Fueled by algorithms and software to assess credit worthiness, the financial technology industry’s growth has been such that regulators in the United States and elsewhere are <a href="https://www.ft.com/content/ae6a1186-9a2f-11e8-9702-5946bae86e6d">exploring ways for these companies to test new products</a> and innovate faster without jeopardizing the health of the financial system.

At the same time, however, there are <a href="https://www.americanbanker.com/opinion/occs-fintech-charter-is-a-mistake">calls from the traditional financial service sector</a> (especially community banks) to subject these companies to the same level of regulatory scrutiny banks face, while <a href="https://www.pymnts.com/news/b2b-payments/2018/bis-fintech-credit-business-p2p-lending/">questions</a> continue about their potential risk to the financial system.

In such an environment, it would be a big mistake for fintech companies to maintain a low profile and focus solely on delivering value to their customers and the financial institutions they partner with. Political risks, as well as opportunities, must be factored in.
<blockquote>It would be a big mistake for fintech companies to maintain a low profile and focus solely on delivering value to customers and partners.</blockquote>
Lawmakers responsible for oversight of the financial services sector have <a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401750">made it clear</a> that one of their priorities will be issues they consider to be critically important for the economic well-being of Americans. This includes encouraging what they consider “responsible innovation in financial technology,” as well as promoting diversity and inclusion in the sector. Given the heightened scrutiny on the industry from Capitol Hill, fintech companies should be actively seeking out opportunities to engage with key stakeholders in Washington, D.C. to demonstrate why their endeavors should be encouraged, not hindered.

The Federal Deposit Corporation’s 2017 <a href="https://www.fdic.gov/householdsurvey/2017/2017report.pdf">National Survey of Unbanked and Underbanked Households</a>, a report assessing "Americans’ access to safe, secure, and affordable banking services," is an example of a perfect educational opportunity.

The report notes that 18.7 percent of U.S. households were “underbanked” last year, meaning they had an account at an insured institution but also tapped alternative financial services such as: money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title loans.

Many of the above options come with double or triple-digit interest rates, and that is one reason U.S. regulators have encouraged banks, rather than unregulated providers, to <a href="https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-51.html">make more small-dollar loans</a> to customers.

The FDIC report presents a great opportunity for fintech companies, in conversations with lawmakers, regulators, and media, to underscore the key role the industry plays in making loans to under-served borrowers and communities ignored by traditional banks - and without the predatory terms common in payday and title loans. As the report notes, the majority of households using alternative financial services were in a less-advantaged group: low-income, less-educated, younger, black and Hispanic, disabled, and with volatile income.

For banks to offer small-dollar loans to these customer segments in a cost-effective manner will require partnerships with technology firms. Fintech companies can provide access to a broader range of data and analytics, potentially helping banks to serve more consumers responsibly. Richard Cordray, the former director of the Consumer Finance Protection Bureau (CFPB), recently <a href="https://www.fastcompany.com/90318224/now-wanted-by-equifax-and-other-credit-bureaus-your-alternative-data">noted</a> how "alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources."

Additionally, point-of-sale lending is popular with younger borrowers, who are reluctant to take on credit card debt, but are comfortable borrowing for specific purchases. Point-of-sale lending is being fueled by fintech firms, such as Affirm and GreenSky, which have the necessary technology and also relationships with thousands of merchants. They can connect banks with borrowers.

Point-of-sale loans are an important driver of consumer loan growth for banks at a time when many are cutting back on auto lending activity and demand for home equity loans has declined. Smaller, community banks, especially, can become overexposed to specific market segments, particularly commercial real estate. Offering these types of personal loans helps to diversify their risk.

Furthermore, U.S. retail banks <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/49360224">are closing branches</a> at the fastest rate on record – 1,947 in 2018 alone – as consumers continue to migrate to online and mobile banking options. Clearly, the future of banking is the internet, and community banks need to partner with fintech firms to keep up with the large Wall Street banks. More to the point, without fintech partnerships, many community banks may go out of business, creating banking deserts that would be a significant blow to greater financial inclusion.

An excellent example of community banks using fintech to compete with the big banks is <a href="https://globenewswire.com/news-release/2018/02/07/1335463/0/en/Radius-Bank-Mantl-Launch-New-Digital-Account-Opening-Platform.html">Radius Bank</a>, a $1 billion asset institution in Boston, which is <a href="https://www.americanbanker.com/news/fintech-partnerships-can-work-see-radius-bank">establishing long-term relationships</a> with fintech providers, and is finding them to be mutually beneficial. The bank is serving more customers, and standing out from the crowd by partnering with technology firms. The bank is trying to become the Amazon of banking, but according to the article, "It's hard for banks to reach Amazon-like levels of usability on their own."

