Can Social Enterprises challenge High Cost Short Term Lenders
Can Social Enterprises challenge High Cost Short Term Lenders (HCST) such as PayDay Lenders, Rent to Buy etc across the UK?
In 2017, the Chair of “Fair for You”, a Community Interest Company, suggested that Social Enterprises could be a successful alternative to Payday Lenders.
“Fair for You” provides low cost loans to the UK’s poorest families, to buy white goods etc.
“Fair for You” was created by Angela Clements, its CEO who had a background in the Credit Union world. She was determined to match Credit Union’s interest rates, defined as a low cost loan.
It was questioned back in 2015, why so little was being done to tackle the fact that the less money you have, the more you are forced to pay for household items, such as cookers, fridges and buggies considered by most as essential to give a family a basic standard of living.
Much was said about the need for the financial regulator to clamp down on rip off high cost credit providers, including payday lenders and rent to own stores. Not much was said about why there were so few alternatives.
It was postulated that it had to change and a report at that time in 2017 called for a shake up of low cost credit provision for the 12 Million people estimated to be unable to access “mainstream” credit.
Other than the success of “Fair for You”, NO major UK wide new ideas have yet taken place.
In 2017, the “Centre for Responsible Credit” (CfRC) examined the social impact of “Fair for You” and it suggested it was a workable solution to the specific problem.
From this report it was shown that for every £1 spent in that year by “Fair for You”, the return was £4.56 and “Fair for You” had the potential for rapid national scaling.
In 2017, “Fair for You” had provided funding for around 5,000 people from the UK’s poorest communities, to buy fridges, beds, washing machines and other items through its retail website.
The 2017 report highlighted the benefits of “Fair for You” for its customers -
They were were less anxious, stressed or depressed,
Almost half had seen an improvement in their physical health
A third reported that their children’s health and wellbeing had improved as the result of taking a low cost loan.
Some of these benefits arose from
No longer fearing that a financial bump in the road would result in their cooker or dryer being taken away by a “rent to own” provider.
Others mentioned their ability to cook fresh food or save money by buying in bulk
That’s before direct savings calculated at over £500 per item, compared with buying equivalent items from a “rent to buy” at that time.
Oct 2020
It was reported that 7 UK social investors have teamed up to provide innovative financing to affordable credit provider “Fair for You”.
The investment in July 2020, is in the form of a perpetual bond – the first time such an instrument has been used to fund affordable credit – and provides quasi equity capital of £7.5m.
The deal includes £5m in dormant assets funding from the government-backed Fair4All Finance, plus further investment from “Fair for You” ’s existing social investors:
Joseph Rowntree Foundation, Esmee Fairbairn Foundation, Tudor Trust, Barrow Cadbury Trust, Robertson Trust and Ignite.
The investment provides £4.35m upfront (with £1.85m from Fair4All Finance, and the remainder from the other investors), rising to £7.5m when fully drawn down from Fair4All Finance.
“Fair for You” aims to relieve poverty by helping low-income families avoid going without what they need or resorting to high-cost credit.
It was established by social investors in 2015 to challenge the existing commercial, high-cost credit providers, such as Brighthouse. It has to date provided over 80,000 loans at an average of £350.
Available across the UK, “Fair for You” has garnered 8,000 customer ratings on Trustpilot, with an average score of 4.9 out of 5.
It is estimated that around 15 million people in the UK struggle to access affordable credit.
Lockdown has made it even harder for families to go without basic items such as cookers and washing machines.
“Fair for You” says it has issued twice as many loans during lockdown as in the same period last year.
This investment round alone will allow the social enterprise to increase its lending ten-fold, rising from 25,000 loans last year to a projected 250,000 loans per year in five years’ time.
This is expected to deliver at least £58m in cost savings to customers each year by helping them avoid high-cost, short term credit.
Pushing out unscrupulous competitors
“Fair for You” has appointed Sarah Gardiner, formerly head of investor relations at Nationwide, to lead on commercial fundraising. Gardiner said Fair for You had “demonstrated the huge opportunity” to fill a “much-needed gap in the market”.
Howard Bell, Chair of “Fair for You” – and a co-founder of PayPal Europe – said:
“The need for “Fair for You” to scale rapidly has never been clearer. We are delighted to be the first genuine not-for-profit to use the dormant assets funding and ongoing support from social investors to leverage commercial funding and push out firms that take advantage of financially vulnerable customers.”
This phrase “The need for “Fair for You” to scale rapidly has never been clearer” has been also stated by Sacha Romanovitch, CEO at Fair4All Finance.
The CEO of Fair4All Finance – which received £65m in dormant asset money earlier this year to increase access to fair, affordable financial products and services – said the team at “Fair for You” demonstrated a clear “commitment and passion to make a difference”.
She added: “The investment they have already made in tracking their social impact has made this a natural area for them to build on as we develop tools and resources that can be shared with the wider sector.
Their key challenge was restructuring their balance sheet to allow them to secure further lending capital alongside support to continue innovation in product design and impact reporting.
We are confident that the learning from them will create significant value for the sector as a whole.”
In September 2020 Fair4All Finance published a Report on the social impact of “Fair for You” which they had commissioned from the Centre for Responsible Credit (CfRC), who had done previous reports on “Fair for You”.
The CfRC research included a survey of more than 3,500 customers and analysis of over 50,000 loan records.
It found that “by providing fair, decent, and flexible loans to help low income families obtain essential household items including beds, cookers, fridges, and washing machines, “Fair for You” has not only eased their financial burdens but also had hugely positive impacts for their health and well-being, including that of their children”.
