What would work as a viable alternative to payday loans?

Lead Research Organisation: The Young Foundation
Department Name: Research

Abstract

This research will develop a 'borrowers-eye-view' of the different competing offers of payday loans and alternative forms of credit. We will conduct in-depth interviews with low income borrowers to evaluate how the experience of taking out a payday loan compares to alternative forms of credit. We will then carry out a series of participative workshops to co-design with low income borrowers an alternative credit offer that would meet borrowers' demands while offering less harmful financial terms. The research will conclude with publications for both academic and non-academic audiences and a series of dissemination events to share findings with policymakers and delivery organisations.

The research has been designed to support the Welsh government's objective of mitigating the effects of poverty and, in particular, its goal of increasing the use of credit unions as an alternative to more harmful forms of short-term credit. The work starts from the premise that product design-and the design of the broader alternative credit offer (from how it is delivered to how it is perceived in the local community)-will be decisive to the success or failure of this strategy. Getting product design right will require a richer and more detailed understanding of the user-experience of different forms of credit than we have today. It will also require greater involvement from borrowers in describing what would work as a genuine alternative to payday loans.

The wider context for the work is the risk that, for a large swathe of the Welsh population on low incomes, the economic recovery could be marred by an historic overhang of debt. Overall UK consumer debt trebled in value from 1993 to 2013 reaching £158 billion, leaving many in poverty to face high debt repayments and chronic uncertainty as interest rates now start to rise. Nowhere are these risks sharper than in the case of payday loans. The UK payday loan industry, covering short-term and high interest rate debts, grew from £100 llion to £1.7 billion in the seven years from 2004. The Public Accounts Committee estimates that there are now around 2 million payday loan customers in the UK. This staggering rise of extremely high-interest-rate debt threatens to shape the way many in poverty experience the economic recovery, reducing household spending power, increasing insecurity, and derailing anti-poverty strategies.

There is already growing evidence of the personal costs of short-term credit. The debt charity StepChange has recorded a 44 per cent increase in Wales in the number of people calling their helpline for advice since 2010. The Citizens Advice Bureau in Wales reported in May 2013 that the number of people seeking help to deal with debts emerging from use of payday loans rose from 93 to 609 in just one year, a rise of 555%. Levels of debt are increasing. In Cardiff, the average payday lending balance rose 42% in just one year from 2011 to 2012. A similar picture is portrayed by StepChange analysis of its clients in Wales, with 18% reporting struggling with a payday loan in 2013 compared to 2.6% in 2010.

This research will support policymakers in a strategy of encouraging alternative forms of credit, giving the richest and most detailed evaluation to date of different credit offers from a borrowers-eye-view, and working with low income borrowers themselves to sketch out what would work as a viable alternative.

Planned Impact

This research proposal has been conceived specifically so as to maximise impact. The central objective for the research is to influence policy and practice by setting out a clear 'borrowers-eye-view' of the choice between pay day loans and alternative forms of credit. The research methods we have chosen engage users throughout the work. And we have chosen dissemination methods, and have built a research team, that give the work a clear route to influencing key policymakers.

Who will benefit from the research and how?

A key beneficiary from the research will be the community of alternative credit providers. We have discussed the proposal with the Association of British Credit Unions Ltd (ABCUL), which represents around 70 per cent of credit unions in Britain, and anticipate further consultation with ABCUL throughout the project. To ensure impact, we will engage alternative providers in the inception workshop to refine our methodology, in expert interviews and in our planned dissemination events. Alternative credit providers will benefit from a clearer evaluation of the relative strengths and weaknesses of the current credit offer for low income customers, and from an assessment of the precise nature of demand for alternative credit products-for example, which specific product features are in highest demand?

Policymakers are another key beneficiary and we have discussed the work with senior advisors in the Welsh government. Policymakers will benefit from specific recommendations that set out more clearly than before a diagnostic that explains the rise of pay day loans, an account of the precise needs that they meet, and an account of unmet needs. They will also benefit more generally from our planned policy publication that will highlight the issue of problematic borrowing and build the case for action. We anticipate drawing on our team's strong links to senior UK policymakers throughout the project.

We have taken a number of design decisions to increase impact on both the policymaking and provider communities. A key output from the project will be dissemination events including a conference in Cardiff for alternative providers of credit and two roundtables in Cardiff and London for high-level policymakers. Written outputs will include a narrative-heavy publication to influence policy debates in Wales and the wider UK and a publication pitched directly to alternative credit providers. Unusually for a bid of this kind, our principle investigator has worked in the heart of government (Number 10, Cabinet Office) and has led a number of highly influential policy processes (Resolution Foundation) and will lead the strategy to ensure policy impact.

