PAYDAY LENDING MARKET INVESTIGATION
Summary of a response hearing with Think Finance (UK) Limited held in July 2014
[I’ve always counseled that to understand what’s coming in the U.S. payday loan space, look to the U.K. for insight. A few highlights from The CMA (Competition & Markets Authority) in the United Kingdom does just that.]
“* Shortly after Sunny launched [Think Finance U.K formed “Sunny”] it experienced a large spike in applications of low quality. Think Finance believe that this was driven by customers, who were already active in the market becoming aware of a new lender and applying after they had been rejected by other lenders or as a potential new source of funding. Sunny were currently issuing around [redacted] loans per month and at present the balance of new to repeat borrowers was skewed towards new borrowers as they sought to build up their customer base. Sunny was generating revenue of around £[redacted].”
[Much like the “new guy in town.” A new payday lender opens up for biz and all the regulars apply. They get approved and send their buddies over to the new lender who doesn’t have a clue.]
“* In the US, Think Finance had significant flexibility in its risk based pricing which allowed customers to be offered rates from between 3% and 30% per month. Think Finance thought the FCA’s [UK regulator] proposed price cap would impact its ability to operate this model in the UK; by charging higher rates for new customers whilst it gathered a better understanding of the credit risk of those 3 customers (and those that defaulted) it was able to charge lower risk customers a lower rate. By restricting the ability to charge higher rates for higher risk customers, Think Finance could no longer afford to offer the steep price progression it currently offers.
“* Think Finance said that speed of payment by a lender was more important to many customers than the offer of no fees, flexibility of duration and repayment of a loan and lower interest rates.”
[SO TRUE! Those of us who have worked behind the counter and talked with borrowers on the phone know this all too well.]
“* Think Finance thought that there might be some validation of the market as a result of regulatory interventions that might lead to some growth in the market however because of barriers to expansion it was likely that this growth would be concentrated amongst the three largest lenders.
[We’re witnessing this in the US.]
“* Think Finance supported the cap on default charges as a good thing for consumers. It noted that at present some lenders were levying late/default fees in the order of £140.
[Roughly $220 US.]
“* New entrants to the market faced the constraint of existing large lenders spending large amounts of money on advertising and brand awareness that new entrants could not match. Achieving any significant form of brand awareness was a long process and very costly, thereby raising the cost to the new entrant and limiting price innovation.
[The payday loan industry, including lenders, associations, lobbyists… is dominated by the incumbents. With a few geo exceptions, consolidation is the order of the day. The exceptions are Michael Brown and his team at TOFSC and Max Wood with Borrow Smart
[Think Finance includes RISE, Sunny, and Elastic and Elevate.]
Send an email to Jer@PaydayManual.com for the entire CMA Summary with highlights.