Many U.S. lawmakers have been vocal about their desire to end predatory lending practices, and fintech companies (and businesses more generally) need to aggressively seize opportunities such as these to show how they are part of the solution.

Image Credit: <a href="https://www.flickr.com/photos/ponyrojo/5637105898/in/photolist-9A8Dc1-2dkvzjP-bp9LdB-96Ht48-27CpeT9-4vhcKu-7EuRys-9KyKpy-5ZUyW1-8m4vvW-64LqPo-hqLSF-2beKjsV-SP3mQu-roCJtM-9i41MQ-6i2uAC-84xWrA-29RVSQ-8hJ4zN-7iRxSm-P3c5Y-c54Cjs-21dQrj1-9gAKEo-92AuVC-gMXTWR-4DbgiZ-5Gp5GJ-hqLQP-huPt-5x3P5Q-cDPYro-7wL6oK-5jPeF5-4NGwPF-rNw91C-hNRXw-64fGf6-ZdSeUE-ahPTgp-9vk1JA-2bQq4PY-JrFe1G-ohepF-9s5tkC-6JTkec-64rPAo-9cHsn3-ifNojx">pony rojo</a> /  <a href="https://creativecommons.org/licenses/by-nc/2.0/">CC BY-NC 2.0</a>

Seizing Opportunities for Proactive Public Policy Engagement on Fintech

&nbsp;

<img class="aligncenter wp-image-24663" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/11/cashnetusa1.png" alt="" width="614" height="298" />I recently browsed the website of <a href="https://www.cashnetusa.com/">CashNetUSA</a>, a company that offers payday loans and related products in 38 states across the United States. The website was easy to read and presented the application process and the (very high) charges simply and clearly. But I wanted to know more. Is this company legitimate? Does it live up to its promises? Will I experience any problems along the way? More broadly, how can a consumer tell whether an online payday lender is trustworthy?

I had no peer or family member to ask about this, so I turned to online credit provider reviews and began a Google-based armchair investigation.

The first review site that popped up was <a href="https://www.consumeraffairs.com/">ConsumerAffairs</a> (not to be confused with the better-known <a href="https://www.consumerreports.org/cro/index.htm">Consumer Reports</a>*). Companies pay to be reviewed on ConsumerAffairs, and CashNetUSA had over 1,500 reviews on the site. CashNetUSA slides a few of the most favorable reviews directly onto its own website, like these:
Customer service is always perfect and always goes out of their way to help me! CashNetUSA is in my opinion the very best company with the best prices when you need a little extra help. I will recommend CashNetUSA to all my friends and family who need a little extra help, and need fast friendly service. (Rock Creek, Ohio)
This review suspiciously resembled advertising copy. The next one sounded a bit more like a real person, with a couple of mistakes included.
Today is a good day. Thanks CashNet USA. All your representatives even the online chat did a good job in helping me pay off my old loan and re applying for another. GREAT JOB Team. Thank you for information and help you provided with a Good Altitude (sic). (Mesquite, Texas)
Since the overwhelming majority of the 1,500 raters gave CashNetUSA 5 stars, I began to believe that actual people who have used the service appreciate its speed, simplicity and customer service quality. But what about the much smaller number of 3-star ratings, from people who are neither satisfied nor particularly angry? Many of these folks liked dealing with the company but complained about the high interest rates. The 1-star ratings were generally rants from people so angry they spluttered all over my computer screen. Clearly their reviews were a chance to vent and get a small bit of revenge. But these were a very small minority: the overall score was over 9 out of 10.

A very similar site is <a href="https://www.trustpilot.com/">Trustpilot</a>, with over 2,000 reviews of CashNetUSA, giving it an overall rating of 8.7. One wonders whether some of these reviews are provided by bots – though the site assures us that’s not happening.
Excellent customer service given by Alonda today at CashNetUSA! Thanks!!! (Johnny Kuhn)
All these positive reviews started getting boring, to tell the truth. I spent more time reading negative ones:
CASH NET USA, IS A RIP OFF, I SUGGEST YOU DO YOUR RESEARCH AND PLEASE TAKE THE TIME TO READ YOUR CONTRACT BEFORE SIGNING, A TOTAL DISAPPOINTMENT. (Connie Head Newman)
Another site, <a href="https://www.highya.com/">HighYa</a>, only had a few ratings, but it was curious that HighYa’s CashNetUSA score was a low 1.8 out of 10, the opposite of the high ratings on Trustpilot and ConsumerAffairs. But HighYa offered an explanation. It explained that CashNetUSA is plagued by scammers who pose as the lender. A common tactic is to request applicants to send bank account details (to “test” a transaction) before approving a loan. Examining the experiences described by the 1-start ratings on all the sites, I concluded that a great many of the low raters had been scammed.

