PLEASE DO NOT ASK FOR CREDIT…
THE NEED FOR A FUNCTIONING CREDIT MARKET FOR ALL

FAIR4ALL FINANCE

Credit is an emotive subject, especially when it is used by lower income households. When used in the wrong way, credit can lead to bad outcomes. It should not be a substitute for better wages and social security benefits. It can be harmful and lead to problem debt, court action and increased anxiety and misery.

However, in our experience, credit (when appropriate), can be hugely valuable to some households, including those on lower incomes. Credit can smooth income, alleviate immediate pressures and help with household budgets.

At Fair4All Finance we are concerned about the changing shape of the consumer credit market; specifically, a growing unavailability of regulated credit for lower income households. We believe that the shape of the credit market is as important as the size. The market needs to serve people on a wide range of incomes and across all housing tenures. However, in the past decade things have changed. Whilst the size has returned to pre-pandemic levels of around £227billion in outstanding consumer credit and credit cards, our evidence is that the shape of the market is changing.

Research undertaken by Ipsos indicates that the poorest households and those in rented accommodation are less likely to be approved for credit and as a result are more likely to make decisions on how to meet their credit solutions in sub-optimal ways including relying on selling goods, going without, missing bills, or even using loan sharks.

Our research is supported by reports from LEK Consulting, who identify a non-standard credit need of £7bn, of which they think a £2bn gap could be commercially met. Clearscore and EY also said the credit market is “failing non-prime borrowers.”

A decade ago, lower income households, accessed forms of higher cost credit such as home-collected and high-cost short-term credit. These products, along with rent-to-own represented around 4% of outstanding regulated consumer credit. Last year these products accounts for under 0.4% of all outstanding credit. In just five years that’s a reduction of 3.5 million loans worth £1bn. This is in the period that included the impact of a pandemic and cost-of-living crisis which disproportionally affected lower income households.

So where have these borrowers gone? Part of the answer appears to be the explosive growth in the use of Buy Now Pay Later (BNPL) which is now used by 27% of adults, including a percentage who held higher cost credit, and a percentage of BNPL borrowers who ought not to be accessing the credit but legislation means that their exposure to the product is not visible. BNPL usage included 44% renters and 14% of people with an income under £15,000. The same FCA report says high cost loans were accessed by 53% of renters and 23% by those with incomes under £15k. Analysis by the FCA in 2023 reports that just over four in ten of any BNPL holders in past twelve months also accessed high cost loans. So, there may be some drift from forms of high cost credit to BNPL.

Denial of credit doesn’t prevent people finding it and this often leads to worse outcomes.

In contrast, the sub-prime credit card market is less buoyant. Apex Insight reported that the “non prime credit card sector shows low growth with new lending compound annual growth rate (CAGR) of 0% in the period 2019 to December 2021”, whilst LEK indicated CAGR sub prime loan balances grew just 2% in the period 2017 to 2023, it is now clear that there has been a substitution of high cost to credit cards.

The Labour Government has committed to regulate BNPL and we are among many organisations that support this. It is credit, it ought to be regulated to protect customers but a consequence of new regulation will be that a proportion of existing and new users will be refused access.

For the avoidance of doubt, we support any regulatory change that compels lenders to be both mindful of who they lend to and supportive of them when they get into difficulties. However, we also see access to credit as being just as critical and believe that balancing access and protection is vital.

Our research shows a clear decline in the access to credit for certain groups because of global and national events, as well as issues such as affordability. We also found that people are increasingly not applying for credit as they believe they will be refused. Denial of credit doesn’t prevent people finding it and this often leads to worse outcomes.

Ipsos research in January and June 2023, of GB adults aged 18 – 75 years found that 7% indicated that they (or someone in their household) reported using an unlicensed or unregulated lender to borrow money. The figure of people who said they had accessed a loan shark increased dramatically to 16% for those people who also reported that they had been declined for credit.

We need to find ways of balancing protection and access. In Ireland, loans under a value of €500 are not reported to CRAs. In the USA, the engagement of six of the eight largest banks into the small dollar loans market is driven in part by very few loans involving a CRA check. Bank of America has issued $500million of small dollar loans to 1.1m of their customers whom they would previously not have lent money to. Whilst replicating a product or solution from another country is not a guarantee of success, lessons can be learnt from international experiences, best practice, and mirroring the active involvement of US banks in small dollar lending is a potential game changer for us in the UK.

We see a functioning credit market as critical for everyone, that includes forms of high cost credit (now that rules and scrutiny have been improved), bank lending (like we see in the USA) and community finance. There is a need for legal credit, issued fairly, offering flexibility and support when things don’t go as planned. Without a functioning market, where do we think people will go to seek solutions?