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Are affordable payday loan alternatives viable for credit unions to deliver?

Are affordable payday loan alternatives viable for credit unions to deliver? Presentation by Gareth Evans: Financial Inclusion Centre Welsh Credit Union Conference (Cardiff) – Thursday 17th July. What is a payday loan?.

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Are affordable payday loan alternatives viable for credit unions to deliver?

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  1. Are affordable payday loan alternatives viable for credit unions to deliver? Presentation by Gareth Evans: Financial Inclusion Centre Welsh Credit Union Conference (Cardiff) – Thursday 17th July

  2. What is a payday loan? Despite the name a payday loans are just small, short-term unsecured loans. It doesn’t matter whether the repayment of loans is linked to a borrower's payday Typical amounts are £300-500 paid pack over 1 month or earlier

  3. Is this too far from what is already being offered by many credit unions?

  4. Threat or opportunity? • Huge market - Financial year 2012: • £2.8 billion lending • 1.8 million customers (5.7 loans per user). • 10.2 million new payday loans. • Between 2011-12 – loan volume increased 35% and loan value 45% • 70% by the big three – Wonga, MoneyShop and QuickQuid. • 80% Payday customers apply online (35% of all new customers via lead generators)

  5. Threat or opportunity? • Payday lending in Wales – approximately 3% of PDL market: • £84 million lending (total interest = £25million + total rollover interest/fees = £31million) • 54,000 customers • 306,000 new payday loans.

  6. Do credit unions want a piece of the market and can we set ourselves apart?

  7. Threat or Opportunity? • Short-term lending is nothing new. • Taken off due to greater demand and technology (we have we let in competition as too slow to make decisions / transfer funds). • Members already borrowing from payday lenders. • Makes decisions on lending to them riskier – multiple loans indicate inability live within means. • Many potential members getting into trouble and want to consolidate. • Lenders moving into longer term loans

  8. So why aren't we competing: Challenges delivering viable payday loans: • Fundamental barrier has been interest rate cap (26.8% now 42.6%) - financial returns make such short-term, high risk loans immediately unprofitable. • IT infrastructure to deliver instant online application / assessment / dispersement platform. • Capital for lending (less of an issues amongst CUs). • Capacity and capability of credit unions. • Inclination / aspirations to deliver.

  9. Why LMCU established a payday loan product: • Meet the borrowing needs of existing LMCU members - shown to be using high cost payday companies. • PDL product would attract new members using payday loan ‘banner’ and would go on to become long-standing members who use the range of services offered by LMCU.

  10. LMCU payday loan scheme: Model for alternative payday lending through credit unions: • ‘Loss leader’ model – knew that it would loose money. • ‘Gateway’ product for new members Pilot project funded by:

  11. Retain ‘positive’ characteristics of payday loans: • Accessible and convenient online access 24/7 • Simple and quick application forms • Sophisticated credit assessment enabling instant decisions • Instant transfer of funds – transfer fee (£11) or paid via BACS (free).

  12. Design out ‘negative’ characteristics: • Affordable – Interest at 26.8% APR (now 42.6% APR) on the declining balance (£3/£100). Compared to average £30/£100. • Affordability checks - new applicants must be employed, earning more than £12Kpa and a current account. • Flexible repayment period over 1, 2 or 3 months. (Subsequent loan up to £1,000 over 6 months). • Repayments taken automatically from the borrower’s bank account on the agreed date(s) – not sporadic CPAs • No rollovers or late payment penalties (int continues). • Access to sustainable/longer term credit and debt advice.

  13. Pilot Evaluation: • Measure the success of the pilot project between launch February 2012 preceding 12 months. • Quantitative analysis of LMCU data recorded during the payday lending pilot to: • Examine actual performance. • Profile new and existing borrowers. • Assess subsequent patterns of financial service usage amongst new members to help determine the actual cost implications of delivering such a payday loan product. • Consultation with LMCU payday loan users: • Surveyed 210 borrowers (17%) on attitudes and behaviours towards the payday lending and LMCU service.

  14. Payday loan pilot performance: • Proved extremely popular - 6,087 applications received (or 500 pm) for £1.5m (average requested loan amount of £238) • 2,923 payday loans approved with a value of £688,000 to 1,219 different borrowers.

  15. Payday loan pilot performance: • Average of 2.39 payday loans per borrower (62% repeat) – industry = 60% repeat & 3-4 loans with same lender • Applicants liked flexible loan repayment terms.

  16. Payday loan pilot performance:

  17. Attracting new members: • Median Income (after tax) - £1,576pm / £18,912pa • Income brackets: • Tier 1 (Above £23K AfT) = 26% • Tier 2 (£13K-£23K AfT) = 58% • Tier 3 (Below £13K AfT) = 16% • 9.8% homeowners

  18. Payday loan pilot performance: • Delinquency levels relatively low: • 6.3% of all LMCU PDL (or 5.2% of total lent) being at least one month in arrears • 1.6% of all LMCU PDL being over 3 month in arrears • Arrear levels amongst new members much higher (12% - 4.8% 1month / 4.4% - 0.8% of LMCU PDL 3month). • Compared to between 28% (OFT) or 35% (Competition Commission) delinquency in rest payday loan industry – where loans being rolled over.

