“There will only be four main payday lenders operating in the sector.” This was the claim made by the Financial Conduct Authority (FCA) back in 2014, as I sat in a crowded seminar hall surrounded by other payday lenders and brokers. With the FCA taking over from the Office of Fair Trading that year, many […]
“There will only be four main payday lenders operating in the sector.”
This was the claim made by the Financial Conduct Authority (FCA) back in 2014, as I sat in a crowded seminar hall surrounded by other payday lenders and brokers. With the FCA taking over from the Office of Fair Trading that year, many industry players were expecting a shake-up as directors of payday loan companies and I huddled into this room trying to get some insight into the pending regulation.
Of course, we laughed off the idea of an industry with only four players. At this point, payday lending had been a booming business with a market valuation of £2 billion, over 3 million loans funded per year, around 200 lenders, and more than 200 brokers, easily. The industry was full of playboys on yachts, international millionaires, and soft regulation – how was it going to be changed so drastically?
Fast forward five years later and the controversial industry has changed dramatically with more and more lenders going into administration. The largest casualty has been market leader Wonga, who closed its books in Q4 last year, slowly followed by The Money Shop, Cash Genie, and recently Wageday Advance. But the question begs, how did these once formidable companies fall? And why are they going into administration?
Payday loans by numbers
In 2013, the payday loan industry was crying out for more regulation. The number of complaints was rising constantly, making headlines, attracting criticism from politicians such as Stella Creasy and religious figures such as Archbishop Justin Welby, and lenders were being accused of charging usurious rates as high as 5,000% APR.
On 1st January 2015, the FCA introduced a price cap on the amount that lenders could charge to 0.8% per day, meaning that, on average, a customer will repay a maximum of £124 per £100 and never repay double the amount they have asked to borrow. Other introductions included a maximum default charge of £15 per missed repayment and a strict authorisation process required for lenders and brokers to operate.
The initial costs and timescales of being authorised were too much for many brokers and lenders to handle with dozens leaving immediately, despite many being offered ‘interim permission.’
The introduction of a price cap, higher compliancy costs, and tougher regulation resulted in lower margins for lenders and a desire to run a stricter lending criteria to ensure maximum repayment.
Whilst many lenders have continued to trade, some have simply not been able to make the business model work – finding that the margins are too tight and the running costs are too high. For them, exiting the industry has been the safest option and, in 2019, we have only 40-50 payday lenders and a similar number of brokers.
High growth is catching up on them
Whilst the payday loan industry was booming pre-regulation, many lenders were issuing loans aggressively and growing exponentially. Wonga was notoriously cited for a £1 billion valuation.
However, this exponential growth came at the expense of issuing loans to customers that could not necessarily afford them, with soft affordability checks and funding based on more behavioural underwriting and aggressive collection practices than the traditional underwriting practices of credit checking and affordability.
The result? Millions of loans were funded to customers without employment, on benefits, no income, and no means of repaying their loan. Now, this group of debtors have a strong claim to ask for compensation, and this is now a thriving sector.
With PPI claims coming to an end in August this year, the role of payday loan compensation claims is taking its place. Those who were issued a loan that they believed lacked checks are able to claim compensation of hundreds of pounds.
Wonga has been the lender most affected by this and has repaid over £200 million worth of compensation claims in the last four years – the process that has put them into administration.
Moreover, the cost of issuing a complaint demands a £500 fee from the Financial Ombudsman Service, regardless of whether it is a strong claim or not, which makes compensation claims a far greater expense.
There are a number of smaller, traditional payday lenders that have been around for over 10 years and were not lending big volumes prior to the FCA price cap – and these companies are now reaping the rewards. Companies such as Wizzcash, Uncle Buck, and MY JAR have the knowledge, resources, and financial competence to continue trading and thrive. As per the statistics below, there are 10 lenders that accounted for 85% of new loans – and as the number of lenders fall, the loan volumes are rising.
The future of payday lending
Payday lending will always have a role in the UK society. It is an important anti-poverty measure which offers a very important service to the 3 million people that apply for it every year – and its existence diminishes the risks of black market economies and loan sharking.
