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Transformingaffordable credit in the UK
February 2020
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Fair4All Finance | February 2020
Foreword 03
Vision & Mission 05
Executive Summary 06
Pilot Process 08
Affordable Credit Theory of Change 09
Affordable Credit Code of Good Practice 13
Scale-up Programme Action Areas 16
Next Steps 22
Appendix 25
Affordable Credit Models 26
Operating Model Best Practice 27
Acknowledgements 29
Fair4All Finance Team 30
Table of Contents
Fair4All Finance2nd Floor28 Commercial StreetLondonE1 6LS
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Fair4All Finance | February 2020
Responsible credit allows borrowers tomeet unexpected costs, to smooth incomesor to make essential purchases that areotherwise unaffordable upfront. Conversely,a lack of access can mean going withoutessential appliances like a boiler or awashing machine, or being unable to affordschool uniforms or birthday presents forchildren. Affordable lenders operate withthe care, forbearance and support thatcustomers in vulnerable circumstancesneed, and can save families hundreds orthousands of pounds a year in repaymentscompared to the rates charged by payday ordoorstep lenders.
Despite this, responsible lending makes uponly a fraction of short-term lending in theUK. Each year, affordable credit providersmake just £250m of loans to this group,while over the same period, high-costshort-term credit providers lend £3bn –more than ten times as much. The challengewe face is how we create a new normal – a“10x challenge” to give more people than everbefore the fair and affordable alternativethey need.
This will require transformational change.Work is needed on the supply side, toincrease the availability and appropriatenessof affordable credit. At the same time, weneed to increase demand, raising awarenessof alternatives to high-cost credit andmaking them more attractive and accessible
to customers. Our scale-up programme ispart of our approach to meet this “10xchallenge” – to work with affordable creditproviders to help them meet this scale.
This report shares our early thinkingacross a number of areas. The Theory ofChange for the affordable credit sector isintended as a living document that will beowned by organisations in the financialinclusion, financial services and widersocial sectors. Our code of good practiceidentifies the key principles and practicesthat we think define what it means to be afair and responsible lender. The findingsfrom our pilot intend to chart a pathway totransformation across five key action areas.We welcome your input and collaborationacross all these elements.
We are hugely grateful to the manypartners, colleagues and organisations thathave contributed time and insight to thiswork, in particular to our strategic partnersCarnegie Trust UK and the Esmée FairbairnFoundation, and the five organisations whoparticipated in our pilot.
We’re looking forward to taking this excitingagenda forward to drive positive change forthe people and communities that mostneed it.
Our scale-upprogramme ispart of ourapproach tomeet this“10x timeschallenge”
For the millions of people in the UK excludedfrom access to mainstream credit, fair andaffordable lenders like credit unions andCDFIs provide a lifeline.
Foreword
Sacha Romanovitch CEO
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£250m
£3bn
We are delighted to see this work from Fair4All Finance, which shows impressivecollaboration and sets a pathway to significantly scale up the provision of animportant component of the social sector in the UK. As an investor in socialinclusion we are pleased to have worked with Fair4All Finance on the Theory ofChange and look forward to collaborating further to make their vision of a fairfinancial system a reality.
Caroline Mason, CEO, Esmée Fairbairn Foundation
Transforming affordable credit in the UK
Annual originations of affordable
short-term loans
Annual originations of high-cost
short-term loans
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Fair4All Finance | February 2020
Fair4All Finance
Our vision: Our mission:A society where the long-termfinancial wellbeing of all peopleis supported by a fair andaccessible financial sector.
To increase the financial resilienceof people in vulnerable circumstancesby increasing access to fair, affordableand appropriate financial productsand services.
We define vulnerability in the same terms as the FCA, where a vulnerablecustomer is someone who is especially susceptible to detriment, with the fourkey drivers of vulnerability being resilience, capability, life events and health.
These drivers will shape a customers’ needs over the whole of their financiallives. We want to see well-designed financial products and services that
better respond to these and support people’s financial wellbeing.
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Transforming affordable credit in the UK
Executive Summary
Scaling affordable credit providers is a key part ofaddressing this challenge and over the last six monthswe’ve been working to identify what is needed to helpthe affordable credit sector to do this. Dozens oforganisations contributed their time and insights to thedevelopment of a shared theory of change to growaffordable credit provision. This identifies the activitiesrequired across every organisation responding to thechallenge. It also identifies what we know are thebenefits of an affordable credit product to customersover having no access to credit or using high cost credit– increased financial resilience, improved financialcapability and improved mental and physical health. Theactivities in the theory of change – if delivered at scale –will enable these benefits to be taken to millions ofcustomers.
