A disrupters view on UK payday
This is our maiden post. It’s our birth story explaining why we, as two outsiders to a much maligned industry, became interested and then involved.
We (Paul Lavin and Tom Brammar) founded a business called L.O.A.F.™— a highly innovative finance startup whose initial area of operation is UK payday. Below, we layout where our personal view on payday comes from and begin to provide a roadmap on how we believe it could be better (much more to follow on that in subsequent posts). There’s a bit of background on us and the business but, again, we’ll put up more detail in subsequent posts.
We are driven by a belief that payday and general short term credit for lower income consumers is broken and needs a radically different approach to be both fair and maintain relevance. We have a strong conviction that we know how to fix this market. A truly radical overhaul is required to ‘sanitise’ a mass of consumers that have been unfairly muddied by current credit norms and practices. As a society we did not intend to arrive at a point where we systematically financially ghettoise a significant segment of society but, well…here we are.
The ideas that became L.O.A.F.™ began gestation in a Buenos Aires bar several years ago where Tom and I were enjoying an after work drink and discussing the events of the day. Wonga had been in the news back home a lot. That day Tom had spoken with someone that runs a LatAm microfinance business. We were struck by some of the superficial similarities we could see between the two businesses and we just couldn’t understand how the cash price charged by firms like Wonga was justified in light of the cost of credit for much poorer and more vulnerable emerging market consumers.
In following months we kept talking, digging and developing knowledge. Our understanding of how very different non-prime credit in developed markets is from emerging market microfinance matured quickly (many people have made the error of thinking microfinance transposes to developed markets). Nevertheless, we continued to develop conviction that the payday product and its price were wrong. We both have entrepreneurial pedigrees, have started businesses before and like to be a bit contrarian so the idea of launching a new idea into a broken space in the UK really got us excited. We took the leap and started L.O.A.F.™…
Blimey! This sector is a tough road to travel. We weren’t naive and we expected a tough time but we have been surprised at just how tough. At every stage there have been significant roadblocks coming both from directly within the sector and the extended periphery that relates to the sector. These barriers are murder for a start-up, particularly one coming from outwith the industry establishment, and can add a lot of costs that get passed onto the consumer .
Our starting point was thinking about poor consumers in emerging markets and wondering why they could have a better price for similar credit than relatively wealthy consumers in the UK. Given the difference in absolute economic circumstances this would seem to indicate that the UK consumer is a much worse risk than, say, her Bangladeshi counterpart. Is that right? To be right it seemed to us that it must mean something along the lines of:
- The ability to economically manage one’s life is weaker in the UK;
- The UK consumer is dumber/more financially illiterate;
- The UK consumer is much more fundamentally dishonest.
From a simple rational perspective we felt it very unlikely that the UK consumer should be considered as at a discount on any of these factors. Therefore, overall, they should be a higher quality credit risk.
Now, some people will throw in macroeconomic or cultural arguments as a counterpoint to our scepticism about credit pricing and lower income consumers in the UK. For example, they will say the price of credit in the UK is higher as we have maxed out our credit as a country or our economy is declining whilst emerging market are rising, or that we have a massively wasteful consumer culture that is disrespectful of and cavalier with money. Or even that we have developed a large layer of people of no moral fiber who just sponge off the rest of us and give nothing back. Whilst there may be some elements of truth in some or all of the above, at the aggregate level these sorts of view are bogus if used to try and justify why a significant proportion of UK consumers should pay for credit at levels that are similar or even above much more vulnerable emerging market consumers.
In our view, consigning so many people to the financial ghetto in the UK is either a collective dumbness, prejudicial nonsense or political grandstanding that doesn’t justify the differential in credit pricing highlighted above.
If you think a working family or single parent in Corby with a couple of kids (variable hours, potentially a few part-time jobs, some benefits support, cash-flows can be tight at times, etc) is on average and through their lifetime more financially vulnerable than a similar family in India (no benefits support, limited healthcare, possibly working in the informal sector, etc) then you need your head looked at. Myths, prejudice and politicised narratives are distorting your reality.
It’s a well known sociological fact that throughout history those of some means in society will tend to find ways to demonise and blame those of lesser means for the situation they find themselves in. We’re all guilty, it’s human nature to disassociate like that. However we think this revulsion factor may have unintentionally influenced how consumer lending has commercially developed since the initial deregulation of the sector back in the 1970s .
Something has gone wrong in the methods and mechanics of the credit system in the UK whereby it seems to be either systematically misrepresenting the consumer or lending money to people in a way it shouldn’t. The malfunction is particularly acute when it comes to something like payday. At L.O.A.F.™ we think both malfunctions continue to compound on each other creating a deepening financial exclusion, and at times a debt trap, for too many people. It is illogical that such a significant proportion of UK consumers should be considered very high credit risks, particularly when it comes to small sum low duration credit. The relationship between borrower and creditor should be truly symbiotic. If credit is valuable, wanted by the consumer and delivered appropriately then it should generally be a creditworthy transaction. We think that human history is on the side of this view .