Whilst we initially laughed off the idea of only four payday lenders operating in the market, the rise in administration of well-known lenders is making this a real possibility.
Beyond payday loans, there is an opportunity for new alternatives to enter the market that can offer more flexible products including app-related banking, flexible overdrafts, and installment lending.
A flaw in payday lending is that all customers are subject to paying a high rate of interest, regardless of their credit rating. So those with average or good credit scores are still prone to paying the same high rates as those with bad credit ratings. If there is a lender that can find this balance, providing affordable payday loans for good credit and finding a way to accommodate bad credit customers, they will be able to crack a very complex market.
News Comments Today’s main news: Varo Money gets preliminary approval for bank charter. SynapseFI raises $17M for banking platform. RateSetter ISA gets 130M GBP inflow in 8 months. Ex-Lloyds Banking boss set to make 3.3M GBP from Funding Circle float. LendInvest hits 1B GBP total lending. Today’s main analysis: International P2P lending volumes for August 2018. Today’s thought-provoking articles: […]
San Francisco-based fintech startup Varo Money has been granted preliminary approval for a national bank charter by the Office of the Comptroller of the Currency (OCC), paving the way for the creation of the first fully-licensed mobile-only bank in the US.
Co-founded by former Wells Fargo executive Colin Walsh, Varo Money has raised $79 million in funding over the past two years and currently provides a range of savings, loans and account-based services through a relationship with The Bancorp Bank.
The approval for a Federal banking charter will enable the firm to expand its portfolio of millennial-friendly financial products on a national scale, providing a wider range of services in all 50 states.
Each FinTech now finds itself at a regulatory Rubicon: To either take control of its destiny by embracing one of the available bank charters, with all of the attendant compliance and regulatory challenges; or to remain a non-bank technology company, dependent on a bank partner or subject to multi-state laws.
Here are four of the most important factors for FinTechs to consider now:
Determine the importance of interest rate exportation to your business.
Consider the need for deposit funding.
Consider the requirements of equity investors – now and in the future.
He has been the chief operating officer of Twitter, the co-head of telecommunications, media and technology investment banking at Goldman Sachs and the executive vice president and chief financial officer of the National Football League. And currently, he is the chief executive officer at the online personal finance company SoFi, short for Social Finance.
Fix problems, don’t pass the buck
‘Be a truth seeker’ so you can make the best decisions possible
SynapseFI, a startup that helps banks and fintech companies work together to develop technology, has announced that it raised a $17 million Series A funding round.
The funding actually closed at the back end of last year, but CEO Sankaet Pathak said the company has been so busy developing new products, hiring and more than that it is only getting around to disclosing the deal now. The investment was led by Trinity Ventures and Core Innovation Capital, with participation from other unnamed backers.
The San Francisco-based startup has sat under the radar for a while now despite starting up in 2014. Its core product is a platform that helps banks and developers work together. That involves developer-facing APIs that allow companies to connect with banks to offer services, and also bank-facing APIs that allow banks to automate and extend back-end operations.
The LendingTree Mortgage Offers Report contains data from actual loan terms offered to borrowers on LendingTree.com by lenders.
APR: Actual APR offers to borrowers on our platform
Down Payment: Though analogous to the LTV, we find that borrowers identify more closely with the down payment. Academic studies have also found that the down payment is the primary concern for homebuyers and one of the main impediments to entering the home buying market.
LTV: Actual LTV offered to borrowers on our platform
Loan Amount: The average loan amount borrowers are offered
Lifetime Interest Paid: This is the total cost a borrower incurs for the loan, inclusive of fees.
With the Office of the Comptroller of the Currency having approved a national bank charter for fintechs this summer, a host of insiders have weighed in on potential pros and cons, and how OCC’s move might ultimately impact credit unions.