To complement this, our ‘Code of Good Practice’identifies some characteristics of best practice inaffordable credit provision. Underlining all of it is a focuson genuinely supporting customers throughout allelements of organisational set-up, systems, processesand customer interaction. Improving outcomes for thecustomer and creating social impact every day is in theDNA of an affordable credit provider.
In June 2019, we launched our expression of interest foraffordable credit providers to come and work with us onour scale-up programme. Over 50 organisations appliedto take part, including CDFIs, Credit Unions and newertechnology providers. From these, five were selected tojoin the process from August 2019.
This was an opportunity to work with those organisationsto learn in detail about what is working in giving theright type of credit to those who need it, and what areascould be developed. To do that our team spent overtwelve weeks engaging with the providers in detail,reviewing processes, interviewing the senior leadershipteams and talking to customers. At the same time, theFair4All Finance team visited other providers andworked in consultation with the wider sector to developa Theory of Change for the affordable credit market.Taken together, this work generated a detailed picture ofwhat it takes to offer a fair and effective affordable creditservices, including key challenges and opportunities.
In addition to providing specific recommendations tothose organisations, we are using the insights we havegathered to develop the next phase of the scale-upprogramme.
We believe customers in vulnerable circumstances and financialdifficulty should have access to a fair and affordable credit option whenappropriate to their circumstances. This option should be available fromproviders who charge a reasonable price based on risk and who treatcustomers with fairness and support to improve their situationthroughout their journey with a lender.
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Fair4All Finance | February 2020
This work has identified five key opportunity areas forcapability development in the affordable credit sector:
System Change and Impact – understandingand evidencing the benefit that affordablecredit provision can make in society.
Funding and Finance – enabling long-termfunding for the affordable credit sector.
Markets, Customer Insight and Product Design –enabling well designed products that supportwellbeing for people in vulnerable circumstances.
Operational Excellence – implementing thesystems and processes which create asustainable operating model.
Governance, Leadership and Talent –building strong governance and a pipelineof transformational leaders and talent for thesector.
This document sets out some of our findings and areasof future enquiry in each of these areas. We aredeveloping the next phase of the programme on theback of these and expect our approach to be finalisedby our board and launched later in the spring. Thissupport will be structured in a way that can be helpful toorganisations across the affordable credit sector andwill range from funding, toolkits, peer learning todetailed consultation.
Later we will be embarking on programmes for otherproduct areas which help customers to build resilience,such as in savings and insurance. We know that creditisn't always the answer – it must be used in the right wayby customers and must be part of a full package ofproducts that support customers across their lifecycle.
We hope the insights on affordable credit in this reportprove to be useful and we look forward to engagingfurther over the coming months.
Executive Summary (continued)
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Fair4All Finance | February 2020
Pilot Process
Following an open call for applications, 55organisations applied to join the pilot, from whichfive were selected. Our selection criteria lookedfor well established organisations with a trackrecord of serving the sector, who:
• focused on serving vulnerable groups insociety, particularly those on low incomes,with lower financial resilience and little accessto mainstream credit
• shared our ambition to grow the affordablecredit sector
• were prepared to commit the time andresources to engage fully in a scale upprogramme
• were committed to a partnership-basedapproach in order to do this
• were committed to demonstrating the socialimpact of their work both through their in-house behaviour to their team, and theirimpact on the communities they serve
We selected five organisations to participate in the pilot based on theirtrack record of delivering affordable credit and our assessment of theirability to scale with the support of Fair4All Finance.
June 2019
Expression ofInterest Launched
Aug 2019
Pilot launched withfive organisations,selected from 55
Feb 2020
Transformingaffordable credit -initial findings from ourprogramme of work
Dec 2019
Individualreports on pilot
organisations
Spring 2020
Planned phase 2launch
NOW
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Transforming affordable credit in the UK
AffordableCredit Theoryof Change
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Theory of ChangeOur Theory of Change has been developed alongside the Esmèe FairbairnFoundation in consultation with the affordable credit and financialinclusion sectors. It is intended to be a shared Theory of Change forevery organisation that is contributing to solving the problem of a sub-scale provision of affordable credit in the UK. Fair4All Finance will workon part of this and in collaboration with others to drive systemic change.
The first part of the Theory of Change focuseson the affordable credit sector; those inputsand activities which will enable the sector togrow in scale, and those outcomes whichmean the affordable credit sector is healthierand having more impact.
The second part of the Theory of Changefocuses on the effects that an increasedprovision of products should have oncustomers – eventually impacting on theirfinancial resilience, financial capability, andhealth and wellbeing.