Having the financial tools to manage mismatched cash-flows is very valuable. This is a particularly powerful lesson we took from what we saw in the emerging world where people in truly unsure and marginal economic circumstances are very active and diligent in using a plethora of formal and informal financial tools (credit in many guises) to smooth their cash-flows.
In fact, the more marginal the economic position of a person/family in the emerging world the more likely they are to be heavy users of tools to manage their cash-flow volatility. It is not unusual for the value flows through these financial management tools to result in cumulative transaction values that are actually a multiple of the consumer’s underlying income. Yes, that’s right, more than their income. The ongoing flow of transactions can be very high as the only thing worse than a low disposable income is a low and volatile disposable income. People will willingly pay a premium to smooth their low and volatile income into slightly lower but more predictable income. That makes sense and they look after the valuable informal and formal financial tools that let them do that.
None of the points we make above are intended to be political or moralistic. Our interest is making a commercial solution that profits from fixing the malfunction in UK credit. We lend to people that many readers will label as ‘vulnerable’ and that will prompt many of you to question the morality of what we do. We view the term ‘vulnerable’ to be a highly politicised and often abused term in UK credit, particularly by some in the ‘concern sector’, media, politicians and regulators. In fact, it’s such a loaded and abused term that we’ll come back to it in later posts. We’d go as far to say that concern for the vulnerable has become an important part of the ghettoising engine for too many low income but able consumers. We are not embarrassed to say that we intend to build a profitable business servicing these ‘vulnerable’ consumers.
We do want to make one political point: In a world where both the left wing and right wing have sought to reduce the welfare safety net it is essential that people have access to credit they trust and can help them manage their cash-flow volatility . It is patronising disassociation from the reality of modern lower income lives to say that people should be more frugal or ‘live within their means’ to avoid cash-flow problems. People who make those sort of assertions and perhaps allude to the ‘deserving poor’ and how the emerging market poor manage without nearly as much are guilty of prejudice and ignorance.
The solution lies in fitting product to the realities of modern life, recognising the limits that data has in representing credit risk, de-arming the self-inflicted and self-defeating bad debt bomb and being a whole lot better at fighting back the barriers to financial and, just as important now, digital exclusion. We can’t help think that our society’s revulsion of the ‘poor’ somehow keeps us from sorting out this exclusion problem. It’s like we collectively yet subconsciously make sure we keep them economically separate from us as consumers.
The following posts on this blog will largely be about taking on conventional wisdom in credit. Some of the things we say or think may well prove wrong but nothing we are saying is casual or coming from an uninformed position. Of course we acknowledge that its purpose is partially to promote our initiative in this sector but that should make it more valuable rather than less. It’s UK focused but it does have relevance to other countries as there are often similar problems .
We think that we have earned our right to an opinion on the payday sector the hard way and with merit, and this blog and its subsequent posts is our way of entering that debate. If you want to know more, want to tell us we’re wrong or want to get involved then drop us a comment below or email me on firstname.lastname@example.org.
 The barriers to entry are an important topic and we will go into them more fully in later post(s). As an example of this, one of the first things we sought to do was get a business bank account (no credit sought). We thought it might be a bit tough as the sector we wanted to be in had terrible press. It was more than a bit tough, it was nearly impossible, and it took over 8 months! Before we finally managed to get a bank account we talked to every mainstream UK bank, the FCA, the Financial Ombudsman Service, the British Bankers Association, the Competition and Markets Authority (called the Competition Commission when we spoke to them — see our submission here) and, finally, we managed to wangle a meeting with Dr Vince Cable when he was the Business Secretary (he didn’t know he was about to meet a wannabe payday lender). Dr Cable was the only person that offered any meaningful help by offering to write to the BBA and major banks on our behalf. Fortunately for us we managed to secure a bank account soon after speaking to Dr Cable. The timing of this was most likely purely coincidental as we don’t think Dr Cable had made any representations on our behalf at the point in time at which we were approved for an account. Sounds pretty exhausting — right? Well, it’s the shallow end of hard as there were a couple of other key relationships we needed to secure that proved an even tougher, bigger barrier to entry.
 The Consumer Credit Act 1974 cemented a step change in the provision of consumer credit in the UK. Prior to this liberalisation of credit, anti-usury laws and direct government control tightly constrained both the availability and price of credit.
 We recommend “Debt: The first 5000 years” by David Graebar for an interesting tour through the history of debt and our attitude to it, or if you prefer something audio then try “Promises, Promises: A history of debt” a programme he did for Radio 4. We don’t agree with all his conclusions (and there are a couple of really terrible interviewees on the radio programme) but it is darn informative and interesting and we bet will challenge most people’s perception of the issue (left and right).
 “Britain’s Personal Debt Crisis” by Damon Gibbons provides a really informative bottom-up perspective on how financial services has moved into to replace the receding welfare state in areas of people’s lives and how that can have very negative consequences for some people (chapters 2-4 are particularly relevant) when the financial product does not fit need or circumstance well, or has been deliberately exploitative. We do not agree with all the conclusions.
 It is important to recognise differences between countries too. For example, Germany and Scandinavia have quite a different credit system from UK. The US system is very similar however the average payday customer in the US is in a quite different economic position and tends to be more persistently financially vulnerable than in the UK.