We also anticipate that the research will be of academic interest, particularly in terms of its novel methodology. We are applying an innovative method that draws on consumer research and product design, a choice we have made specifically in response to the call's ambition to understand 'what works'. As a result, this project is more practical, and more actively engaged with users, than a traditional research council bid. The project team also draws more heavily on expertise from the think tank and independent research community. This consciously reflects our decision to focus squarely on generating actionable insights that inform policy and practice. Indeed, we hope our approach could become an example of a new way of working to understand what works.

The ultimate beneficiaries of the work are of course low income borrowers themselves. The work will have been a success if it encouragers the development of new, more attractive credit offers that present a less harmful alternative to pay day loans, and if it helps policymakers support this kind of activity. We want to help the Welsh government achieve its ambition of mitigating the effects of poverty and its link to problem borrowing by encouraging the expansion and take-up of attractive credit union services.
 
Description 1. This study provides a major contribution to the study of high cost credit customers at a highly timely moment. Originally conceived as a study of payday loan customers, following regulatory change the scope expanded to include two other forms of high cost credit. These other groups (rent-to-buy and doorstep loan customers) have received little academic attention in recent years. The research has generated two robust survey data sets and investigates the customer journey from both a quantitative and qualitative perspective providing substantive new insights.
2. In particular, our research revealed new insights into the absence of active decision-making processes by many consumers, and the heuristics which often guide choice, and into the differences in social acceptability of different forms of credit. The study also provided early insights into how the cap on payday loans has affected customer perceptions of the product.
3. In addition to using traditional research methods, the study took a largely innovative approach to the development of recommendations for policy and practice emerging from the research findings. We drew on the methods of co-creation and social innovation to maximise the impact of the research for policy and practice. This involved holding two workshops bringing together representatives from civil society, the finance industry, housing providers, social innovation experts and policy makers with consumers of high cost credit who had participated in the research. Together they debated the findings and were guided through a process to consider what a feasible and impactful set of recommendations might look like. These initial ideas were then further reviewed and refined by the research team as appropriate.
4. Extensive dissemination activities with a view to developing and encouraging new networks and collaborations. Through events in both Wales and London we have brought together diverse stakeholders from industry, civil society and the world of social innovation to increase dialogue around potential solutions and route to tackling the issues highlighted by the research. These events also provided a new opportunity for civil society organisations working in this field and alternative/ affordable finance providers to engage with the FCA to discuss the barriers to innovation and how the regulator can better support new initiatives. In addition to these collaborative sessions, the team has endeavoured to ensure that key policy and practitioner stakeholders are fully engaged with the findings through bespoke meetings and presentations, for example to teams at Welsh Government, the FCA, financial capability organisations, and the Corporate Responsibility team at a major bank.
Exploitation Route There are a number of key stakeholders who are currently acting on the research outcomes or could potentially do so in the future:
Policymakers - Policymakers in Welsh Government, UK Government, and at the local level in relation to financial inclusion, financial capability education, local planning policy, place-based approaches to local growth and development, etc.
Regulation - The FCA has demonstrated a high level of interest in the findings and is using it to inform its work on reviewing the impacts of the cap on high cost short term credit, as well as future work in the area of consumer protection. The research findings also provide clear evidence of need for greater regulatory support for innovation in the alternative/ affordable finance market.
Housing providers - The outcomes point to a clear role for social landlords and private landlords in tackling many of the issues identified through the research.
Financial services providers - The research provides important insights into the design of products for financially vulnerable consumers and makes a series of recommendations about how current and future products could be developed to improve consumer outcomes.
Third sector organisations - The research evidence underpins the role of civil society organisations, particularly in the field of debt advice, to tackle the issues investigated and highlights potential models for increasing timely uptake of services.
Academia - There is a need for ongoing research, particularly into the evolution of alternative finance products and consumer response to these.
Sectors Communities and Social Services/Policy,Education,Financial Services, and Management Consultancy,Government, Democracy and Justice

URL http://youngfoundation.org/wp-content/uploads/2016/05/Summary-Report-VFinal3.pdf
 