Since its creation in March 2019 Fair4All Finance has created a comprehensivetheory of change, and through its pilot it has provided a robust assessment ofwhat best practice for the sector looks like. We are excited to work with them onthe next phase of the scale-up programme to substantially expand the capacityof the whole of the CDFI affordable credit sector, to create a new and improvednormal for people building their financial resilience.
Theodora Hadjimichael, CEO, Responsible Finance
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Affordable Credit SectorTheory of Change
SCALING UP THE AFFORDABLE CREDIT SECTOR CUSTOMER BENEFIT FROM INCREASED AFFORABLE CREDIT PROVISION
INPUTS ACTIVITIES OUTCOMES SERVICES OUTPUT OUTCOMES SYSTEM
Customer has improvedlife satisfaction
Customer has reducedfear and shame
Customer experiencesa reduction infinancial stress
Customer hasincreased disposableincome
Customer hasreduced indebtedness
Improved financialresilience includingability to managelife events
Improved financialcapability
Improved mentaland physical healthand well-being
Improved childmental and physicalhealth and well-being
IMPACT
Significant and m
aterial increase in use of fair and affordable credit from w
ell-functioning market
INTERMEDIATE LONG-TERM INTERMEDIATE LONG-TERM
Improved local econom
ic and general well-being
Short- and long-termcapital investment andfunding from social andcommercial lenders
Develop long-term funding strategy to meet needs ofaffordable credit sector
Create well-coordinated/attractive market for investors
Advocate for reinvestment into sector from mainstreamand high-cost credit
Advocate for regulatory needs of CDFIs and credit unions
Grow support and sharing network for sector leaders
Support mergers between affordable credit providers
Develop or jointly purchase shareable back-endsystems and tools for affordable credit
Provide support and good practice guidance forproviders
Capacity building support for expansion of employer-based affordable credit
Develop shared customer-facing services for singlecontact point into affordable credit
Innovate affordable credit products and differentiateproducts by customer segment needs
Partner organisations and mainstream creditsignposting to affordable credit
Better marketing and joint branding for affordable credit
Improve customer access to financial information
Lobbying to ensure appropriate regulation on threatsto customer well-being
R&D into credit scoringand data sharing
Long-term fundingof sector
Financial sustainabilityof sector
Affordable credit hasscale and reach overwider geographical area
Improved efficiencyof sector
Diverse range ofproducts that meetcustomer needs andpreferences
Products meet complexcustomer needs
Affordable credit iswidely understood, andits use is normalised
Customers have whatthey need to makebetter choices
Customers areprotected fromharmful lendingpractices
R&D into fintechsolutions for affordablecredit
Development ofcustomer-segmentedpathways for financialproducts
Research intobehavioural driversof credit use
Fair and affordableloans
Affordable credit topurchase householdgoods
Payroll based lendingin partnership withemployers
Budgeting and savingsproducts and training
Debt consolidationand refinancing ofhigh-interest loans
Linked insuranceproducts
Customer meetsconsumption need(eg pay arrears, orpurchase essentialssuch as food ortravel, or largeritems such as bedsor appliances etc.)
Lower cost ofborrowing
Customer can repayloan directly fromsalary, making iteasier to budget
Customers hasimproved budgetingskills
Customer openssavings accounts
Customer hasincreased savings
Customer can payback consolidatedloan at affordable rate
Customer can coverlosses following lifeshock/event
Ethical collectionpractices
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AffordableCredit Code of Good Practice
Affordable Credit Code ofGood PracticeAffordable credit providers are industry leading in their approach tocustomers, providing unique support to people underserved bymainstream financial services.
The organisation will:
01. Organisation set-up and
social purpose
• Have a clearly defined social purpose set out in its constitutional documents to increase the financialresilience and wellbeing of people in vulnerable circumstances – Affordable lenders may serve broader sections of society alongside people in vulnerable circumstances,
and this can help make their lending more sustainable. However, organisations should be able todemonstrate their particular focus on people in more vulnerable circumstances. Fair4All Finance fundingwill be directed towards supporting these people
• Have a clearly defined policy in relation to the distribution of post-tax profits and proceeds from the sale ofassets to ensure that surpluses are principally used to achieve its purpose and that the post-tax pay-outsto shareholders are capped at <50% over time to ensure that there is not undue private gain from theactivities of the organisation
• Be able to demonstrate that the remuneration of its officers and employees, including salaries, benefitsand all forms of distribution or other participation, is reasonable, proportionate and relative to marketpractice for social sector organisations generally and is disclosed
• Ensure that all their employees earn a real living wage – or be working towards this• Evaluate and measure its social impact and make reports publicly available
– Best practice: impact measurement should have a robust methodology, which goes beyond measuringactivity and instead looks at customer outcomes
• Be open to undertaking an independent social impact audit
02. Approach
to customers
• Have a customer-centered culture; organisations will understand the needs of their customer base, and willdesign products and services that suit their needs and help improve their financial resilience and wellbeing.– Best practice: some affordable credit providers have developed customer personas to help map the needs
and behaviours of their customers, which inform product design and lending activity. These personas areunderstood by team members across the organisation
• Have policies and processes for supporting customers that are fully embedded across the organisation.Organisations will understand the needs of their customers in vulnerable circumstances and this will informproduct design and communications with customers. Team members will be well trained in vulnerabilitypolicies and in identifying and serving customers in vulnerable circumstances
Informed by the findings of our scale-up programme and inconsultation with stakeholders, we have set down theprinciples and practices that we believe set good affordablecredit providers apart.
