Are affordable payday loan
alternatives viable for credit unions
to deliver?
Presentation by Gareth Evans: Financial Inclusion Centre
Welsh Credit Union Conference (Cardiff) – Thursday 17th July
What is a payday loan?
• Despite the name a payday loans are just
small, short-term unsecured loans.
• It doesn’t matter whether the repayment of
loans is linked to a borrower's payday
• Typical amounts are £300-500 paid pack over
1 month or earlier
Is this too far from
what is already being
offered by many
credit unions?
Threat or opportunity?
• Huge market - Financial year 2012:
• £2.8 billion lending
• 1.8 million customers (5.7 loans per user).
• 10.2 million new payday loans.
• 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?
• Payday lending in Wales – approximately 3%
of PDL market:
• £84 million lending
(total interest = £25million + total rollover
interest/fees = £31million)
• 54,000 customers
• 306,000 new payday loans.
Do credit unions want a piece
of the market and can we set
ourselves apart?
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).
• 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.
• Lenders moving into longer term loans
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
X
X
X
X
X
the declining balance (£3/£100). Compared to average
£30/£100.
Affordability checks - new applicants must be employed,
earning more than £12Kpa and a current account.
Flexible repayment period over 1, 2 or 3 months.
(Subsequent loan up to £1,000 over 6 months).
Repayments taken automatically from the borrower’s
bank account on the agreed date(s) – not sporadic CPAs
No rollovers or late payment penalties (int continues).
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) - £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)
Saving for Welsh households:
• Payday lending in Wales in 2012 cost welsh
consumers:
• total interest = £25.2million
• total rollover interest/fees = £31.0 million
• If PDL lending via LMCU at 42.6% APR:
• total interest = £2.52million
• total rollover interest = £396,900
Annual saving to welsh households =
£53.2 million
Preventing future PDL use:
• 74% of borrowers had previously taken average of 3.2 loans over 12
months before their first LMCU PDL
– 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
What Next?
• LMCU continued the payday loan product
• Now almost 10,067 loans and £2.63 million lent saving –
current £565,000 in interest.
• New members - 1,040 taking 2,227 loans
• Second evaluation (hopefully!) – 2.5 years lending evidence.
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?
Gareth Evans
Associate Research Manager
Financial Inclusion Centre
E: gareth.evans@inclusioncentre.org.uk
W: www.inclusioncentre.org.uk
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