Description The issues of financial exclusion generally, and high cost credit in particular, remain high on the public policy agenda. Since publication, we have been involved in wide-reaching engagement activities, with policy makers, practitioners from a wide range of allied sectors, and with business. The evidence generated by the research has been used to inform the work of a number of significant national consultations, reviews and strategic policy plans, including the Lords Select Committee on Financial Exclusion, the FCA review of high cost credit and overdrafts, and the Financial Capability Strategy for Wales. The research is also being used heavily by the Public Policy Institute for Wales (PPiW) who, for example, have used it in workshop discussions around differing approaches to poverty, with a focus on the sustainable livelihoods approach which looks at people ability to cope in crisis situations and their ability to influence decision making. The Sustainable Livelihoods Approach looks at people's ability to access credit in assessment of their assets and so the research fed into that part of the discussion. A report produced as a result of the discussions, which mentions the research, can be found here: http://ppiw.org.uk/ppiw-report-publication-a-new-approach-to-poverty-reduction/ . PPiW has also presented the findings to the Royal Statistical Society to illustrate how mixed-methods research can give the stories behind the statistics and unearthed findings that the number would never have been able to show. PPiW argued that this kind of work is much better for helping to draw policy recommendations as it involves people experiencing the problem in both identifying the issues as well as the solutions. It is clear from the insight gathered through the research, however, that changes to policy can only ever represent a small part of the solution to problems of financial exclusion and high cost credit. For this reason, much of our engagement activity has been focused on supporting third sector and innovation-focused organisations on better understanding the issues they seek tackle and some of the potential interventions developed through the co-creation sessions towards the end of the research programme. We have met with housing associations, credit unions and debt/advice charities to share the findings and several tell us have undertaken further activity as a result - disseminating the research more widely through their own networks, using it to reach out to consumers they have contact with, and to inform the development of their strategies and business plans. One Housing Association has told us: "Whilst we were aware of the toll of high cost credit on our tenants the research has made us far more aware of the nuances of the problem (for instance, the difficulty in obtaining £200 to £300 without borrowing) and has helped us to begin to frame a strategic approach. Again, it gave us robust evidence to the effect that the rent to buy market is having on our tenants and how it is viewed as an option. The section on "improving outcomes by working with housing providers" (page 50) was extremely helpful. We are looking at all three recommendations. It has informed our priorities of looking at and increasing the financial literacy of our tenants coupled with a push for a more affordable product." Another third sector organisation in Wales is part of a collaborative National Lottery funded project that provides advice and support to people with debt. They have used the findings to help p[provide training and support to staff dealing with debt and rent arrears. The final area of significant activity has been in the field of social innovation. The research team has met with innovation support organisations and funders across the UK to inform their work and begin early-stage discussions on potential collaborations. In particular, the team was pleased to be able to support the Finance Innovation Lab's Financial Health Fellowship, through acting as part of a wider team of experts providing support and challenge to innovators in the field. The Young Foundation is also considering how it can incorporate the findings into its own innovation support programmes going forward.
First Year Of Impact 2016
Sector Communities and Social Services/Policy,Financial Services, and Management Consultancy
Impact Types Societal

 
Description Referenced in The Financial Capability Strategy for Wales
Geographic Reach Local/Municipal/Regional 
Policy Influence Type Citation in other policy documents
URL https://prismic-io.s3.amazonaws.com/fincap-two%2F3f5d1d53-7e35-44f2-aae2-e5e9c8904a28_fincap+wales+f...
 
Description Submission to FCA call for input on high-cost credit and overdrafts
Geographic Reach National 
Policy Influence Type Participation in a national consultation
 
Description Submission to the Lords Select Committee on Financial Exclusion
Geographic Reach National 
Policy Influence Type Gave evidence to a government review
URL http://www.parliament.uk/documents/lords-committees/financial-exclusion/Financial-Exclusion-Committe...
 
Title High cost credit in Wales - customer survey 
Description The dataset includes data from a survey of 134 consumers in Wales: payday loan customers, home credit customers, rent-to-own customers, and credit union customers. It covers their customer journey through choosing a credit product, the impacts of using credit, and a range of profiling information. The dataset has been deposited with the UK Data Service. 
Type Of Material Database/Collection of data 
Provided To Others? No  
Impact
 
Title High cost credit in Wales - nat rep survey data 
Description We have produced a dataset which contains the results of a n=2,000 nat rep survey of the Welsh population which covers key questions around credit use, financial capability, financial resilience and attitudes to money. The dataset has been deposited with the UK Data Service. 
Type Of Material Database/Collection of data 
Provided To Others? No  
Impact
 
Description 2nd FINEXUS Conference on Financial Networks and Sustainability 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Policymakers/politicians
Results and Impact The research team presented the research findings at the FINEXUS 2018 Conference, in Zurich - the final event of the EU funded Dolfins project. The results of the Young Foundation's #PoorCostsMore campaign (driven by the results) were shared in a panel session on sustainable finance and citizens, a discussion which aimed to examine the role of civic society in sustainable finance and the implications of sustainable finance for society. The campaign was run for the Dolfins project in order to test approaches to engaging citizens in finance and sustainable finance. We ran the campaign in partnership with The Big Issue to back Lord John Bird's Credit Worthiness Assessment Bill. The Credit Worthiness Assessment Bill has now passed its second reading in the House of Lords and is on its way to committee stage.