This will continue to evolve as we work with more providersand identify more examples of good practice. We want theorganisations we work with to strive towards following thiscode of practice, in order to help people in vulnerablecircumstances improve their financial resilience and wellbeing.
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The organisation will:
03. Lending
• Before providing credit, make a detailed assessment of a customer’s income and expenditure to determinethat the loan is affordable and will not push customers into financial difficulty– When determining affordability, organisations should consider leaving customers with enough income
after repayment to cover unforeseen expenses. For example, one affordable credit provider requirescustomers to have a £50 a month ‘buffer’ left over after repayments
• Communicate clearly and transparently with customers, ensuring they have understood how the loan willaffect their financial situation. Customers should be provided with tools to understand the costs ofrepayment over different time periods, including comparison of the total cost of the loan
• Charge an APR and an underlying interest rate that is not excessive, taking into consideration risk andsocial impact objectives– APR is likely to reflect the high cost of lending to customers who are excluded from mainstream credit,
and may cover the costs of administering the loan and running the organisation sustainably. However,as set out in section 1, organisations will not seek to make undue private gain from lending, particularlyfrom those in the most vulnerable circumstances
04. Repayment
and recovery
• Allow customers to repay their loan early without incurring a fee or charge. Organisations should encouragecustomers to repay loans early, where this is affordable
• Take an empathetic approach to arrears and debt recovery, centered on agreeing an affordable andsustainable repayment plan with the customer. Customers in financial difficulty will be treated fairly andprovided with appropriate support– Best practice should include:
– Not charging arrears fees or charges– Providing payment holidays on request– Freezing or cancelling interest for customers in financial difficulty– Sufficiently considering the mental wellbeing of customers through all recovery communications– Avoiding the outsourcing of debt collection where possible. Where a third-party debt collection agency
is used, organisations must ensure it operates in line with their own recovery policies– Never putting the debt in the hands of bailiffs either directly or through a third party
05. Customer supportand wrap-around
services
• Provide support for customers to build their financial resilience, either in house or through partnerships orreferrals to a third party. This should include encouraging savings behaviour, building financial capabilityand helping customers access their full entitlement to grants and benefits– Best practice: organisations should consider partnering with or referring to other financial services
providers to offer additional products that can improve customer financial resilience, such as basic bankaccounts, savings account or insurance. Some affordable lenders encourage customers to makepayments towards a linked savings account or contents insurance policy alongside their loanrepayments, building their financial resilience and encouraging good money management habits
• Provide customers who are declined for credit with information about why the decision has been taken,alongside signposting to relevant guidance or support
• Work in partnership with free debt advice providers, maintaining an active channel to refer customers towhen they are in financial difficulty at either the application stage or whilst they are a customer
Scale-upProgrammeAction Areas
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System Change and ImpactReal impact reporting enables an evidenced understanding of thebenefit of affordable credit to an organisation’s customers, along withproviding the detailed case to investors, policy professionals and thewider stakeholder community that affordable credit has a benefit onpeople’s lives. This area will influence and evidence the impact ofsystemic change in affordable credit provision to society, using standardimpact reporting tools and tiered approaches to implementation.