The next few sites I checked featured reviews written by the staff of the site, rather than consumer reviews. For example, <a href="http://www.toptenreviews.com">Top Ten Reviews</a> explained the service and praised CashNetUSA for ease of use. The big buttons allowing readers to click straight through to the CashNetUSA website revealed that the site is pretty cozy with the companies it reviews. However, at the same time, the site posted a warning to consumers to avoid use of payday loans whenever possible.

<a href="https://www.supermoney.com/">SuperMoney</a> only had three customer reviews of CashNetUSA, with a mediocre 3 star rating. But this site helpfully informed that CashNetUSA is a brand of Chicago-based Enova International, which also operates in Europe and South America.

The last site I checked was <a href="http://www.simplethriftyliving.com">Simple. Thrifty. Living.</a>, which summed up the picture I was beginning to get about CashNetUSA:
In general, among payday loan lenders, CashNetUSA fares pretty well when it comes to reviews. They are generally at or near the top of any payday loan rankings, mostly because of their organized business practices, easy availability and history in the payday loans field. To some, that may seem like saying a certain restaurant is the best of the restaurants with health code violations, but for someone who truly needs a payday loan, knowing which is the best and not a complete scam can be very helpful. 
Or, as SuperMoney said, more succinctly:
The APRs are high, but it's hard to beat as a fast source of cash in an emergency. 
This exploration of the review sites satisfied my curiosity about CashNetUSA, but it was only by visiting several sites that I got the full scoop. I’d like to know more about the business models behind these sites – and how their sources of income influence the ratings they display. The reviews from individual consumers on the bigger sites convinced me of the legitimacy and service quality of CashNetUSA, but I discounted those results somewhat, knowing that companies pay to be listed and encourage customers to place positive reviews, or place such reviews surreptitiously themselves. The staff-written reviews provided helpful information about the company that helped me draw my own conclusions – including that very important insight about the scamming problem. But without corroboration from the consumer reviews, I probably would have discounted them, too. Only by consulting both consumer and staff reviews could I piece together what seemed like a reliable picture.

I wonder how many people in search of a quick cash loan actually take the trouble to scan these reviews. With so much information at our fingertips, but without much ability to verify its sources, it makes perfect sense to fall back on the old reliable method: word of mouth from people we trust.

For more on how consumers try to verify the legitimacy of financial service offerings, see the report from CFI Fellow Alexis Beggs Olsen, <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/782">Uniting Tech and Touch: Why Centaur Products Are Better for Consumers and Providers, Evidence from Kenya</a>.

*Consumer Reports, possibly alone among organizations offering reviews, does not accept payment from any company it reviews, but instead operates through subscriptions from consumers. With no subscription, I was not able to access its information.

Have you read?

<a href="https://cfi-blog.org/2017/11/16/watch-out-unicorns-centaurs-are-the-future-of-financial-inclusion/">Watch out Unicorns: Centaurs Are the Future of Financial Inclusion</a>

<a href="https://cfi-blog.org/2017/10/26/tiny-loans-big-questions-client-protection-in-mobile-consumer-credit/">Tiny Loans, Big Questions: Client Protection in Mobile Consumer Credit</a>

<a href="https://cfi-blog.org/2017/10/03/how-mobile-money-is-closing-the-agricultural-finance-gap-for-women-in-kenya/">How Mobile Money Is Closing the Agricultural Finance Gap for Women in Kenya</a>

&nbsp;

&nbsp;

Choosing a Payday Lender: Can Online Reviews Help?

Over the past few decades, across demographics and regions, the proportion of people in the United States with bank accounts has increased steadily, a <a href="https://www.whitehouse.gov/sites/default/files/docs/20160610_financial_inclusion_cea_issue_brief.pdf">new report</a> from the White House details. More specifically, the report found that between 1989 and 2013: the percentage of U.S. households with bank accounts increased from 86 percent to 93 percent; the percentage of households in the bottom income quintile with bank accounts increased from 56 percent to 79 percent; among racial minorities, the percentage of households with bank accounts increased from 65 percent to 87 percent; and regional disparities have diminished, with financial inclusion increasing across all geographies. All of this progress in financial services access warrants acknowledging, of course, yet there remain sizeable gaps toward financial inclusion that call for immediate action.

For example, like most countries that enjoy high access rates, many banked Americans remain underserved. Twenty percent of households in the U.S. with bank accounts also rely on alternative/informal financial services. In 2013, roughly 5 percent of unbanked or underbanked households turned to payday loans, the White House report found. Indeed a few weeks ago we <a href="https://cfi-blog.org/2016/06/02/critical-regulation-the-consumer-financial-protection-bureaus-new-rules-on-payday-loans-and-short-term-credit/">spotlighted</a> new proposed regulation from the Consumer Financial Protection Bureau (CFPB) to rein in the growing high interest rate/fee-laden payday loan and short-term credit markets.