The 'Credit where credit's due?' report helped to inform how The Young Foundation designed the campaign. For example, one of the reasons we decided to host the campaign on Facebook as a result of the research highlighting the role peers play in supporting others to engage with financial services, including debt advice. The research showed how people were more confident accessing services for support if referred by someone they trust (friends/family). Therefore having peers sharing messages on finance over Facebook, as opposed to less trusted institutions, was suggested to be a more effective way of engaging more citizens.
Year(s) Of Engagement Activity 2018
URL http://www.finexus.uzh.ch/en/events/conference-financial-networks-2.html
 
Description Co-design sessions - Cardiff and Wrexham 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Two co-design events were held in January 2016, one in Cardiff and the other in Wrexham.
The events were structured into three main parts: sharing the preliminary research findings; an "innovation showcase" (which highlighted some of the solutions to similar challenges that are being tried across the UK and globally); a co-design activity which encouraged people to engage with the findings and develop recommendations for policy, practice and new products/ services.
At each event, we brought together groups of people who have a vested interest in the outcomes but who do not typically work together to design solutions. These included: Welsh Govt. and local authority policy makers; representatives from third sector advice organisations and housing associations; representatives from the lending community (high cost credit lenders and credit unions); experts from think tanks; and importantly also included users of high cost credit who had participated in the research.
The events led to useful connections being made between attendees and the development of interesting potential solutions to some of the issues raised in our research. The outcomes are being used to help further shape the forthcoming publications.
Year(s) Of Engagement Activity 2016
 
Description Financial Conduct Authority presentation 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact A presentation of research findings to 40-45 policy experts, economists, and consumers specialists who work at the FCA.
Year(s) Of Engagement Activity 2016
 
Description Meeting with NESTA impact investments team 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Other audiences
Results and Impact Presentation and discussion of findings with the NESTA impact investment team. NESTA is the leading innovation think and do tank in the UK. Part of their work focuses on investing in products and services that improve supply of, access to, and allocation of resources for communities and individuals experiencing exclusion. The resources theyare particularly focused on are: energy, food, healthcare, financial services and social connections. Our research helps to inform their thinking in the financial services space.
Year(s) Of Engagement Activity 2016
 
Description Meeting with New Economics Foundation to share results 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Third sector organisations
Results and Impact Presentation and discussion of findings with the New Economics Foundation, an influential think tank.
Year(s) Of Engagement Activity 2016
 
Description Participation in Stepchange Charity roundtable 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact Research team contributed to discussion at roundtable hosted by Stepchange debt charity on payday loans and affordable credit to support their thinking on affordable credit policy.
Year(s) Of Engagement Activity 2016
 
Description Presentation to Lloyds Responsible Business Team 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Industry/Business
Results and Impact Presentation to the LLoyds Responsible Business team which sparked questions and discussions around the perceptions and role of mainstream banking in tackling the high cost credit problem.
Year(s) Of Engagement Activity 2016
 
Description Presentation to South Wales Capability Forum 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Professional Practitioners
Results and Impact Presentation of research findings to the South Wales Financial Capability Forum
Year(s) Of Engagement Activity 2016
 
Description Report launch event 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Professional Practitioners
Results and Impact Report launch event with subsequent debate, held at the University of Cardiff. Attended by around 50 people and led to discussions about what practical steps can arise from the research. Notable shift in discussion away from the need for further research to better understand the issues to the need for practical action in response.
Year(s) Of Engagement Activity 2016
 
Description Research summary in Welsh Tenants E-Zine 
Form Of Engagement Activity A magazine, newsletter or online publication
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Professional Practitioners
Results and Impact An article summarising our research and supporting its findings as a source to inform debate and stimulate discussion on financial inclusion by community and housing organisations. The Welsh Tenants E-Zine is distributed to Tenants and Residents across Wales, Housing Staff, Housing Organisations and PRS letting agents. The professionals in this sector have close engagement with a significant group of high cost credit users and are identified in our report as a sector which has significant potential to have positive impact on outcomes for individuals.
Year(s) Of Engagement Activity 2016
 
Description Supporting Financial Innovation Lab Fellowship Programme Design 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact Members of the research team have held discussions/ briefings with representatives of the Finance Innovation Lab and attended a programme design workshop to contribute expertise on the issues investigated through our research. The programme is designed to incubate and grown innovations which support the development of financial health.
Year(s) Of Engagement Activity 2016,2017
URL http://financeinnovationlab.org/
 
Description Welsh Govt. meeting re. recommendations 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Policymakers/politicians
Results and Impact Meeting with senior policymakers from Welsh Government to discuss the implications and recommendations emerging from the research, and how it can connect to the Welsh Financial Inclusion Strategy.
Year(s) Of Engagement Activity 2016
 
Description Westminster report launch event 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact An event held on the Parliamentary Estate, hosted by Baroness Glenys Thornton and Stephen Kinnock MP. Attended by around 50 people and led to discussions about what practical steps can arise from the research.
Year(s) Of Engagement Activity 2016