Our Insights• Affordable credit products and organisations have real
benefits to a customers which can be better articulated,including on the benefits to the overall householdfinancial resilience of a client, along with their health,mental health and general wellbeing
• There is little annual impact reporting currently, andwhen it does exist it tends to focus on the activity of theorganisation (eg number of loans issued and cost saving),rather than outcomes on customers lives beyond creditprovision
• The standard technology offerings to affordable creditproviders do not facilitate the collection of data whichmeasures impact
Outcomes• Evidence of the systemic change that affordable credit
provision can make in society• A consistency to reporting on impact across the
affordable credit sectors, that enables learning aboutwhat works best for customers and the development of acompelling story across the sector
• Impact reporting which is based on customer outcomesand robust measurement and data collection
• Collaboration across regulators, government andstakeholders to focus and evidence change programmesand drive supportive policy change
Sector tools and resources
• Standard set of outcomes for affordablecredit impact
• Implementation toolkit for outcomes,including measurement methodology
Funding and FinanceThis area will aim to enable long term funding for providers in theaffordable credit sector. Under this, Fair4All Finance are setting up adebt and an equity fund to help to scale provision alongside grantfunding provision. Detailed support will focus on the financial model andbalance sheet of organisations, to work towards a set-up which enablesthem to obtain lending and growth capital from social or commercialsources at affordable rates comparable to those available by mainstream
Our Insights• There is a pressing need for the right capital in the
sector, in particular long-term, patient capital whichenables investment in scale and creates secure balancesheets. Alongside this, debt financing is required to lenddirectly to customers
• Whilst financial management is a strength across theaffordable credit sector, further investment in tools andmodels would strengthen finance functions to thedegree that commercial finance providers would be ableto make investment decisions. Currently, the financialmodels in the sector lack the robustness of assumptionsand mechanics to gain the confidence of investmentfrom commercial providers
• Growth projections and past performance sometimesrely significantly on subsidy in the form of grant funding.A model which creates a pathway to sustainability withreal equity capital is required to significantly grow anaffordable lending business
Outcomes• Providers have strong balance sheets, a track record of
profitability, robust financial modelling and systems anda clear growth strategy
• There is a substantial equity fund set up, and a debt fundavailable from the commercial markets which isdesigned specifically for the needs of affordable creditorganisations
• Affordable credit organisations are able to access capitalrates which enable a sustainable operation
Sector tools and resources
• Access to a dedicated affordable creditequity fund through Fair4All and a debt fundthrough commercial providers
• Access to grant funding where appropriateto build capability
• Pro forma financial models which have theapproval of a wide investor group
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Markets, Customer Insight and Product DesignThis area will focus on enabling well designed products that supportwellbeing among groups of customers in vulnerable circumstances. Itwill identify what the need is for customers at a national level, using datafrom a range of sources including debt advice agencies, government andother civil society organisations. This data will be used to inform productdesign, leading to shared product and customer analysis tools acrossthe sector. Marketing strategy support will ensure that these productsreach the right customers.
Our Insights• Their focus on vulnerability sets affordable credit
organisations apart from most traditional lenders, asthere are industry leading examples of understandingcustomers needs in detail and designing productsaround them. The best way to understand customers isto map their needs and typical behaviours with personas,then ensure that these personas are understood acrossthe organisation
• There are opportunities to evolve affordable creditproduct offerings with the benefit of in-depth customerinsight, such as exploring increased product flexibility,such as products that also offer a revolving as well as afixed facility and a linked savings account. Marketpenetration across the affordable credit sector is low
• Marketing could be made more effective by beingbrought into a coherent strategy with appropriate KPIsattached. Currently approaches have tended to focus onmarketing tactics executed outside of an overarchingstrategy. Many organisations have deposits which couldbe lent out with improved marketing
Outcomes• Strong insight into markets, channels and targeting;
good segmentation of consumers and their needs;consumer centred design of sustainable products, whichincludes design and referral for those that are in themost challenging situations
• Increased market reach to customers who would benefitfrom affordable credit
Sector tools and resources• Collective approach to customer persona
analysis• Shared dataset for affordable credit
customer analysis and behavioural insightstoolkit
• Toolkit with approaches to new product analysis
• Shared approaches to enable furtherpenetration into employers
• Codification of a good practice approach tomarketing strategy
• Insights into the impact of benefits andemployer-linked lending
Operational ExcellenceThis area will focus on the systems and processes which enablecustomers to be served and loans to be made, targeting a sustainableoperating model for a provider. It includes having well documentedprocesses which support the customer throughout their journey, and theright technology to bring efficiencies and maximise the time of lendingofficers. This area will focus on all aspects of the customer journey fromloan decisions to the processes of collections and recovery to ensurethat they are optimised to both serve the business and customers.
Our Insights• There is an opportunity to disseminate best practice in
operations across the affordable credit sector, throughleaders who have brought innovative and successfulapproaches to achieve operational excellence in theirown organisations. For example, ethical collectionsprocesses are often bespoke but could be replicatedacross providers
• From the pilot process, it is clear that manyorganisations grapple with the same questions ofoperational efficiency which could duplicate effortacross the sector unnecessarily
• There are opportunities to automate some processeswhere face-to-face contact is less beneficial whichwould help to reduce cost and rapidly scale.
