Friday 1st June 2018
Consumers need finance
Levels of consumer borrowing are at their highest since the financial crash in 2008, with total borrowings now at 200BN+ including a rise of 9% in the year to September 2017 (1), prompting the Bank of England and FCA to warn of concerns about a consumer finance bubble. This is because finance is no longer being used to fund one off expensive purchases like cars or home improvements as it was a decade ago; millions of people in the UK are increasingly turning to finance just to get by and fill the gap between pay checks.
Studies have revealed that each year 7 million people in Britain use credit to pay for everyday essentials and an estimated 13 million people would need to turn to credit to cover an emergency cost (2). Staggeringly, 40% of workers have less than £100 in savings (3). This is not just an issue affecting low paid people, the lack of savings permeates the entire income spectrum. 31 % of 'middle class' (4) workers could not find £500 if faced with emergency expenditure (5).
Enter the high cost credit market
In order to bridge the gap in their cash flow, consumers have been increasingly turning to short term credit in order to get by. The demand for these short-term loan products led to the explosion of the pay day loans market and door step lending market. The High Cost Credit market is enormous, used by 4.4 million consumers annually and making £4.5BN of loans in 2017 (6). This type of short term personal cash flow lending is expensive. Taking a loan of £500 over 52 weeks with a door step lender you would typically repay £936. Despite the regulatory price cap introduced by the FCA in 2015, the Citizens Advice Bureau identified high interest rates as the largest cause of detriment in the current payday loan market, with 37% of people identifying this as the main issue with repayment (7).
As well as the high cost, other poor lending practices prevalent in the High Cost Credit sector can lead workers into a spiral of unmanageable debt, hugely exacerbating financial stress.
Examples of the worst aspects of those poor lending practices include:
Door Step Loans: evidence of unmanageable debts caused by high-pressure sales tactics, poor affordability checks, and aggressive repayment collection practices (8):
" A single parent was £2,500 in door step loan debt. On the same day that his 9 year old son died, the lending agent came to his home and demanded payment. Despite having the situation explained, the agent refused to leave and escorted a family member to an ATM to withdraw cash and make a £150 payment."
Source: CAB, Debt on the Doorstep (Feb 2017)
Pay Day Lenders: using continuous payment authorities to collect loan repayments, and other potentially dangerous models for collecting repayments, such as taking control of borrowers' internet banking:
"A woman from the West Midlands had three pay day loans at the same time in 2015 when one firm, when one firm took the last of her money from her account without any prior notice or permission"
Source: CAB, Pay day loans after the cap (Aug 2016)
Why is there so much detriment in the High Cost Credit market?
Short term lending in particular is itself high risk and inherently expensive. In very simplistic terms: lenders model the likelihood of default on their loans across their portfolio and (broadly) set their interest rates at a level which they have calculated will provide enough income to cover the losses on the loans they estimate will default as well as deliver a healthy profit. If a Lender estimates it needs to make for example £50 profit on each £200 loan to cover his default risk (and make a profit), the interest rate required to achieve that income over 1 month is much higher than over 12 months.
This is the position put forward by High Cost Credit providers to justify their high fees and interest. They also point to the fact that their customer base has a higher risk of default as those who use those products have lower incomes and less savings and lower than average traditional credit score.
There is now another way to fill personal cash flow gaps.
Welcome Unify (Exit pay day lenders)
Unify is a new and innovative pay advance app, which partners with Employers, to enable employees to access their earned but unpaid wages on demand. For every day that an employee works they build up an available balance from which they can request an advance at any time. If an employee requests an advance on their wages, Unify provides the requested advance amount and then automatically performs the reconciliation on pay day, deducting the amount of the advance and directing the balance to the employee.
Unify's innovative pay advances give workers a powerful new tool for managing their finances and dealing with unexpected expenditure.
Unify enables early access to accrued but unpaid wages - it is not a loan and as such we do not take a credit risk on the individuals. This means we can charge a single, fair, transaction fee for processing a pay advance. We do not charge interest, late payment or default fees of any kind. This means that every employee who works for one of our partner employers can access pay advances regardless of their income, status and credit file.
Partnerships with Employers - a 'win-win'
Unify is a free-to-offer employee benefit, allowing Employers to partner with us to provide their workers with instant pay advances. This partnership is a win-win for employers and employees.
Employees financial lives can be significantly improved by our accessing their earned wages when they need them and avoiding pay day lenders.
Employers benefit from powerful staff retention improvements and increased employee productivity. These translate to real '£' staff cost reductions.
Improving staff retention
Losing employees is a significant cost to businesses, especially in industries with high levels of employee turnover such as retail, hospitality, restaurant and manufacturing sectors. Linked-IN estimates the cost of replacing an entry level employee are equivalent to 50% of their annual salary rising to 100% of annual salary for more senior or technical employees (9).
In the first independent study of its kind in the US, Harvard university found that the implementation of a pay-advance based financial wellbeing benefit like Unify has been shown to reduce employee turnover by an estimated 19% (10). Harvard university estimated that the cost reductions attributed to reduced employee turnover using a pay advance benefit, for a company of 340,000 employees were US$107,810,560 per annum.
The CIPD found that money worries are biggest source of stress to UK employees (11). Studies have shown that employees miss days at work and their productivity is severely affected by financial stress. It is estimated this kind of absenteeism and presenteeism (people coming to work ill) cost businesses approximately 4% of their total payroll costs each year (12).
Unify significantly reduces this cost to businesses, by reducing employees' financial stress and actively increasing employees' motivation when at work, by showing employees the instant benefit of every day worked with their increasing pay advance availability.
Through forging powerful partnerships with employers, Unify aims to improve the financial lives of millions of workers through the provision of low-cost responsible pay advances. At the same time, it will provide Employers with a powerful free-to-offer employee retention and engagement tool that can save their organisations millions or even tens of millions of pounds each year in staff costs.
We believe this 'win-win' scenario will lead to a paradigm shift in the way employees access their wages and eliminate the need for and existence of predatory high cost lending practices.
If you are interested in joining our journey towards a better financial world for working people, please get in touch.
1 Office of National Statistics, (2017)
2 Step Change Debt Charity, (2016)
3 Money Advice Service, Press Release: Low savings levels putting millions at financial risk, 2016
4 'Middle class' defined as ABC1 group (includes professional, junior managerial and administrative workers)
5 The Bank Workers Charity, Employee Financial Wellbeing- Time to do more, 2017
6 FCA HCSTC Appendix July 2017
7 Citizens Advice Bureau, Pay Day loans after the Cap, August 2016
8 Citizens Advice Bureau, Debt on the Doorstep, February 2017
9 Linked-IN, Calculating the costs of employee attrition and dis-engagement, 2017
10 Harvard M-RCBG, The Power of the Salary Link: Assessing the Benefits of Employer-Sponsored FinTech Liquidity and Credit Solutions for Low-Wage Working Americans and their Employers, March 2018
11 CIPD, Financial Wellbeing needs to become part of wellbeing at work strategy, 2016
12 Barclays, Financial Wellbeing: The last Taboo in the workplace?, 2014