The Treasury says ‘too many people are turning’ to payday and guarantor lending firms.
A £2m fund has been launched to encourage fintechs and community lenders to develop new ways to make credit more affordable.
The prize, called the Affordable Credit Challenge, backed by the Treasury and UK charity Nesta, aims to combat the prevalence of high-cost payday and guarantor loan firms such as Amigo Loans or GetMyLoans.
The fund said: “While high-cost credit has a role to play in the market, too many people have been turning to these lenders – such as payday or guarantor loans – when it has not been appropriate for their own personal situation.”
Consumers took out 5.4 million high-cost short-term loans in the year to the end of last June and paid £800m in interest and charges on them, according to City regulator the Financial Conduct Authority (FCA).
In total, consumers borrowed just under £1.3bn of this type of lending and paid back £2.1bn. The average loan was £250, consumers typically paid back £430, said the FCA.
The fund wants to encourage the use of credit unions, who are not-for-profit financial cooperatives, and other types of cheaper community lenders.
It said: “These types of lenders can offer loans at far cheaper rates than high-cost short-term lenders, with the interest rate capped at 42.6 per cent compared to an average of 1,250 per cent for a high-cost lender.”
The fund added that 19 per cent of the people it surveyed who were desperate for cash say they wouldn’t know where to find a credit union or community lender, and one in ten are put off because of their lack of a website or app.
Greater financial access
Fintechs grew in the wake of the 2008 financial crisis and public dissatisfaction with high-street banks. These start ups promised better customer service, greater access to borrowing for small firms and wider access to financial services for poorer people.
Economic Secretary to the Treasury, John Glen said: “Most of us will rely on borrowing of one form or another during our lives, whether through loans, credit cards or a mortgage. However, millions of people struggle to access fair and affordable credit.
“I want to see more people benefit from the transformative power of digital technology, which is why we have launched the Affordable Credit Challenge. This is a vital opportunity for fintechs to work with community lenders to give more people control over their money.”
Nesta Challenges head of better markers Chris Gorst added: “Technology is already transforming how we manage our money every day, but our trusted community institutions - like the local credit union - have fallen behind in the use of technology. This means they often struggle to reach customers or compete with the speed and convenience offered by high-cost lenders. It’s now time for the fintech innovators to unite with social lenders and transform the personal lending market for the better.”
Nesta is a registered charity set up in 2011 funded by the National Lottery, and is a non-departmental public body with a statutory remit “to promote talent, creativity and innovation in science, technology and the arts”.
Applications for the fund open today and close on 29 September 2019. Grants will be awarded to six partnerships seeking to develop the most promising solutions, with three of these partnerships winning cash prizes in spring 2020.
More about the fund can be found here.