• Few providers have developed cohesive technologyroadmaps and most lack in-house technology skills orexperience, which together result in ad-hoc procurementdecisions and dependence on legacy technologies thatinhibit innovations and access to fintechs
• Sometimes the profitability of loan products is notunderstood, and a better understanding of cost base andrevenue by product line would enable better strategicdecisions
Outcomes• The level of operational unit costs enables the
organisation to make a surplus on loans offered at anaffordable rate
• The customer journey is smooth, fast, enabled bytechnology (eg Open Banking) and fair, using dataethically, and is comparable with that of mainstreamlenders
• Bad debt rates are low and customers return to theorganisation following an arrears experience.
• More joined up marketing activity, supported by highquality specialist providers
Sector tools and resources
• Shared services across the sector forcommon processes such as collections orunderwriting, with the possibility ofextending to full loan management services
• Codification of a standard approach totechnology strategy
• Possible access to aggregated purchasingthrough scale economies across the sector
• A pricing analytics tool which enablesanalysis of profitability per loan based onunit cost and revenue
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Governance, Leadership and TalentThis area will aim to build strong governance and a pipeline oftransformational leaders and talent for the sector. It will develop aframework to bring senior talent into affordable lenders, both throughcoaching and leadership development, and through developing pathwaysfor skilled professionals from outside the sector.
Our Insights• Many affordable credit organisations have strong and
experienced leadership teams and boards who haveextensive experience in the sector. Yet the sector needsmore transformational leaders on boards and at the execlevel to get to significant scale. The relationship betweenthe mindset of a CEO and board regarding growthorientation and organisations’ preparedness to grow isacknowledged as important
• To get to the next stage of growth, leadership coachingand governance support will help to set up moreorganisations for success in scaling up. Boardremuneration has been seen to be an effective driver ofgood governance and board participation in thebusiness. Resourcing roadmaps across the organisationmust reflect growth targets
• There are organisations from outside the sector whowant to play a part in helping it to grow, for examplemainstream financial services providers. This could beleveraged to bring in the right outside talent where it isneeded
Outcomes• Building great calibre boards with a diverse range of
skills to support development of strategic growth planand governance of delivery
• Building leadership teams with the breadth and depth ofcapability to develop and deliver a strategic plan acrosskey capabilities from strategy and finance to technology
• Ensuring that providers can attract, develop and retaintalented people and have access to outsourced resourcesacross core areas to enable sustainable growth
Sector tools and resources
• Sector leadership development programme • Talent secondments from outside thesector
Next Steps
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Support Approach and What NextThe work on the Theory of Change and the pilot has confirmed that twolevels of support are needed: capability building and funding of theaffordable credit sector. We therefore intend to develop our programmeof support as follows. We are finalising details of this to launch the nextphase in the spring.
Our offer:Capability buildingFor each of these five areas, Fair4AllFinance intends to bring together agroup of leaders from inside andoutside the sector to advise on theimplementation and to create sharedassets. Available to all will be opensource tools and guidance along withpeer learning sessions; for those thatmeet specific criteria a more in depthprogramme of support will be available.We are seeking collaborations as wedesign the next phase of the programmeon these five action areas.
Our offer: Scale-up fundingThe capability building programme willsupport the critical infrastructure thatenables sustainability in each of thesefive areas, with grant funding asappropriate. Following this, organisationscan seek equity and debt investmentfrom the affordable credit fund whichwill aim to bring significant scale tosector provision, working towards our10x challenge.
Scale-up Capability building todevelop the enabling capabilitiesto scaling
Affordable Credit Fund Equityand debt funding to reachsignificantly more customers
Capability focusedCentres of Excellenceand sector-wide assets Affordable Credit
Providers
Grant fundingsupport to enableproviders to investin implementationand criticalinfrastructure
• System Change & Impact
• Funding & Finance
• Markets, CustomerInsights & Product Design
• Operational Excellence
• Governance, Leadership& Talent
Route for engagementCollaboration we want to partner with organisations who arealready doing great work on our five target areas; to develop theCentres of Excellence and to ensure that the programmes utilisethe best of what is already out there. If you have existing work inthese areas and think that we should collaborate please reachout to us at [email protected].
Funding we are currently raising investment into our debt andequity funds and are seeking interest from organisations whomay want to co-fund the sector along with us. If you would like tofind out more information about this please let us know.
Affordable Credit Providers we are looking to launch anexpression of interest process in the Spring for affordable creditproviders to work with us on the next phase of our programme,to scale their organisations and to deliver great outcomes forcustomers. Please stay tuned for more information on this,which will be communicated through our newsletter.