“The threat to any financial institution, including credit unions, would be around the prospect of a fintech with compelling, modern technology and innovative approaches to traditional banking services becoming regulated and competing with CUs and banks,” said Michael Carter, EVP of digital practice for the Memphis-based Strategic Resource Management (SRM).
Ted Bilke, president of Symitar and VP of Jack Henry & Associates, said one charter “negative” could be enabling large players like Walmart and Amazon to “provide traditional depository and lending services” that compete directly with traditional credit union business.
When cash flow slows, becomes stagnant, or is otherwise disrupted (large purchases, overdue accounts, etc.), business owners can become vulnerable to a variety of financial woes. Bills can go unpaid, vendor relationships can become strained, and, if the problems persist, your credit can take a quick slide downward. Unfortunately, cash flow problems can also impact another essential part of your business – payroll.
Aside from leaving employees disgruntled, failure to meet your payroll obligations is considered a violation of the Fair Labor Standards Act (FLSA), which can result in penalties handed down from the Department of Labor.
Why can’t you make payroll?
Though the exact reason for payroll problems can vary from business to business, there are typically two primary circumstances that leave business owners frantically trying to make good on this obligation: changes in cash flow or unexpected expenses.
Affirm, Inc., the company founded by entrepreneur Max Levchin to provide fair and honest alternatives to traditional credit, today announced the “Shop with Affirm” fall fashion campaign and released the findings of a new survey revealing how Americans plan to shop and pay for apparel purchases this fall.
Starting in September, Affirm will feature fashion and apparel brands that partner with Affirm across Instagram and Affirm.com, showing consumers where they can buy now and pay for purchases over time with Affirm. Many fashion brands now give customers the option to use Affirm to buy items with no interest, repaid in three easy monthly installments.
The campaign was designed to make great brands accessible to more customers, offering a transparent payment option that better aligns with shoppers’ cash flows and helps them budget for fall purchases.
White Oak Healthcare Finance, LLC (“White Oak”), today announced it acted as sole lender and administrative agent on the funding of a $20 million asset based senior credit facility for Fox Rehabilitation, Inc. (“Fox”). The funds were primarily used to refinance existing indebtedness and support continued growth.
Fox provides physical, occupational and speech therapy services to help geriatric patients regain a better quality of life. “We are excited to partner with a practice that is so highly focused on clinical outcomes. By investing in people and processes, Fox has demonstrated the unique ability to maintain continuity of care while expanding throughout the country,” said Ross Eldridge, Managing Director at White Oak.
Peer-to-peer lender RateSetter has seen a inflows of more than £130m into its Innovative Finance ISA in just eight months.
The firm, one of the three largest P2P lending platforms in the UK, launched its IFISA to existing customers in February and new customers in March. Like its peers Funding Circle and Zopa, the platform was fully regulated and therefore able to launch an IFISA later than many of its smaller peers.
John Battersby, head of communications at the firm, says that demand has been higher than expected for Ratesetter’s ISA.
The disgraced former boss of Lloyds Banking Group could make millions of pounds when fintech darling Funding Circle lists on the stock market in the coming weeks.
Eric Daniels, who orchestrated Lloyds’ disastrous takeover of rival HBOS during the financial crisis which left the bank in need of a £20billion taxpayer bailout, is an investor and director at the peer-to-peer lender.
He owns a 0.2 per cent stake in the business, which looks set to be worth £3.3million when it joins the stock market.
LendInvest, an online property finance platform, reports it has secured £150 million of “initial funding” in a new joint venture with Nomura, a global investment bank, and Magnetar, an alternative investment manager. This new capital infusion now places LendInvest’s total capital for lending at around £1 billion. The JV with LendInvest will see the funding used for residential development finance.
Nomura is a Japan headquartered financial services group with an integrated global network spanning over 30 countries. Magnetar, based in the US, is a $13.7 billion investment manager that seeks to achieve stable risk-adjusted returns by opportunistically employing a wide range of fixed income, energy, quantitative and fundamental investment strategies.
THE PEER-TO-PEER lending industry has blasted the City watchdog’s proposed investor restrictions as unfair, costly and damaging to the sector’s future.
