Are affordable payday loan alternatives viable for credit unions to deliver? Mick Mc Ateer : Financial Inclusion Centre
Threat or opportunity? • Huge market worth with approximately 3 – 4 million users. • Financial year 2012 – £2.8 billion lending 10.2 M payday loans to 1.6 M customers • 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)
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). • CU 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. • PD lenders moving into longer term loans
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
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.
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.
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:
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).
Design out ‘negative’ characteristics: X Affordable – Interest at 26.8% APR (now 42.6% APR) on the declining balance (£3/£100). Compared to average £30/£100. X Affordability checks - new applicants must be employed, earning more than £12Kpa and a current account. X Flexible repayment period over 1, 2 or 3 months. (Subsequent loan up to £1,000 over 6 months). X Repayments taken automatically from the borrower’s bank account on the agreed date(s) – not sporadic CPAs X No rollovers or late payment penalties (int continues). X Access to sustainable/longer term credit and debt advice.
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.
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.
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 .
Payday loan pilot performance:
Attracting new members: • Median Income (after tax) of new members - £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
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.
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) • If 8.2million PDL in 2011/12 had been through a CU, £749 million would have been collectively saved in interest alone (or £91.43 per loan).
Preventing future PDL use: • 74% of borrowers had previously taken a PDL over 12 months before their first LMCU PDL – amongst these an average of 3.2 loans per year. – Worryingly, 17% of these had taken six or more loans.
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.
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).
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.
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.
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 £8,950 or £3.06 for every loan
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
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