alternatives viable for credit unions to deliver? Mick Mc Ateer : - - PowerPoint PPT Presentation

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

• n 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

• f 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%
• f the 331 went on to take out longer-term loans.
• LMCU lent an additional £90K in non-payday credit (generating
• ver £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
• r £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

What Next?

• LMCU continued the payday loan product
• As of 01 Sept 2014 - Now 12,289 loans and £3.28 million lent to 5,000

people – current £885,000 in interest alone (plus £1.12M in additional rollover interest/charges) .

• New members attracted - 1,700
• Second evaluation (hopefully!) – extra lending evidence.
• Roll out though other CU nationally using same infrastructure (Leeds)

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?

Mick McAteer

Co-Director

Financial Inclusion Centre

E: mick.mcateer@inclusioncentre.org.uk W: www.inclusioncentre.org.uk