.
- Kalia concurred. She added that Neyber offer genuine consumer benefit.
- Ashton disagreed, pointing out that Banks are the largest sub-prime lender via unauthorized overdrafts. In addition, they have a “captive” rather than active user base; people have to pay the charges, they do not choose to borrow money. He said that the way to change this and make banks less “protectionist” was to open up access to data. Open banking is a good step in this direction.
- Julian Knight MP intervened in support of Mr. Ashton, saying that the report the APPG had done had found that unauthorized overdrafts are a problem area which get less attention than other sub-prime lending.
Lord Kirkwood asked how the APPG and alternative lenders can attract the interests of government. He believes that now is the time to try and contact the government about provision of financial advice and education. He had seen a Universal credit application the previous day and whilst it went smoothly, what struck both him and the job coach was that the applicant needed advice about consumer credit and his finances. He suggested the government could allow and encourage job coaches to point job-seekers towards good alternative lenders or financial advice bodies and charities.
- Ashton said that part of the problem is perception. Lots of advice options such as the Money Advice Service already exist. But one cannot rely on consumers for whom they would be helpful to use them.
In response, Lord Kirkwood asked the guest speakers if they could make the government do one thing to help consumers, what would it be?
- Ashton said wider access to data for firms and consumers
- Mehdi said greater investigations into debt management services. A growing problem is debt management firms encouraging and mis-representing the upsides of IVAs.
- Regulation around debt management plans are minimal. He wants to see more publicity granted to the consequences of taking out IVAs. He compared people encouraging them to people who sold PPIs historically.
- Jason Wassell of the FLA interjected to support the suggestion that such claims are increasing. He said that people are moving from debt management to IVAs.
- Kalia said she is on the board of StepChange and they too are seeing it.
- Jeanette Burgess, a partner at Walker Morris LLP, said that previously debt management firms were profitable owing to the way their fees were structured, the bulk being up front. They have changed their practice since the FCA ruled that they could not use this fee structure. People therefore want to move into practices which are regulated by the much less strenuous Insolvency Practioners Regime.
Lee Rowley MP asked the guests where their customers were coming from. What meant they needed alternative credit, where were they going for it previously?
- Mehdi said his customers mostly came between mid and sub-prime. Often, they are people who had not previously heard of Credit Unions.
- Kalia pointed to a stat which suggested 48% of borrowers are doing so to meet their basic financial needs. She argued low wage growth was a big part of this. 65% of Neyber customers have £10,000 of credit cards, they go to Neyber for debt consolidation. A further 20% go to them for big ticket items and 10% have been excluded from financial products previously.
- Ashton said Safety Net Credit customers are traditional “blue collar workers.” They are all employed but generally have slightly erratic incomes. 30% have thin or impaired credit files. They have a significant number of migrant customers, because credit references do not cross borders and hence they have no credit file to point to.
- Mehdi pointed out that the current system rewards people who are always in debt. It is far easier for them to access credit than people who have never attempted to borrow anything. He questioned whether this was positive.
Mr Rowley then asked the panel about their default rates and how they keep them down.
- Ashton explained that default rates can be misleading because in Safety Net credit’s case in order to aid the consumer they often encourage them to freeze their accounts when they are struggling. This ensures no more interest is charged and they stop getting into more debt.
- He added that 1st party fraud is an issue. Roughly 10% of customers do not make their very first repayment. He noted the difference between inability to pay and refusal.
- Kalia said her firm it is generally attritional defaults as the nature of payroll lending means 1st party fraud is less common. She mentioned that police officers are regular customers of theirs. She told Mr. Rowley that there is a cap on the amount they will take from people’s wage packets; they are fully regulated by the FCA as a lender.
Lee Rowley MP asked what needs to be done on financial education?
- Mehdi said that part of the issue is just telling people what is good for them will not necessarily make it work. People do not always do what is good for them.
- Ashton pointed to the safety net model as helping. When people start they borrow a lot manually. After 12 months, they generally stop doing so; they start to wait for the system to kick cash into their accounts when they need it rather than taking out extra debt.
- Kalia said an effort needed to be taken to stop money being seen as “boring” by consumers and young people.