  19. Savings for LMCU PDL borrowers: • An affordable PDL product has the potential to save significant amounts for borrowers. • Average PDL £265 charged at £25 /£100 borrowed. • This typical loan repaid over 1 month would therefore cost at least £66, compare to just £5.30 with LMCU. • By borrowing through LMCU, the 1,219 members collectively saved £145K in interest charges alone (£119 p. borrower or £50 p. loan)

  20. Saving for Welsh households: • Payday lending in Wales in 2012 cost welsh consumers: • total interest = £25.2million • total rollover interest/fees = £31.0 million • If PDL lending via LMCU at 42.6% APR: • total interest = £2.52million • total rollover interest = £396,900 Annual saving to welsh households = £53.2 million

  21. Preventing future PDL use: • 74% of borrowers had previously taken average of 3.2 loans over 12 months before their first LMCU PDL • Worryingly, 17% of these had taken six or more loans.

  22. Preventing future use of PDL: • Payday lending through a CU is an effective way of diverting away from high cost lenders – 2/3 LMCU users unlikely to borrow from other PDL companies again. • Primary reason for borrowing through LMCU was the low cost (66%). • Others liked it was offered by CU(19%) and longer repayment option (10%). • Satisfaction levels were very high with 74% very satisfied and 24% fairly satisfied. • All those payday users surveyed were willing to recommend friends/family.

  23. Subsequent use of LMCU services: • CU membership encourages recent joiners to build financial resilience through the accumulation of savings. • Almost £18,000 accumulated by 331 new members – a £53 per member (£95 for new member who had been with LMCU for at least 9 months). • Quarter of new members opened a CUCA with LMCU • Initially attracted by access to short-term credit but 27% of the 331 went on to take out longer-term loans. • LMCU lent an additional £90K in non-payday credit (generating over £15,000 in interest) – an average of £1,044 over 17.9 months. • Longer-term loan usage increases dramatically with membership. • Over 40% of new members with at least 6 months membership take out a longer term loan (52% with at least 9 months).

  24. Financial viability of PDL product Estimated income from delivering PDL product: • Each PDL generates an average income of £12.02 (total income £35,142) • 77% of this revenue is from loan interest (or £9.23 per loan), 21% from the option for instant transfers (£3 per transfer) and just 2% from joining fees (£2). • Additional net profit generated from new members taking out additional longer-term loans was approximately £13,000 or equivalent to £40.16 for every new member. • Those who joined the credit union within the first three months of the pilot, each generated the credit union approximately £87.51.

  25. Financial viability of PDL product Estimated cost of operating the PDL product: • Each PDL costs an average £11.99 (total expenditure £35,058) • LMCU estimates cost for making a first loan is £18.57 but repeat loans are £4.00 as fully automated and requires no external checks. • Additional costs of over £4,500 to administer refused or ineligible loans. • Just over £15,000 during the pilot was determined as delinquent together with over £400 in credit control costs.

  26. Financial sustainability of an alternative PDL product • Payday pilot not financially viable at the point of evaluation - pilot generated an actual loss of £6,725 (£2.30 for each loan) • Model is financially sustainable when additional income generation levels projected for new members with LMCU for at least 9 months: • Would actually realise a net profit of at least £8,950or £3.06 for every loan

  27. Financial sustainability of an alternative PDL product • Modelled the effect of April’s interest rate increase to 42.6% APR (£100 borrowed for 1 month cost £3 (rather than £2): • Increased profit margins would have resulted in £9,311 profit or £3.19 per loans (with additional income from use of other LMCU services). • OR projected overall net profit of £25,000 if all new members generated additional income as identified amongst 9 month membership

  28. What Next? LMCU continued the payday loan product Now almost 10,067 loans and £2.63 millionlent saving – current £565,000 in interest. New members - 1,040 taking 2,227 loans Second evaluation (hopefully!) – 2.5 years lending evidence.

  29. Questions and debate? • Should we be operating within the payday loan market? • Is this the right product for credit unions? • How do we scale the product to provide greater coverage?

  30. Gareth Evans Associate Research Manager Financial Inclusion Centre E: gareth.evans@inclusioncentre.org.uk W: www.inclusioncentre.org.uk

  31. Payday loan customers • Median net household income - £24,000 • 70% need a loan due to change in financial circumstances. • Reason for borrowing: • Living expenses (50%) • Car/vehicle expenses (10%) • Clothes/household items (7%) • Holiday (4%) • Pay off other (non payday) debts (4%) and Repay another payday loan (2%) • Rent/mortgage (4%) • Socializing (2%) • 60% of new customers take out a further loan with same company (and will take out 3-4 additional loans in same year) • 40% say could not have used alternative lending source • 29% turned down for credit in last 12 months

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