THE AFFORDABLE CREDIT CHALLENGE – THE PROBLEM SPACE

The Affordable Credit Challenge supports partnerships between UK Community Lenders and Fintechs developing innovative technological solutions that will increase access to affordable, responsible credit for the financially vulnerable. Challenge Objective

Three Core Perspectives of the Problem Space 1. Financially Vulnerable Individuals People who experience financial exclusion will find it hard to access or use mainstream financial products and services. Financial exclusion can be experienced in many ways by people in many different circumstances, but often results in them paying a ‘poverty premium’ for banking and credit services. 2. Responsible Lenders Community Development Finance Institutions and Credit Unions provide loans and support to those who find it hard to access finance from mainstream sources. While they both share this same purpose, they each operate under different regulatory constraints and work with slightly different, though largely overlapping member groups. 3. Fintechs Companies or businesses that leverage new technology to create new and better financial services for both consumers and businesses. It includes companies of all kinds that may operate in personal financial management, insurance, payment, asset management, etc. 1. Financially vulnerable individuals 2. Responsible lenders 3. Fintechs

Overview of the lending landscape for the Financially Vulnerable

The ‘Financially Vulnerable’ perspective According to a 2017 survey, 3.1 million (6%) of all UK adults used high cost credit (where the APR is equal to or above 100%) in the previous year. Many people turn to high-cost credit out of necessity - they need to borrow to help with essential expenses. Usually they’ve been turned down for mainstream credit due to a low credit score. While some are aware of the high interest rates they’ll be charged, they feel backed into a corner and need the money quickly. The speed with which the lender makes the decision is key – often people need the money urgently. Recent research reports that whilst providers of alternatives to high cost credit do exist, they are small, not well known and don’t provide the speed and efficiency that many high-cost credit lenders offer and that the financially vulnerable often seek.

Profiling ‘Financial Vulnerability’ Source: IEP financial capability & inclusion work stream

Getting a loan with a Responsible Lender This map of the high-level process for borrowers and lenders shows their experiences, as well as the behind the scenes activities and systems lenders rely on. The map serves as a first orientation on the great variety of processes that exists and allows to pinpoint problems and opportunities in conversations between Community Lenders and Fintechs.

A shared challenge space Community lenders know there are many opportunities to improve both frontstage and backstage service components to better serve new and existing borrowers. The challenge for Community Lenders centres around how their products and services can move market demand to affordable flexible products available at short notice. Fintechs focussed on responsible lending have already been working with Community Lenders ready to adopt new technology products and services. Some Fintechs even offer products of their own directly to financially excluded borrowers. For some Community Lenders past collaborations have challenged their resources, capacity and technology expertise. Fintechs seek more social and community lending knowledge to understand the specific needs and motivations of borrowers. Together, Community Lenders and Fintechs have a great opportunity to collaborate around tailored processes and service provision that can grow and scale across the sector.

Deep Dive - Research reports for further reading Personal Lending in the CDFI Sector: Evolution of the sector and the challenges to growth Provides a detailed recent history of development in the Community Lending sector, initiatives, work and challenges in the sector. The Financial Inclusion Centre - Discussion paper, 2018 Scaling Community Lenders - The role of social investment. Government research and analysis focussed on the needs of Community Lenders for Social Investment and access to capital. The Cabinet Office, 2015 Tackling financial exclusion through local partnerships Comprehensive research and recommendations on forming local finance partnerships Barrow Cadbury Trust & Responsible Finance, 2017 Understanding the decision making of people who are experiencing financial exclusion Gives up-to-date insight into the experiences and challenges of people on low incomes in accessing appropriate financial products and services. Big Lottery Fund, 2018 Payday Denied: Exploring the lived experience of declined payday loan applicants Comprehensive research, statistical analysis and recommendations Carnegie UK Trust, Barrow Cadbury Trust, Toynbee hall, The Centre for Business in Society, 2018 Creating effective Fintech partnerships to address financial exclusion Market analysis and sizing with borrower personas and analysis of opportunities for tech My Pocket Skill, Nesta, 2019