The United States also ranks dismally when it comes to financial literacy. In the <a href="http://www.forbes.com/sites/maggiemcgrath/2015/11/18/in-a-global-test-of-financial-literacy-the-u-s/#35f059e36a16">S&amp;P Global FinLit Survey</a>, it was determined that 57 percent of the American population is financially literate, which puts the country at 14th globally, according to the S&amp;P.

To address these gaps, the current Administration and the U.S. Department of the Treasury are involved in a number of initiatives. The establishment of the CFPB, as a result of the Dodd-Frank Act, created a focal point for consumer empowerment and attention to the underserved. In December 2015 the Treasury Department, in conjunction with USAID and other agencies, hosted a <a href="https://www.treasury.gov/press-center/press-releases/Pages/jl0289.aspx">Financial Inclusion Forum</a> which brought together service providers, policy makers, regulators, NGOs, consumer groups, and other stakeholders to address the challenges posed by financial exclusion. Forum participants announced 10 initiatives spanning key areas including fintech for the base of the pyramid, financial access for the particularly-excluded Mississippi Delta region, financial capability of young people and women, and retirement savings. What was perhaps most notable about the Forum was that it included both global and domestic actors, dispensing with the boundaries between them. This was moderately successful, as the challenges are somewhat different, but it is clear that there is increasing convergence.

The Department of the Treasury also established the <a href="https://www.treasury.gov/resource-center/financial-education/Pages/Finemp.aspx">Financial Empowerment Innovation Fund</a>, which awarded contracts for 11 research projects focusing on areas including financial capability surrounding higher education decision-making, payments and savings innovation, and integrating financial education into more classrooms.

Most recently, last Friday the White House <a href="https://www.whitehouse.gov/blog/2016/06/10/future-finance-now">convened</a> stakeholders from across the fintech ecosystem to discuss how fintech can help advance critical economic policy priorities. The number of fintech startups in the country increased from 800 to over 2,000 from April 2015 to February 2016, with venture capital funding in this area reaching unseen highs in 2015. A <a href="http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201503.pdf">survey</a> conducted by the Federal Reserve Board of Governors found that 40 percent of the unbanked had a smartphone, as did 70 percent of the underbanked.

One of the important features of financial inclusion work in the U.S. is that it is not only a federal matter, but is also taken up by states, and especially, by cities. Our <a href="http://www.centerforfinancialinclusion.org/fi2020/roadmap-to-inclusion/innovations-in-financial-capability">Innovations in Financial Capability-Building</a> project identifies a number of standout initiatives in the United States. Financial Empowerment Centers in New York City incorporate targeted financial counseling alongside the delivery of social supports such as housing services, homelessness prevention, and workforce development. This is an example of delivering financial capability messages at the teachable moments when people are making important life decisions. The model is being rolled out in a growing number of cities in the United States through the Cities for Financial Empowerment initiative.

Have you read?

<a href="https://cfi-blog.org/2015/08/26/investing-in-native-american-communities/">Investing in Native American Communities</a>

<a href="https://cfi-blog.org/2016/05/02/in-the-united-states-gender-gaps-in-financial-literacy-and-pay-persist/">In the United States, Gender Gaps in Financial Literacy and Pay Persist</a>

<a href="https://cfi-blog.org/2016/03/22/the-trouble-with-retail-credit-cards/">The Trouble with Retail Credit Cards</a>

The White House Releases Financial Inclusion Scorecard

Access to credit is essential. But when lenders operate through a business model that overwhelmingly turns small loans (think $500) into insurmountable cycles of debt, they are not providing an essential service and are instead profiteering. Such is the case with the payday loan and related short-term credit markets in the United States. Today, the Consumer Financial Protection Bureau (CFPB) unveiled new proposed rules designed to improve the practices of these lenders that draw customers into cycles of debt. The aim of the rules isn’t to kill essential access to credit, but to rein-in the payday loan industry’s reliance on having a high percentage of borrowers who are unable to repay their loans and are drawn-in to repeat borrowing at higher rates and with additional fees.

There are more payday storefronts than McDonald’s restaurants in the United States. Across storefront and online lenders, there are roughly 16,000 providers serving over 19 million American households. In the U.S., payday loans typically have an annual interest rate of 390 percent or more, according to the CFPB. These loans are purportedly designed to hold borrowers over between paychecks or short periods of time. Similarly, single payment auto title loans, which use borrowers’ vehicle titles for collateral, hold an annual interest rate of about 300 percent, and are typically to be repaid within 30 days. However, the vast majority of these loans aren’t repaid in the time allotted. Considering both payday and auto title loans, four out of five borrowers aren’t able to repay their loans during the time allotted and have to renew their loan or take out another loan to cover the first one. Such actions incur additional fees and interest, and build a long-term debt trap for borrowers.

