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175 years have passed since the publication of Charles Dickens’ A Christmas Carol, and in many respects the inequalities of the festive season haven’t changed that much. There are those for whom the celebration of Christmas is an unambiguous and affordable pleasure. Equally there are those who struggle to cope with the expectation to eat, drink and be merry while also buying presents for friends, family and secret Santa co-workers.
But one thing has changed. While there are an awful lot of people for whom Christmas represents financial stress, there is a multi-layered financial services industry on hand to ensure that even those whose bank accounts are looking a little threadbare, can nonetheless join the annual festival of consumption. Overdrafts, credit cards, term loans, and store card easy payment plans. All are on hand to oil the retail wheels. And for the hard-pressed consumer, it’s often a case of buy now, worry about the repayments and interest charges later.
And it is often the most vulnerable consumers who end up getting the worst deals. For instance, this week, Britain’s Financial Conduct Authority tabled proposals aimed at preventing banks from imposing sky-high charges on those who breach their account overdraft arrangements. It’s a lucrative revenue stream. In 2017, Britain’s unarranged overdraft charges amounted to £750m. But here’s the thing – only 1.5% of customers were subjected to the penalties and they tended to be those who were already financially stressed.
The FCA has also promised a crackdown on buy-to-own retailers who enable their customers to purchase expensive goods – anything from washing machines to laptops – through a weekly repayment spread over fives years. While this makes the products affordable, the total cost (including interest charges) can be three times that of the official retail price. Under the FCA proposals, the final amount paid will limited to a maximum of twice the ticket prices.
The common factor here is it is those who are least able to pay who often end up being charged the largest amounts. The same could be said of short-term payday loans, which have traditionally appealed to people who are struggling to make ends meet between one salary check and the next. Costs are relatively low if the sum is paid back within a short period, but if the borrower falters in the repayment schedule, the interest charges spiral higher.
The Risk Penalty
All of this begs a question. The vulnerable in society tend to pay more because the institutions that lend to them, price in the associated risks. But given that most, if not all of us, will require credit at some time in our lives – and probably on multiple occasions – is there any way that those with the least resources can be protected from being on the receiving end of the highest charges.
Can Finance Be Fair?
Or to put it another way, can debt finance ever be fair? And can entrepreneurs – and in particular the fintech industry – play a role in delivering that fairness?
Roger Gewolb, an American entrepreneur and fair finance campaigner based in the U.K. thinks so and in a bid to provide a better range of financial options, even for those with poor credit scores, he has launched a new website, FairMoney.
As Gewolb sees it, one of the main consequences of the 2007/8 financial crisis was that banks recalibrated their lending criteria and scorecards, thus consigning 50% of the United Kingdom’s potential borrowers to non prime status. Other providers flooded in to fill the vacuum, including so-called payday loans companies. “Payday loans could have helped,” he says. “But they exploited people.”
There were, he acknowledges, other alternatives, such as peer to peer lending platforms, but Gewolb argues that the original spirit of these sites – characterized by ordinary savers collectively lending to others – has changed with the arrival of institutional money. “And there is no best practice. The regulation is ultra light,” he says.
As founder of the not-for-profit Campaign for Fair Finance, Gewolb saw these problems at first hand, but now he is seeking to provide a solution. FairMoney aims to provide borrowers with the cheapest available loans, according to their requirements and their credit scores. The concept is familiar to users of comparison sites. Potential borrowers decide which type of loan they require – from a list that includes term loans, peer to peer lending and car finance – and the site suggests providers. The deals on offer vary significantly depending on whether the borrower’s credit score is good, poor or bad. For instance, while APR rates for those with good credit run from 5.0 to 19.9% those with poor scores could end up paying between 19.2% and a hefty162.8%, depending on the loan type. In other words, borrowers can’t defy gravity when it comes to risk assessment. However, Gewolb says the purpose is to provide a fair deal, based on circumstances.
He adds that lenders who use the site must conform to fair finance good practice. “They have to sign up to charter,” adds Gewolb.
Short Term Loans
Controversially perhaps, the site does include providers that be described as payday lenders. Gewolb says there is a case for short-term finance as a tool to help people manage their finance. Equally there will always be a need for emergency cash. “43% of the British population could not find £300 for an unexpected bill, “ he says. However, he stresses that this corner of the loans market is not actively promoted on the site. “We do have payday lenders but you have to look for them.”
Gewolb says he hopes Fair Money will act as a shining example to the industry in terms of its mission to treat borrowers fairly. And there is undoubtedly an opportunity for entrepreneurs in the fintech and financial services arena to create a USP based around fairness. It’s a concept that extends beyond banking into areas such as insurance and travel, which have come under scrutiny from U.K. regulators over their pricing policies and the deals available through comparison sites.
The question whether sites such as Fairmoney can make its voice heard in a market where there are many big brand comparison sites up and running and arguably no real consensus as to what constitutes fairness. It’s early days but Gewolb says the borrowing figures to date indicate that the site is gaining traction.
Arguably he premise behind the site is perhaps also a wake up call for the society at large. The U.K. is the world’s fifth biggest economy, so the fact that such as large proportion of the population is regarded as non-prime highlights a fairness issue that goes beyond banking and extends into areas such as levels of payment and what constitutes a living wage. But that’s another story.
December 23, 2018 at 05:21AM
Forbes – Entrepreneurs