ABCUL wish to commend the work of Fair4All Finance since its inception. Theopen, transparent and robust engagement methodology utilised so far has beenreally encouraging as we identify the key opportunities and business challengesaround the development and significant expansion of the affordable creditmarket across the country. We look forward to continuing to positively engagein the months ahead to deliver real and transformational change for creditunions and consumers alike.
Robert Kelly, ABCUL CEO: January 2020
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Appendix
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Affordable Credit Modelsgoing into Scale-upAffordable credit providers are typically locally based, small in size andoperate very close to the mark of breaking even. Providers mustdetermine the right model of financing and invest in their capability priorto embarking on a high growth plan.
CDFIs Credit Unions Alternative Socially Orientated Providers
Description Locally founded communitylenders in a non-profitstructure, typically CommunityInterest Companies orCommunity Benefit Societies
Regulated mutuals with thePrudential Regulation Authority,long established communitydeposit takers and lenders
New providers such as payrolllending and salary advancemechanisms, and other affordablelending mechanisms enabled bytechnology
Market size 12 organisations, c£30 millionin annual lending
300 organisations in GB, c£230min annual lending to our targetgroups
c10 organisations
Customer base Traditionally the lowest incomeborrowers on the edge offinancial resilience
A range of customers, someborrowing for bigger items such ashousehold repairs, but asignificant element of lowerincome borrowers. Servecustomers based on a local oremployer common bond
Majority of customers areemployed, and have a range ofneed and incomes
Scale-up challenge Access to capital to grow;systems and processes at thepoint where significant scale-up can be achieved
Identifying the appropriate crosssubsidy model to serve theaffordable sector, investing incapability to scale
Proving the model and its level ofservice and impact to vulnerablecustomers in vulnerablecircumstances
Affordable Credit OperatingGood PracticeOur work across these business areas with our pilot organisations hashighlighted good practice for the operation of affordable creditorganisations.
Business Area
What great looks like Areas to explore for affordable credit leaders
Strategy • Business planning the business plan is well documented andsets out compelling ambition evidenced by data and informed bymarket knowledge. There is a clear pathway to commercialsustainability outside of grant funding revenue and contingenciesare well considered and hedged in the business plan. Thestrategy is aligned with the impact that organisation wants tocreate and there is a mechanism to monitor whether thebusiness model and impact goals are aligned
• Vision there is a consistent vision and purpose which isunderstood across the organisation
• Does the strategy demonstratesignificant ambition to grow thebusiness, with the rightconsideration of operational modeland readiness?
• Does the organisation capitalise fullyon strategy relationships, such aswith employers or housingassociations as channels?
Governance, Leadership,
People and Culture
• Management and Board there is a well-resourced managementteam that has each member operating as specialist lead withroles clearly delineated. This is supported and governed by anengaged board which gives appropriate challenge throughongoing commitment and board meeting attendance
• People and Culture the organisation is well resourced and aresource plan reflects the business plan. There is a clearidentifiable culture in the organisation which supports achievingits vision and growth plan
• Are other skills and profiles neededin the management team to deliver ahigh growth plan?
• Is the board set up to take theorganisation through a scale-upphase?
Customers and Products
• Product customers have a good range of clear product choicesthat meet their needs for simplicity, flexibility, speed and costvia the channels that they need. The customers are ‘sticky’ andsupport the organisation through advocating in online reviewsand in person
• Customer there is clear evidence of detailed customerpersonas, credit choices and behaviours and these are used toinfluence product decisions and lending activity
• Impact the organisation understands its social impact andmeasures this with a robust methodology
• To what extent does the product fitwith the customer need? Could theintroduction of structures such as arevolving credit product better meetcustomer needs?
• Impact measurement which goesbeyond activity into customeroutcomes, such as improvedfinancial resilience and mentalhealth metrics?
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Business Area
What great looks like Areas to explore for affordable credit leaders
Sales and Marketing
• Marketing the organisation has a marketing strategy which hasappropriate KPIs that are used to adapt the tactical use ofchannels
• Social Media full activity plan which has adequate measurementand understanding of conversions and ROI
• Using specialist outsourcedproviders where it wouldn’t beeffective to build in-house capability
• Is there an effective process toensure that in customers invulnerable circumstances aresought in marketing activity?
Operations • Documentation There is an integrated operations manualbringing together process clarity, systems and standards forcustomer experience
• Credit Assessment an automated decision platform withintegrated credit risk assessment uses a blend of historical datawith open banking and CRA data. The automated decisionplatform frees up the allocation of resources for complex cases.There is historical evidence of changes to the credit riskapproach which have driven down the bad debt rate
• Collections process utilises automation and enables sensiblerescheduling of repayments to encourage borrowers to get backon track with appropriate escalation procedures andoutsourcing of actions as appropriate
• Provisioning policy documented and reviewed on regular cycleto accommodate learning and write-off processes are enactedconsistently
• Is there an appropriate degree ofautomation for a lending businessthat competes with high speed,online models?