P2P platforms have been busy digesting the Financial Conduct Authority’s (FCA’s) long-awaited post-implementation review of the sector – released over the summer – and while most are happy with plans for heightened transparency and loanbook disclosure, there are concerns over proposed marketing restrictions and appropriateness tests for investors.
These proposals would make P2P lending platforms become the preserve of sophisticated, high-net-worth or ‘restricted’ investors, akin to crowd bond providers like Abundance and alternative investment firms such as Goji.
Welendus, the FCA-approved Peer-to-Peer (“P2P”) lender, today announces the launch of an industry-first; it’s HMRC-approved Innovative Finance ISA (“IF-ISA”), which will allow investors to invest their annual ISA allowance in a flexible high return investment product, with no income tax on the interest earnings. This product will be the first ISA product on the market with up to a 15% return.
The UK’s short-term lending market is now worth £3.7 billion per year, however new innovative products have been few and far between, leaving great opportunity for disruption and innovation. In addition, the UK’s P2P lending market is expected to exceed £10 billion this year, and up to £19 billion by 2020.
Britain’s buy-to-let landlords are divided over their future, in light of tax and market changes – according to latest research from property-backed P2P lending product, Octopus Choice.
While three in five buy to let investors (56%) want to keep or buy more rental properties, two in five (44%) are looking to sell. The majority of UK landlords still view it as a money-making asset class but think it will be on the decline in the future. As the market consolidates, buy to let owners are polarized across the country, with tough decisions to make on whether to stay or leave the sector.
For those looking to exit the market, nearly a quarter blame falling yields (24%) and tax changes (23%), while a fifth blame cooling house prices (19%). Three in five (60%) say that property management had become a burden and 61% undervalued the costs involved.
At one point Wonga was the UK’s biggest payday lender and tipped for a $1bn listing on the New York Stock Exchange, but it collapsed under the weight of compensation claims from customers who had been mis-sold loans and has not done enough to repair the damage.
Some 200,000 customers who owe an estimated £400m in short-term loans are still being asked to make repayments to the company, despite the fact compensation claimants are unlikely to ever receive a full pay-out.
The current reality is a world away from 2008, the year Wonga launched. The company positioned itself as a flexible digital alternative to banks and as an option for people looking online for a financial fix in 15 minutes.
Taking a cheeky and brash tone, the loans firm invested heavily in marketing to raise its brand awareness. Wonga’s advertising spend rocketed from £22,000 in 2009 to £16m by 2011, according to estimates by analysts AC Nielson MMS.
In 2010, Wonga made its first high profile move into sponsorship, teaming up with Transport for London to sponsor five hours of free late-night travel on New Year’s Eve. That same year the company made its first foray into the world of sports through a shirt sponsorship deal with Blackpool FC, which it would continue until 2015.
Britain’s buy-to-let landlords are divided over their future, in light of tax and market changes with 56% buy to let investors wanting to keep or buy more rental properties, and 44% are looking to sell. This is according to latest research from property-backed P2P lending product, Octopus Choice.
The majority of UK landlords still view it as a money-making asset class, but think it will be on the decline in the future. As the market consolidates, buy to let owners are polarized across the country, with tough decisions to make on whether to stay or leave the sector.
Combined, the trio have lost nearly 194 billion Hong Kong dollars (US$24.8 billion) in market capitalization this year, Datastream shows, while a Thomson Reuters index of Hong Kong-listed auto and truck manufacturers is down 39%.
Vehicle purchases are on the decline: In July, new car sales were 5.5% lower than in the same month last year. Sales of insurance policies are also falling. Peer-to-peer lending for car purchases had become increasingly popular, but after a series of lending scandals the government has cracked down.
We need to understand that the fintech industry is extremely broad, and the user base does not fit into a single category. Therefore, the applications of financial technology will find relevance in many spheres. This is one of the factors that have accounted for a massive growth in the number of fintech startups across the world. It is estimated that the number of startups in the fintech space has increased 8-fold; from an estimated 1000 companies in 2005 to more than 8000 companies in 2016.