Other Headline findings include:
“Fair for You” has generated at least £50.5 million of social value for 33,500 customers since starting its operations in 2015.
60% of “Fair for You” customers are now better able to pay their rent, Council Tax and other household bills as a result.
“Fair for You” has helped an estimated 71% of its customers move away from high cost credit, realising just under £9 million of financial savings
Over £2 million saved from reduced use of NHS services, due to the positive health benefits of having essential home items
The report also identifies over 20 types of customer impacts. These include reduced living costs, healthier diets and improved mental health.
Bloom’s comments on the success of “Fair for You” and Fair Finance
Bloom believes that the success of “Fair for You” shows what is possible.
Bloom has always promoted their offering and thus help expand its development as their model is very specific and does its job superbly.
In no way does Bloom want to replicate or interfere in a proven process, with many proven benefits such as direct delivery to the client and free recycling of kitchen appliances.
In just over 4 years, it has gone from serving just a few in 2015, to 5,000 people in 2017 and over 33,500 people (50,000 Loans) now, with aspirations to provide as many as 250,000 loans within 5 years.
With regards to other Fair Finance, the 2017 report from CfRC stated -
“It was postulated that it had to change and a report at that time in 2017 called for a shake up of low cost credit provision for the 12 Million people estimated to be unable to access “mainstream” credit.”
Since 2017, there has been a huge reduction in Payday Lenders (known as High Cost Short Term Credit) including organisations such as Wonga, WageDay Advance, Quickquid, Pounds to Pocket, Moneyshop, Sunny to name a few, the well known “Rent to Buy” organisation - Brighthouse - have gone.
4 years after the interest rate cap was introduced in 2015, the latest facts and figures on the High Cost Short Term Credit (HCSTC) market are as follows :
While 4 in 5 of these loans are usually paid off in one month or less, if one looks at the typical interest rates charged, it works out to be 1,300% annualised. Rates vary by payday lender, but compared with most other credit options, this is an expensive way to borrow.
Year to date figures to June 2018 showed over 5.4 million of the loans had been taken out, almost half the peak in 2013 (10 million) before regulatory action was taken by the FCA.
The number of providers had also fallen from over 100 to just 88 in 2018, since then many others have closed, the most notable provider to leave the market being Wonga in 2018.
2019 saw a further tranche of other big-name payday lenders follow in Wonga's footsteps. All forced into administration by large volumes of historical mis-selling claims.
Casualties included: Wage Day Advance, 247 Money Box, Swift Sterling, Piggy Bank, and the UK's biggest direct lender at the time, CashEuroNet UK LLC (or as we know them: Quick Quid, Pounds to Pocket and On Stride Financial).
Money Donut reports:- 2020 Another bad year for Payday Lenders
“2020 started where the previous year left off, with one of the UK's most recognisable payday brands - Peachy Loans - going out of business early doors.
Close behind was high street stalwart, The Money Shop, which first opened its doors in the UK in 1992. It shut up shop for the last time in March, closing or selling off all 97 stores. Uncle Buck also failed to buck the trend and didn't make it through to April.
And it was a gloomy day for Sunny Loans when they succumbed to the effects of coronavirus and a backlog of customer complaints in June.”
Bloom’s view of the Future
Bloom believes that despite “Fair for You”‘s success, the overall situation and provision of services, appears to miss the main problem - the lack of coverage available of alternative fair finance lenders in the UK.
The need for Fair Finance across the UK
From details provided by CfRC
2017 - “It was postulated that it had to change and a report at that time in 2017 called for a shake up of low cost credit provision for the 12 Million people estimated to be unable to access “mainstream” credit.”
2020 - Report stated It is estimated that around 15 million people in the UK struggle to access affordable credit.
This was before the impact of Covid 19 was fully known - just as an example see the REPORT from Transunion (Credit Reference Agency) issued Nov 2020 which states
“As we approach the end of the year a third of households (34%) say they will decrease discretionary spending by a lot in the next three months and 71% remain concerned about their ability to pay current bills and loans.”
Note the following facts about existing Credit Unions and Responsible Finance Organisations (RFO's) in the UK
Bank of England statistics issued on 28th August 2020, shows there are now just 277 remaining Credit Unions in England, Scotland and Wales with 145 in Northern Ireland.
The Community Investment Steering Group Report Nov 2019 - Scaling up Community Investment in the UK states that there are only 23 active RFO's in the UK.
From these statistics it estimated that no more than 5 - 10% of the UK has any coverage available from a Credit Union or a RFO. There are 69 cities and over 48,000 towns in the UK. In the last 10 years many Credit Unions have been closed and NO services replace those lost to the massive detriment of the Community in which they were based.
Further evidence of the Scale of the issue
To give some further indication of the scale of need, please refer to the Report “English Indices of Deprivation 2019” issued by the Ministry of Housing, Communities and Local Government.
The detailed Report is available at the embedded link.
The indices to reflect the following 7 types of deprivation / referred to as domains -
Income - split between Children 0 - 15 and Older People 60 +
Employment
Education
Health
Crime
Barriers to Housing and Services
Living Environment
The indices relatively rank each of 32,844 small areas (with an average population of 1,500) split into 10 equal groups - Deciles.
The No 1 most deprived neighbourhood in England according to the IMD2019 is to the east of the Jaywick area of Clacton on Sea (Tendring 018a). This area was also ranked as the most deprived nationally according to the IMD2015 and IMD2010.