UK’s traditional doorstep lenders are moving online to take advantage of what is clearly the next growth frontier. Doorstep payday loan lenders, whose agents have been collecting cash from borrowers in UK’s most hard-bitten neighbourhoods for decades, have finally seen the “light”.
The move comes in the wake of rate caps imposed by the financial watchdog as well as other regulatory restraints on payday loan lenders which have created a perfect opportunity. Doorstep lenders can now enter the online space with more transparent loan pricing as well as sustainable repayment terms which borrowers have desired for years.
Provident Financial, a FTSE 100 financial services company, was the first to lead the way through its online business, Satsuma, which offers loans repayable on a weekly basis. According to Provident Financial, all indications suggest Satsuma will break even this year paving way for profits and the launch of a new monthly repayment product. Morses Club will follow Provident Financial’s path when they launch an online loan before the end of the year. The company, which was listed on Aim in May 2016, is the 2nd largest doorstep lender with 200,000 customers.
According to Morses Club C.E.O. Paul Smith, the company has a unique opportunity to get a new set of customers given the fact that Morses Club has been receiving over 125,000 website hits monthly, most of which (75%) are from individuals searching for online loans. Paul Smith is set to reveal the terms of his company’s new online loan product during Morses Club’s debut financial results release in early October.
Morses Club, which owns Shopacheck, listed its shares on the stock market when its private equity owners Rcapital floated 49% of the shares. Although the company’s share price fell immediately after the initial public offering, the shares have recovered recent weeks. On Friday, the share closed at 112.5p compared to a 108p float price.
The opportunities for doorstep lenders venturing online is enormous given the fact that the UK has over 12 million consumers who don’t meet the credit standards of mainstream banks. Traditional doorstep lenders currently service approximately a sixth of these customers (2 million customers). These borrowers are heavily reliant on irregular employment or benefits and have little to no credit history. These consumers are forced to depend on costly credit to settle emergency expenses as well as pay for special occasions like children’s birthdays.
According to the C.E.O of Provident Financial, Peter Crook, doorstep lenders offered their services to nurses, teachers, and public sector workers a decade ago, however, these customers now have online loans as their only option.
There are however skeptics that feel the move by doorstep lenders to go online carries additional risks. Subprime lenders like John Van Kuffeler, CEO of Non-Standard Finance which operates as Loans At Home claims that online lending won’t work effectively with the lower end of the 12 million customers who don’t meet the credit standards of mainstream banks. According to Kuffeler, meeting face-to-face is much better than having online engagements from a credit assessment standpoint.
Kuffeler claims that lenders should do home credit, go door-to-door or use a branch-based system to ensure face-to-face engagements. Kuffeler’s concerns appear valid, however, the demand for short-term unsecured loans is too high.
Before the credit crisis in 2008, UK’s small-value short-term unsecured loans market was valued at approximately £12bn with Lloyds, Barclays and many other high-street lenders active. When the credit crisis hit, credit conditions tightened causing the volume of short-term unsecured loans written by mainstream banks to hit record lows.
Payday loan companies stepped in to fill the resulting vacuum. Doorstep lenders are poised to step in and fill the void created by payday loan companies today on the wake of rate caps among other regulatory restraints imposed on payday lenders by the financial watchdog. The new regulations are making it hard for traditional payday loan lenders to operate.
Doorstep lenders have also realised that people are no longer willing to borrow and service their short-term unsecured loans traditionally. There is, however, need for caution if doorstep lenders expect to stand the test of time. Industry players like Panmure Gordon analyst Donald Tait expect Morses Club to approach online lending cautiously given the fact that rapid expansion of unsecured lending was the main cause of the collapse of Panmure Gordon’s former parent bank, London Scottish Bank back in 2008.
All in all, the opportunity is there for doorstep lenders that will be able to match risk with loan pricing perfectly given the fact that the subprime market appears to suffer from a permanent recession sometimes.