In the United States this problem causes great hardship: <a href="http://files.consumerfinance.gov/f/documents/CFPB_Proposes_Rule_End_Payday_Debt_Traps.pdf">more than one-third</a> of payday installment loan sequences and nearly one-third of auto title installment loan sequences end in default; 25 percent of car title loan customers have their cars seized; and last year the fees associated with customers needing to take out new loans to cover previous ones grew to <a href="http://thinkprogress.org/economy/2011/12/06/382752/big-banks-finance-payday-lending/">$3.5 billion</a>.

In addition to typical payday and auto title lenders, the CFPB’s new proposed rules apply to online lenders, deposit advance loans, and certain high-cost installment and open-end loans. Only consumer loans are involved, because CFPB’s authority does not extend to small businesses, although it is certainly the case that many people use personal loans for business purposes.

Key elements of the rules are:
<ol>
 	<li>The full-payment test: Under the new rules lenders would have to determine whether borrowers can afford their payment obligations without bringing on other financial hardships. They would have to verify income and check existing debt service requirements. One measure of repayment capacity for a payday loan is that a person would not have to re-borrow to repay the loan within 30 days. The rules also propose limiting the number of short-term loans that can be made in quick succession.</li>
 	<li>Principal payoff option for certain short-term loans: For loans of $500 or less, the above requirement is waived. Furthermore, provided borrowers retire at least one-third of their debt each time, up to two extensions of the loan would be allowed.</li>
 	<li>Less risky, longer-term lending options: This proposal offers lenders two ways to avoid some regulation by offering one of two alternative versions of a short-term loan. The first option would be offering loans that generally meet the parameters of the National Credit Union Administration “payday alternative loans” program. The other option would be offering loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less.</li>
 	<li>Debit attempt cutoff: To deal with a related problem often encountered by payday borrowers – overdraft fees – lenders would have to give consumers written notice before attempting to debit the consumer’s account to collect payment. After two failed attempts, the lender would be prohibited from debiting the account without new authorization from the borrower.</li>
</ol>
The proposed rules are very much in keeping with the practices the Smart Campaign has championed. Its standards on avoiding overindebtedness require repayment capacity assessment, including a look at income, expenses and debt service. Its responsible pricing standards call for avoiding excessive fees, especially penalty fees. And the Campaign standards wave a red flag when the structure of a business model incorporates frequent default as an expected outcome.

The federal government is not the only actor going after payday lenders. Last month Google <a href="https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=2&amp;cad=rja&amp;uact=8&amp;ved=0ahUKEwjXgar72onNAhVDFj4KHRIZBq4QFggjMAE&amp;url=https%3A%2F%2Fwww.washingtonpost.com%2Fnews%2Fthe-switch%2Fwp%2F2016%2F05%2F11%2Fgoogle-to-ban-payday-loan-advertisements%2F&amp;usg=AFQjCNGJ8u1LKhtyFrZTNolNj8hc3rLIIw&amp;sig2=COA5Avw3P7p6q4tFmc-UTw&amp;bvm=bv.123325700,d.cWw">banned</a> ads from payday lenders, and about a dozen states have issued their own <a href="http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates?version=meter+at+0&amp;module=meter-Links&amp;pgtype=article&amp;contentId=&amp;mediaId=&amp;referrer=&amp;priority=true&amp;action=click&amp;contentCollection=meter-links-click">rate caps and rules</a> clamping down on the industry.

Today’s announcement involves a proposal, not a fait accompli. CFPB will be accepting comments on the proposed rules all summer before publishing the final regulations in the autumn. We are sure to see a wide array of evidence marshalled both in favor and against, and a not a few hot tempers on both sides. The first element of the rules – the Full Payment Test – is the most contentious piece. It requires significantly more underwriting and diligence/documentation on a customer than loans typically require today. This will not only increase the cost to provide these loans, it will also mean that the underwriting process is longer, potentially negating the speed and convenience benefits of payday loans.

Today the CFPB also launched an inquiry into other potentially high-risk loan products and practices that are not specifically covered by the proposed rules.

For more information on both the new rules and inquiry, and to offer your comment, <a href="http://files.consumerfinance.gov/f/documents/CFPB_Proposes_Rule_End_Payday_Debt_Traps.pdf">click here</a>.

Have you read?

