The future of small short term loans is changing.
Although we cannot predict the future, we can gain some insight into the possibilities. By looking at trends and technological developments.
The current small short-term loan industry is different from five years ago.
The future of short term loans, even five years from now, might look different to what we see today.
New technologies for short term lending
New technologies are likely to be the biggest drivers of change in the payday loans industry.
Already, we are seeing how technological developments are changing the way these loans work.
Small loan affordability assessments
Affordability assessments have always been something of a sticking point. For providers of payday loans.
Short term loans should only get given to those that can cope with repayments.
The Financial Conduct Authority, insists on responsible lending. Lenders that choose not to carry out thorough assessments are at risk of losing money. Through compensation claims and debt write-offs.
In recent years, affordability assessments have become more in-depth. For example, Wonga’s recorded default rates dropped from 7.4% in 2014 to 4.4% in 2015.
Despite this, affordability assessments are not yet infallible. Some borrowers, will give false details about their income or expenditure.
When this happens, an affordability assessment will not be accurate. These false details may get given on purpose, but may also be accidental.
Yodlee and account aggregation services (e.g AccountScore)
In the past, lenders have been unable to look into the bank accounts of applicants. Now, this insight is an option for loan providers.
SafetyNet Credit is one lender making use of new technology. To make their affordability assessments more detailed than most current lenders.
To do this they use Yodlee or AccountScore. It is an account aggregation service. To connect to ‘read only versions’ of customer bank account details.
Yodlee allows SafetyNet Credit and others, to have direct access to transaction information. More so it does not give the lenders the ability to make payments or other changes. But does enable them to see exactly how much money is entering and leaving a bank account.
Before approving a loan, SafetyNet Credit will carry out an affordability assessment. Using details from the applicant’s own bank statements.
This is still not perfect
But it is much more accurate than relying on an applicant’s manual input.
Account aggregation services allow companies like SafetyNet Credit to track a customer’s finances.
If their account balance is dropping lower, SafetyNet may reduce a customer’s credit limit. And if they appear to be struggling, SafetyNet can reach out to a borrower before things get out of hand.
Lending and loan repayment options
Most loans today are repaid using a Continuous Payment Authority (CPA). Which gives the lender ongoing permission to take money from the borrower’s bank account.
By using a CPA, providers of payday loans can vary instalment amounts. And take repayments on different days each month. As long as they have had the account holder’s permission.
Account aggregation services can change the way repayments get made. For example, SafetyNet Credit monitors a customer’s bank account using AccountScore technology. SNC will only take money when there are enough funds available.
Besides, SafetyNet Credit can provide a small loan. More so when a customer goes past their overdraft. As a result, borrowers will not get hit with unauthorised overdraft charges. Also they can be as high as £5 per day.
Using this technology, short term loans become like credit cards. They offer revolving credit. Money that can get borrowed and repaid as often as required, whilst the agreement is in place.
Each borrower has a personalised credit limit. And can borrow up to their limit, repaying money and borrowing again.
Unlike credit cards, short term loans can get withdrawn for cash payments. And can get used to cover outgoing Direct Debits.
How credit scoring is changing
Lenders have used a credit score to decide on credit limits. Or to make a decision about accepting or rejecting a loan application.
Now, traditional credit scoring is getting considered an outdated method.
As well as using Yodlee or AccountScore technologies and other similar services to access real-time bank balance and transaction information. Lenders are starting to turn to new credit scoring solutions.
The average consumer is becoming easier to track. Where transactions once took place in physical locations. People are now purchasing products and paying their bills online.
Each of these actions can get recorded, building up a detailed consumer profile.
Over time, it is likely that lenders will use a wider range of sources. To build a more complete picture for each borrower’s financial situation.
As well as becoming more thorough, credit scores are easier to access. Whilst consumers had to pay to access their credit score in recent years. There are now an increasing number of companies such as Noddle and Clearscore.
That offer free access to basic credit scoring information. This can help consumers to make more educated decisions about applying for credit.
The future of small short-term loans: finding a provider
Some consumers choose a lender based on their TV or print advertising. Or a recommendation from a friend. Others select their lender following an online search.
Or by visiting a website that gets promoted in an online advertisement.
Since 13th July 2016, Google has not shown paid-for advertisements. Especially for short-term loans of 60 days or fewer. And this change is almost certain to have a strong impact on the future of payday loans.
The larger and more well-known lenders. Such as Wonga, Peachy and QuickQuid, hold the prominent positions in Google search results. And these are organic results, built up over a long period of time due to reputation and popularity.
Smaller and lesser known lenders will unlikely hold prominent search engine result positions unless they innovate and adapt.
In the past, these smaller lenders could pay for adverts that would make them visible. Even on the first page of Google’s results, if they had the funds available. Now these lenders will be hard to find, placed a long way down a list of results that may span many pages.
Google’s payday loan rules gets marketed as a positive move. Helping to protect consumers. It is possible that the decision has limited competition.
The biggest lenders will continue to attract new customers as they feature more prominently with Google. Whilst the smallest and newest lenders will struggle and find it more difficult to find their audience.
It is possible that an increasing number of people will turn to small loan brokers, such as Cash Lady to find and compare the small loan lenders. The future of payday loans can be one that remains competitive. As long as brokers such as ourselves can help find and discover the wider range of options available.
The future of small short term loans will be one that get influenced by technology.
New technologies are improving affordability. And the assessment process, making these assessments more accurate and reliable. As a result, it is probable that default rates will drop.
Lenders are likely to become strict when deciding the results of loan applications. The onus is on the lender to be fair and responsible. And only providing loans to people that should be able to afford their repayments.
An increasing number of consumers will have detailed control over their borrowing. Borrowers can better manage their finances at any hour of the day or night. Lenders are likely to find that consumers are more involved at every stage of the process. Perhaps repaying loans earlier to reduce the amount of interest.
Options for repayment are also likely to become far more advanced.
With bank monitoring getting better and better, lenders will find new ways to make sure funds are available. This will reduce the number of failed repayments, benefiting both consumers and lenders.
Revolving credit may well become a far more popular option than it is now.
Traditional payday loans are likely to continue to have value. Particularly with those that like a clear repayment date without an ongoing credit agreement. But there will be consumers that prefer to have a more flexible borrowing option.
With revolving credit, consumers have the option to borrow and repay as often as they like. Which may suit some individuals better.
Changes to online advertising rules may make it harder for smaller, subprime lenders. Including the newest payday loan companies, to compete with the biggest names. So this is likely to make the most well-known, bigger companies even bigger. As well as restricting access to smaller and newer lenders that have something to offer.
Borrowers will have to work harder to find lesser known lenders. Or use payday loan brokers to discover the smaller companies. And to compare them with the likes of Wonga, Peachy and QuickQuid.