As government support for financial inclusion is due to end in April, campaigners, politicians and practitioners have been examining how to stop or replace high-cost credit.
Around 6 million people in the UK annually use payday loans, home credit services, pawn shops and other non-mainstream financial services, paying between 300% and 3,000% interest to access small amounts of finance. Many assume it's because of a lack of understanding about the rates being charged, and most policy has focused around greater transparency in pricing and more education. But, hard as it might be to accept, I have rarely met a user of a payday loan or home credit service who didn't know how much they were being charged or what they were paying.
Poor people often have limited choice in the financial products they use. This can be due to a lack of basic information such as a driving licence, passport or utility bills, as a result of credit scoring procedures, which prioritise employment and home ownership, or because of a lack of credit history data. However, with just under 2 million people without a bank account, there are many people who choose to use expensive and non-mainstream products.
Every year I run a focus group with our clients and ask them what are their five most important considerations when choosing a financial product. The response is always the same. High on the list is accessibility – "Can I access the product because of my income, location or background?" Unlike banks, all these companies providing alternative sources of credit advertise that people with county court judgments, benefits claimants and part-time workers are welcome, and doorstep lenders will even come to your home.
Flexibility is usually next: can the product accommodate a variable and flexible income – "Can I change a payment date if the Department for Work and Pensions withholds a payment for a week or I miss a week off work?" A doorstep lender allows for missed payments – contrast this with how hard it is to convince your bank to hold a direct debit payment for a few days.
Clients value respect – they want the person offering them the product to treat them with respect and to value them. I hear many stories of people being treated badly at banks – either being made to feel small or looked down upon. Doorstep lenders are not people with baseball bats and Rottweilers, they are often members of your community, understand your predicament and probably live on your estate.
Speed is also cited as important, particularly with payday loan clients – "I can walk in off the street, sign up for a loan and leave in 20 minutes with £200 cash." Paperwork is minimal.
Finally, people tell us that honesty and simplicity are key factors in deciding to use a product. They find APRs difficult to understand and bank products can be complicated; people like the simple approach of £20 a week for a £500 loan over a year from a doorstep lender; £15 per £100 a week from a payday lender; or 10% a month on what you borrow from a pawn shop. These products rarely have penalty charges or additional payments.
For you and I, price or cost might come top of our list, but for our clients it comes in at number 12. Not because they're not interested but because it's just not as important as the custom-designed products offered by these lenders. In many cases they accept that the service they want will cost more.
We might look at the choices people make and think that they are wrong because they seem expensive, but if we're going to be serious about creating alternatives then we need to understand why people use them.
• Faisel Rahman is director of Fair Finance, a financial inclusion social enterprise.