<a href="https://cfi-blog.org/2014/01/22/cleaning-up-debt-collection-in-the-u-s/" target="_blank" rel="noopener">Cleaning Up Debt Collection in the U.S.</a>

<a href="https://cfi-blog.org/2014/03/21/cfpb-gives-voice-to-clients/" target="_blank" rel="noopener">CFPB Gives Voice to Clients</a>

<a href="https://cfi-blog.org/2015/02/04/keeping-score-the-client-protection-principles-vs-the-u-s-subprime-auto-loan-market/">Keeping Score: The Client Protection Principles vs. the U.S. Subprime Auto Loan Market</a>

Critical Regulation: The Consumer Financial Protection Bureau’s New Rules on Payday Loans and Short-Term Credit

&gt; Posted by Jeffrey Riecke, Communications Associate, CFI

[getty src="179420788?et=XhlcaUXgRzVFwBe0J3qIcw&amp;sig=5RHchA0qKpeIZyTgHka08MyCjO9VDdHaPcdPwpsY_P4=" width="594" height="396"]

Wonga, the U.K.’s largest payday lender, is <a href="http://www.bbc.com/news/business-29457044">forgiving</a> £220 million in loans from 330,000 clients in arrears. Another 45,000 Wonga clients on precarious financial footing will no longer have to pay interest on their active loans. The news came last Thursday after talks between Wonga and the U.K. regulator, the Financial Conduct Authority (FCA), which culminated in Wonga instilling new, and reportedly urgently needed lending affordability checks. The forgiveness measures are intended to cover clients that wouldn’t have been given loans under the new affordability measures. They follow what has been a controversial rise for the lending firm and suggest where the U.K’s payday industry may be headed.

Wonga, which currently lends to about a million clients a year, has incurred complaints in the past for its lack of affordability checks, high interest rates, unscrupulous debt collection practices, and misleading advertising. Those speaking out against the firm include politicians, trade unions, and public demonstrators. Even Archbishop of Canterbury Justin Welby once <a href="http://www.independent.co.uk/news/business/analysis-and-features/making-a-whole-lot-of-wonga-critics-are-unhappy-as-profits-soar-but-the-lenders-founder-insists-it-merely-provides-a-service-for-the-digital-generation-8797146.html" target="_blank">stated</a> that he would “compete [Wonga] out of business” through the launch of a Church-backed group of credit unions.

Wonga’s advertising campaigns have featured “mom and pop” character puppets, as well as sponsorship of the Newcastle United football club which entitled Wonga’s logo to appear on the players’ jerseys. Both initiatives incited criticism that the firm pushed loans to younger clientele. At the time of the agreement with Newcastle, the leader of the Newcastle City Council <a href="http://www.theguardian.com/football/2012/oct/09/mp-newcastle-wonga" target="_blank">stated</a> that he was “appalled and sickened” that the club signed the deal. Wonga’s advertising received a <a href="http://www.theguardian.com/business/2014/apr/09/wonga-advert-banned-interest-rate" target="_blank">setback</a> in April of this year when a regulator forced a campaign to be cancelled in which viewers were misled on interest rates.

On collections, last June the FCA revealed that Wonga <a href="http://www.forbes.com/sites/francescoppola/2014/10/04/1161/" target="_blank">sent</a> thousands of fake legal letters to clients in the attempt to scare them into paying. The regulator ordered Wonga to offer redress to the roughly 45,000 clients affected.

In the media frenzy following last Thursday’s announcement, the firm’s critics have not been soft spoken. Online news site TechCrunch <a href="http://techcrunch.com/2014/10/02/wronga/" target="_blank">wrote</a>, “No, that’s not disruptive business behavior. It’s plain old loan sharking.” Forbes <a href="http://www.forbes.com/sites/francescoppola/2014/10/04/1161/" target="_blank">wrote</a>, “If Wonga can transform itself into a responsible short-term lender, it may for the first time provide a useful public service.” Member of Parliament (MP) Pat McFadden, who serves on the Commons Treasury Committee <a href="http://www.mirror.co.uk/money/city-news/wonga-forced-write-330000-customers-4363986" target="_blank">said</a>, “These findings drive a coach and horses through the claim that Wonga has been lending responsibly.” Fellow MP on the Treasury Committee John Mann <a href="http://www.theguardian.com/money/2014/oct/02/wonga-writes-off-customer-debt" target="_blank">said</a>, “I welcome today’s latest step to crack down on irresponsible payday lenders… This is a company that has taken advantage of people in dire financial circumstances.”

What’s happened with Wonga suggests the possibility of sweeping changes for payday lending in the U.K. Though Wonga’s new affordability checks are reportedly voluntary, the director of supervision at the FCA <a href="http://www.bbc.com/news/business-29457044" target="_blank">stated</a> that the proceedings “should put the rest of the industry on notice” in terms of lending affordably and responsibly. In July of this year, the FCA <a href="https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=2&amp;cad=rja&amp;uact=8&amp;ved=0CCUQFjAB&amp;url=http%3A%2F%2Fwww.forbes.com%2Fsites%2Ffrancescoppola%2F2014%2F10%2F04%2F1161%2F&amp;ei=sXw0VNmIOpeKsQSKoIKICQ&amp;usg=AFQjCNGT_DfPMJO0EOQ29GYfnI7Rhs5YUg&amp;sig2=RcCUgKYwf19vbWsyLeMuBg&amp;bvm=bv.76943099,d.cWc">announced</a> that it plans to cap the interest rates payday lenders can charge as well as the number of times loans may be rolled over. A recent review of the industry <a href="http://www.forbes.com/sites/francescoppola/2014/10/04/1161/">revealed</a> that the average annual salary of a payday loan recipient is roughly £16,500, well below the median in the U.K. of £26,500. Moreover, payday borrowers are often already heavily indebted.