• Does the unit cost of a loan enableprofitability at higher volumes?
• Is human ‘high touch’ appropriatelyused in the customer journey?
IT andInfrastructure
• Roadmap and Organisation IT strategy and roadmap developedfor the next three to five years, with change programmesidentified, costed and resourced. There is clear responsibility forIT strategy and operations assigned to senior individual. Highdegree of board sponsorship and engagement in the IT strategy.Developers on site to integrate applications, manageinternet/mobile changes and develop bespoke technologies
• Core Software integrated applications, incorporatingautomation, and manual interventions only for exceptionprocessing or specialist underwriting. Mobile app and strongonline capability and presence. Best of breed applications usedto serve specific functionality. Use of modern technologystandards including API management. Flexible and scalableplatform
• IT costs - represent good value for money in terms of size oforganisation, quality, quantity and extent of IT services
• How significant is the role that ITplays in the back office of theorganisation? Is this well balancedand does it set the organisation upfor growth?
• Are the platforms used modern andflexible to changing business andcustomer demands?
Finance • Models – Balance sheet and profit and loss are fully integratedand in workable excel models. A clear understanding ofcustomer profitability informs price. A sustainable businessmodel showing ability to meet costs. A strong balance sheet ableto withstand growth and shocks
• Would the financial model besuitable for commercial investors toassess the business through?
• Does the model enable medium termplanning with realistic accuracy?
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AcknowledgementsWe would like to particularly acknowledge our strategic partnersCarnegie Trust UK and the Esmée Fairbairn Foundation for theircontributions to the development of our programme. This work alsowouldn’t be possible without the energy and commitment that our fivepilot organisations have put into the programme: Enterprise CreditUnion, Fair for You, Five Lamps, Leeds Credit Union and Moneyline. Inaddition, many organisations have been incredibly generous with theirtime as we have consulted and learnt about the affordable creditecosystem and the issues that customers face day to day. Thank you toall those who have contributed, including:
• 1st Alliance Ayrshire Credit Union
• The Association of British Credit Unions
• Barrow Cadbury Trust
• Behavioural Insights Team
• Big Issue Invest
• Big Society Capital
• Bristol Credit Union
• Carnegie Trust
• Capital Credit Union
• Centre for Responsible Credit
• Citizens Advice
• Clockwise Credit Union
• East Kilbride Credit Union
• East Sussex Credit Union
• Enterprise Credit Union
• The Esmée Fairbairn Foundation
• Demos
• Department for Digital, Culture,
Media and Sport
• The Financial Conduct Authority
• Fair by Design
• Fair Money Advice
• Fair Finance
• Fair For You
• The Fairbanking Foundation
• Financial Inclusion Commission
• Five Lamps / Conduit
• Grant Thornton
• Glasgow Credit Union
• The Inclusive Economy Partnership
• Insuring Women’s Futures
• Joseph Rowntree Foundation
• Leeds Credit Union
• London Mutual Credit Union
• Liverpool John Moores University
• Lloyds Banking Group
• Money A&E
• Money and Mental Health Policy Institute
• Money and Pensions Service
• Moneyline
• The National Lottery Community Fund
• National Numeracy
• Nationwide Building Society
• Nesta
• Personal Finance Research Centre,
University of Bristol
• Pro Bono Economics
• Responsible Finance
• Right Way Credit Union
• Salford University
• Scottish League of Credit Unions
• Small Change
• Social Investment Scotland
• StepChange
• Toynbee Hall
• Tudor Trust
• UK Finance
• Unity Bank
• HM Treasury
Sacha Romanovitch CEO
Becky ClaydonDirector of Operations
Tom LakeHead of Policy & Strategy
Fionn SharpePolicy & Strategy Advisor
Hanadi Al-SaidiSocial Researcher & Advisor
Temi OdesanyaExecutive Assistant,Office & Marketing Coordinator
Leonie JarrettCommunications
Jonathan TurnerHead of Technology
Kate PenderGrowth Programme Manager
Niall AlexanderAffordable Credit Associate
Richard Collier-Keywood Chair
Linda StevensCompany Secretary
Sir Leigh LewisNon-Executive Director
Joanna Elson OBENon-Executive Director
Faith ReynoldsNon-Executive Director
James InvineNon-Executive Director
Ingrid Kulkuljan Non-Executive Director
Fair4All Finance Team
Permanent team: Specialist Consultants: Board:
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