The fintech industry is still in a growth phase and therefore there is every possibility that we will continue to see an increase in the number of startups jumping into the fintech space. However, the emerging markets will see more of the increase in the number of startups due to the underserved nature of these markets.
ACORN OakNorth Holdings has today announced that it has secured $100m from the EDBI of Singapore, NIBC Bank, Clermont Group, GIC, and Coltrane Asset Management. The $100m represented 4.3% of the company. The capital will be used to accelerate the growth of ACORN machine and enable OakNorth to continue scaling its lending efforts in the UK.
Meanwhile, ACORN machine has opened offices in New York and Singapore to service clients across multiple continents and will have over $5bn of assets under service on its platform by year end. NIBC Bank is the platform’s first client in the Netherlands. ACORN machine’s team now consists of almost 100 people and in the short term expects to add another 50 people across growth and operations, engineering, machine learning and data science.
Biz2Credit announced on Wednesday the launch of its BizAnalyzer Virtual CFO, which is described as an advanced software tool that enables business owners to make smarter financial decisions about their companies. According to Biz2Credit, the virtual CFO software is available to clients of Paychex Promise, a subscription-based service from Paychex, a provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services.
If you are salaried and earn up to Rs 20,000 every month, cold calls and emails from banks for pre-approved personal loans is a regular thing. But for someone planning to open a franchise store or start a catering business, getting an unsecured loan is not easy. Banks and NBFCs are reluctant to fund businesses or expansion plans of MSMEs/SMEs or proprietors.
This could be due to factors like lack of credit data, remote location or poor education. Banks and financial institutions require an individual to display established source of income, thus leaving about 80 percent of the population with no access to credit.
The Peer-to-peer (P2P) online platform aims to bridge the gap between people who can lend and those who want to borrow without any security. The P2P industry took its first baby step in October in the form of RBI regulations which allows high-end investors to lend their money to low-end borrowers.
This gap in payments in certain industries can be up to several months, such as in the construction sector. When unexpected crises hit, such as late payments by customers or budget overruns during projects, businesses without adequate financing can be left high and dry.
With so much at stake, SMEs need to ask themselves if their current financing facilities are adequate for their needs and future expansion.
While the SME Financing Survey suggests that SMEs do not have a serious problem with getting external debt financing as 90 per cent of SMEs were successful in securing loans in 2017, other SME surveys indicate that financing is still a top concern by this particular segment. In a separate SME Development Survey 2017 by DP Info, 35 per cent of SMEs cited facing financing concerns – up from 22 per cent in 2016 and 14 per cent in 2015.
Kristine Ng understands very well the struggles SMEs go through to obtain financing. She spent a decade in the banking sector – five with Credit Guarantee Corporation (CGC), which was set up with the sole objective to help SMEs obtain credit facilities by providing guarantee schemes.
Recognising the need to plug the funding gap, particularly among smaller and micro enterprises. Kristine left her corporate career to start to start peer-to-peer (P2P) platform Fundaztic with a team of senior level ex-bankers.
Indonesian ride-hailing and online payment company GO-JEK is expanding its financial technology services through partnerships with three peer-to-peer (P2P) lending firms: Findaya, Dana Cita and Aktivaku.
GO-JEK’s payment system GO-PAY launched last year, accounting for more than half of the startup’s transactions. The company integrated GO-PAY into the GO-JEK app, enabling customers to store money on their mobile phones — similar to a digital debit card. Adding to the GO-PAY account can be done from a bank account or ATM. If customers don’t have a bank account, they can hand cash over to GO-JEK’s drivers, and it will be transferred immediately to their account.
Over the last 18 months, 16 multinational financial firms started operating in the Israeli tech system, or increased their local footprint through strategic partnerships and investments, according to a new report by Start-Up Nation Central (SNC), a nonprofit working to promote Israeli tech.
Newcomers include French insurance firm AXA SA, Bank of Montreal, Fosun, TD Bank, AmTrust, and Mastercard.