Of the larger industry, MP Stella Creasy recently <a href="http://www.dailymail.co.uk/news/article-2781153/Payday-loans-written-1million-people-Wonga-founder-walked-4million-payoff-left.html" target="_blank">said</a>, “Wonga is not the bad apple – the industry is a rotten barrel.” Gillian guy, Chief Executive of the nonprofit Citizens Advice <a href="http://www.dailymail.co.uk/news/article-2781153/Payday-loans-written-1million-people-Wonga-founder-walked-4million-payoff-left.html" target="_blank">said</a>, “A lack of checks by lenders is setting a debt trap for borrowers. It is a widespread problem within the industry. Citizens Advice has found that in half of payday loans cases reported to us, lenders didn’t ask about people’s personal finances.” Industry advocates, such as the Centre for Responsible Credit, are <a href="http://www.dailymail.co.uk/news/article-2781153/Payday-loans-written-1million-people-Wonga-founder-walked-4million-payoff-left.html" target="_blank">campaigning</a> for similar reforms for other payday lending firms.

Have you read?

<a href="http://cfi-blog.org/2014/01/22/cleaning-up-debt-collection-in-the-u-s/" target="_blank">Cleaning Up Debt Collection in the U.S.</a>

<a href="http://cfi-blog.org/2014/03/21/cfpb-gives-voice-to-clients/" target="_blank">CFPB Gives Voice to Clients</a>

<a href="http://cfi-blog.org/2014/04/11/giving-microfinance-clients-a-voice/" target="_blank">Giving Microfinance Clients a Voice</a>

Wonga Forgives £220 Million. What’s Next in the U.K.’s Payday Lending Industry?

&gt; Posted by Sonja E. Kelly, Fellow, CFI

<a href="http://www.gatesfoundation.org/what-we-do/global-development/financial-services-for-the-poor" target="_blank" rel="attachment wp-att-10090"><img class="alignright size-medium wp-image-10090" style="border:0" alt="A Rwandan farmer uses her cell phone to access markets for beans and maize. The Bill &amp; Melinda Gates Foundation support this initiative of increased opportunity through enabled mobile phone usage." src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/03/fsp_farmermobilephonerwanda_450x300.jpg?w=300" width="300" height="200" /></a>When we talk about “on-ramps” to financial inclusion, we are engaging with the idea that there are “entrance points” to the road that will take us to global inclusion, just as there are ways to access a highway to get people closer to their final destinations. We’ve already blogged about a number of different on-ramps: <a href="http://cfi-blog.org/2013/01/10/payroll-loans-the-coffee-date-of-financial-services/" target="_blank">payroll loans</a>, <a href="http://cfi-blog.org/2013/02/19/post-offices-fill-financial-inclusion-gaps/" target="_blank">post office service points</a>, <a href="http://cfi-blog.org/2013/01/30/savings-groups-and-the-mdgs/" target="_blank">savings groups</a>, and <a href="http://cfi-blog.org/2012/04/20/mobile-money-transfer-what-does-it-mean-for-financial-inclusion/" target="_blank">mobile money</a>, to name a few.

MasterCard’s Amit Jain and Gidget Hall explore another on-ramp: electronic bill payment.

I would venture to say that most people do not find bill pay exciting. In my house, the prospect of paying bills is a subject that tends to trigger groaning and deferral.

However, Jain and Hall observe that bill payment is a financial management exercise that is common among most people, including those with no existing banking relationships. They argue that of any potential on-ramp to financial inclusion, bill pay is the most common across the world. In addition, they note that bill payment is a regularly recurring process, which, if approached as an on-ramp to financial inclusion, could contribute to a habit of efficient and effective financial management.

From a supply-side perspective, electronic bill payment has the potential to benefit a range of players including retailers, banks, billers, and aggregators. Working together, under this logic, would benefit all of the parties. For example, billers could lower their costs associated with accepting payments at their physical offices, banks could engage and acquire customers, and the government could reduce the black economy and make transactions easier to track.

On the demand side, the authors observe that paying bills electronically could benefit people who would not have to travel as far, or work in cash only, and would therefore attract clients to formal financial services. An added benefit could be the development of good financial habits. This move toward the formal financial system would initiate an engagement with other products, including other electronic payments, borrowing, investment, savings, and insurance.

