Can tech help reinvent the community lending sector?

Over 8 million people use credit to pay for everyday household expenses, and many of them struggle to access fair, affordable credit. Community lenders offer one alternative to profit-driven financial services – but without the deep pockets to invest in things like marketing or technology, they have remained under the radar. Chris Gorst, from Nesta Challenges, on how a new competition is encouraging collaboration with fintech innovators to shape a kinder personal lending market.

Are community lenders one of the UK’s best-kept secrets?

With many credit unions and community banks now offering savings and loans products, and even current accounts and mortgages, could these be a viable alternative to mainstream, profit-driven financial services? As payday lenders such as Wonga and QuickQuid collapse under the weight of customer complaints, the question is a timely one.

The advantages of community lenders are numerous: they’re non-profit, rooted in their local community, their savings and lending rates are competitive, and they offer a more affordable credit alternative to those who might otherwise turn to high-cost credit. Their position at the heart of their communities also allows them to understand and tailor their offer to the people that they serve.

Without making full use of technology, community lenders will struggle to grow while their digitally-savvy, high-cost competitors surge ahead

The British public likes the idea of community lenders. Research conducted by Nesta Challenges to mark the launch of the Affordable Credit Challenge, revealed that eight in 10 (82%) people think more needs to be done to ensure there are alternatives to high-cost lenders. Three-quarters of those polled believe not-for-profit, community lenders need more support to succeed. 

What is a community lender?

Community lenders are not-for-profit organisations, such as credit unions or community development finance institutions (CDFIs), that provide financial services including loans and savings.

The personal loans that community lenders provide are often targeted at people with limited access to mainstream sources of credit (such as bank loans, overdrafts or credit cards). Many of these customers are on low or irregular incomes; loans enable them to manage the peaks and troughs in income by smoothing their cash flow.

Source: the Cabinet Office


But without the deep pockets of the high-cost lenders for things such as marketing and technological investment, community lenders have remained under the radar. The flipside of their community focus is that they tend to be small and lack the resources to invest in improving their services – including keeping up with technology. Borrowers value convenience as well as (and sometimes more than) price, and current technology has raised consumers’ expectations for speed and 24/7 availability. Without making full use of digital technology, community lenders will struggle to grow while their digitally-savvy, high-cost competitors surge ahead.


Tapping into fintech

In parallel, we see technology transforming financial services. The rise of the fintech sector has led to innovative, agile start-ups shaking up traditional banking and going head-to-head with the large banks by using tech to provide services that people really want. So a natural question is: could the fintech disruptors help give community lending a new burst of energy?

This has been recognised by HM Treasury, which has partnered with Nesta Challenges to create the Affordable Credit Challenge. The Challenge encourages fintech innovators to partner with community lenders and use technology to widen access to responsible, affordable credit.

Recently, we announced the six finalist partnerships between fintechs and community lenders which have secured £150,000 each in funding to develop their innovations. The finalists’ solutions include several that aim to make it easier to join a credit union. The partnership between Capital Credit Union, Nivo and Soar focuses on developing a mobile app using the latest digital financial technology to allow new and existing  members to sign up and apply for loans. Credit Unions for Greater Manchester and Incuto are working together on a single, streamlined application portal for a consortium of credit unions making it easier for people to find and apply for affordable credit. These products aim to compete with the speed and accessibility offered by payday lenders.  

Two partnerships in the Challenge are very much focused on helping the financially vulnerable. Central Liverpool Credit Union (CLCU) and NestEgg will use open banking data to provide an alternative credit scoring system, automating loan decisions and generating financial health indicators focused on borrowing, spending and planning. These indicators will help applicants and loan officers alike to understand decisions taken and to help unsuccessful borrowers by providing information about how to improve their financial health. Meanwhile, Fair for You and EML & Lending Metrics are developing a revolving loan facility to provide buffer credit specifically for a frozen food shop during school holidays. This will help low-income households that otherwise turn to high-cost, short-term credit to cover spikes in grocery costs when children aren't getting school dinners.

Fair for You and EML & Lending Metrics are developing a revolving loan facility to provide buffer credit for a frozen food shop during school holidays

The final two partnerships are focused on helping public sector workers, including a joint venture between Police Credit Union Ltd and Credit Kudos, to offer a reward loan solution that uses open banking to monitor a borrower’s behaviour and reduces the interest rate they pay as they develop better financial habits. Salad Money has also partnered with Credit Kudos to develop an innovative way to offer affordable loans for NHS workers that are repaid using payslip deductions, using open banking and artificial intelligence to improve credit decisions. A key part of this solution will be reflecting insights on decisions back to borrowers, to help them understand their habits and how to improve them. 


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As we change the way we manage our own money, encouraged by initiatives such as open banking and the appeal of attractive new fintech brands, we need to explore with equal vigour the changing world of credit and lending. The next few years will see considerable positive change in the financial ecosystem, and we hope that this will be just as pronounced in the community lending sector.

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Header photo: Stephen Mazurek (IT & innovation manager) and Paul Norgrove (CEO) of the Serve and Protect Credit Union, an umbrella brand providing credit union services for the Police, Military and Prison Service. The Police Credit Union is a finalist in the Affordable Credit Challenge, working with Credit Kudos.