By Richard Grint, financial services expert
April 2014 saw significant change in the consumer credit industry, with a host of lending firms coming under the supervision of the Financial Conduct Authority (FCA) for the first time. Most of the media coverage was focused on one segment of the market: payday loan companies. The coverage was almost universally negative, with some sections of the media predicting that half of all payday lenders would rather go out of business than operate under stricter regulations. As Martin Wheatley, FCA’s Chief Executive, told the BBC: "I think our processes will probably force about a quarter of the firms out of the industry and that's a good thing because those are the firms that have poor practices. And for the rest – we want them to improve."
Despite these predictions, and the poor reputation of payday lending firms in general, the short-term lending market is here to stay. By providing manageable one-off loans to those with a genuine need, payday lending could increasingly fulfil a niche yet vital role in the lending industry. Payday lenders that can adjust to this changed operating and regulatory environment could well restore legitimacy to their tarnished reputations, and those that are set up to treat their customers fairly in the long term will be able to build competitive advantage in a profitable (and not unattractive) market.
First of all, payday lenders need to reposition themselves as trustworthy (and compliant) providers of legitimate and valuable services. While they will have already done some of the work required to achieve this, they will need to take specific action to ensure that they are treating customers fairly, and truly operating with the public’s best interests at heart.
Many of the largest firms already have advanced analytics in place to assess the probability of a customer repaying; enhanced product opening and maintenance processes and systems will provide even more information that can be used to decrease default rates and maximise sales.
Similarly, the more obvious changes to each firm’s operating model, as mandated by the new regulatory environment, will have already been made. Greater disclosure of facts and charges, limited loan rollovers, and restricted usage of continuous payment authorities (CPA) will have become the norm for those firms still operating, and will have been welcomed by customers.
While many companies will have already amended their operating models, the biggest changes for lenders in the regulated environment will be cultural, and these will take time to embed. Payday lenders need to embed the FSA’s Treating Customers Fairly (TCF) principles into every area of their operation, and into every customer interaction. By treating customers fairly, lenders will be able to comply with both the letter and spirit of the regulations – increasing customer perception and satisfaction whilst remaining profitable
There are a number of key steps that firms should take to assure their revised approach in the new regulatory environment:
Overhaul customer contact centres, including taking on board best practice lessons and benchmarks from organisations in other industries. Simple changes like increased opening hours and streamlining the call process can lead to significant boosts in customer satisfaction.
Take a holistic, flexible approach to overdue repayments – in line with those taken across the retail banking and wider consumer credit industries. In particular, operators should be empowered to freeze or defer charges for customers in financial hardship, rather than automatically use CPAs.
Enhance the level of customer communications at each stage of the process, across all channels, including digital. By keeping the customer informed and engaged, payday lenders are likely to increase customer perception and reduce loan delinquency rates.
Consider performing regular compliance health-checks against key regulatory rulebooks during the critical early period of operating under FCA supervision. This should be done by a combination of payday lenders’ newly enhanced compliance functions and by outside agents with experience of assuring consumer protection regulatory compliance across the financial services industry.
The first firms to seize this opportunity will enhance their reputations, become leaders in a newly reputable sector and, for those that get it right, play a valuable role in the lending industry.