What would work as a viable alternative to payday loans?

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 million 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.

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.