Perhaps most compelling is the authors’ point that bill payment has the potential to drive lending. When bill payment is electronic, lending institutions have more data on which to base their decisions. The authors offer that in fact, in Bhuvaneswar, India, people are already applying for loans and using their bill pay records to prove their dependability and creditworthiness. Even in the absence of formal credit bureaus, such proof of responsible financial decisions could provide critical information.

For more information and to read the whole paper, visit MasterCard <a href="http://newsroom.mastercard.com/press-releases/mastercard-study-bill-payment-represents-key-entry-point-to-greater-financial-inclusion/" target="_blank">here</a>.

Image credit: <a href="http://www.gatesfoundation.org/what-we-do/global-development/financial-services-for-the-poor" target="_blank">The Bill &amp; Melinda Gates Foundation</a>

Have you read?

<a href="http://cfi-blog.org/2013/01/30/savings-groups-and-the-mdgs/" target="_blank">Savings Groups and the MDGs</a>

<a href="http://cfi-blog.org/2012/12/12/are-e-payments-a-boost-or-bane-to-fi2020/" target="_blank">Are E-Payments a Boost or Bane to FI2020?</a>

<a href="http://cfi-blog.org/2012/04/11/mobile-money-as-a-payment-planning-tool/" target="_blank">Mobile Money as a (Payment) Planning Tool</a>

Bill Pay as an On-Ramp to Financial Inclusion

&gt; Posted by Sonja E. Kelly, Fellow, CFI

<a href="http://www.hatchcollaborative.com/2012/07/10/lets-have-coffee/" target="_blank" rel="attachment wp-att-9345"><img class="alignright size-medium wp-image-9345" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/01/van-houtte-coffee-date_emag_article_large.jpeg?w=300" width="300" height="200" /></a>We’ve talked in this blog about on-ramps to financial inclusion—the services that get new people into formal financial services, build trust between clients and providers, and establish new financial habits in the lives of individuals. Here’s one example, for one group of potential new customers.

Payroll loans in Latin America were recently called “the coffee date” of financial inclusion by <a href="http://online.wsj.com/article/SB10001424127887323689604578222130866020660.html" target="_blank">The Wall Street Journal</a> because they’re a relatively low-risk way to let both parties—the client and the financial institution—decide how and whether to continue the relationship.

Payroll loans are disbursed by a bank to a consumer and then automatically repaid through deductions from an individual’s paycheck. Such loans are a natural fit in a formal employment setting, especially if payroll is handled through direct deposit in a bank.

Payroll loans are a convenient way to take advantage of an institutional structure in which employees already have a bank account. They yield a much higher repayment rate than credit cards. They allow individuals to establish a credit history with a small principle and small transactions. It is no wonder that payroll loans increased 16.5 percent last year in Brazil to become an $88 billion market, and 32 percent in Mexico to become a $9 billion market.

At the Center, our vision of financial inclusion includes convenience, choice, and affordability. Here’s where we see payroll loans as perhaps a good on-ramp, but not necessarily a final destination. While payroll loans are convenient because they use the same institution through which clients are already receiving paychecks, they rarely offer a choice of lender. The system does not foster a competitive marketplace for consumers. Banks may have a greater incentive to court employers than individuals. This incentive structure may bring up questions of consumer protection. Does the bank have the best interest of the consumer or the employer in mind?

Another question concerns affordability. Since payroll loans have a higher repayment rate than credit cards (97 percent vs. 95 percent), one might expect them to carry a lower interest rate. In Mexico, however, payroll loans and credit card rates, at about 35 percent per annum, are roughly equivalent.

Even the best coffee dates are seldom the basis for a long-term relationship, so the real question is whether employees whose first experience with credit is through payroll loans actually do build a credit history that they can use to access more services over time.

And as a final note, while we can celebrate the existence of an on-ramp for people with formal sector employment, it is also true that <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/300" target="_blank">in Mexico, over 60 percent of all households operate in the informal sector</a>, beyond the reach of payroll loans. Is anyone asking those folks out for coffee?

Image Credit: <a href="http://www.hatchcollaborative.com/2012/07/10/lets-have-coffee/" target="_blank">Hatch Collaborative</a>

Have you read?

<a href="http://cfi-blog.org/2012/12/12/are-e-payments-a-boost-or-bane-to-fi2020/" target="_blank">Are E-Payments a Boost or Bane to FI2020?</a>

<a href="http://cfi-blog.org/2012/11/07/seven-trends-to-watch-in-the-march-to-achieve-full-financial-inclusion-for-all/" target="_blank">Seven Trends to Watch in the March to Full Financial Inclusion for All</a>

<a href="http://cfi-blog.org/2011/01/11/access-to-finance-as-a-network-infrastructure-problem/" target="_blank">Access to Finance as a Network Infrastructure Problem</a>

Payday Loans

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