Can credit scores make payday lending ethical?

Payday lenders need to work harder to not target vulnerable borrowers.

A new report (pdf) by Damon Gibbons, published in partnership by Friends Provident and the Centre for Responsible Credit, looks at the benefits of credit data sharing and raises another possible solution to the problem of irresponsible lenders targeting the financially vulnerable.

It might be a surprise that credit scoring is not standard procedure for high-cost lenders on the high street and online. But most of us are familiar with payday lenders' adverts promising easy cash with no credit checks. The speed with which hard-up borrowers can obtain very expensive loans does have consequences, and making data sharing a priority would start to set this problem straight.

What does credit scoring and data sharing involve?

Credit scoring, simply put, is the system financial institutions have in place to check whether a person is said to be creditworthy before assessing a loan application. The system, regulated by the Financial Services Authority, works on a points system and is often shared with credit reference agencies. If a person's points score is deemed high enough then their loan application will generally be accepted; otherwise, that loan application can be denied.

How it can benefit responsible lending?

The Office for Fair Trading's guidance to lenders on responsible lending states that a creditor must consider whether a credit commitment will adversely impact upon an individual's financial situation. Ideally, credit scoring and data sharing can help lenders adhere to those guidelines. They will finally have a database to look at which will give them some indication of whether a loan of a particular amount, say, will be beneficial to them or impact negatively on their financial situation.

What bad behaviour it can stop?

At the moment there is no law stopping a payday lender from lending large sums of money, at expensive rates of interest, to low income consumers. There is only guidance to do this, and we know that this is not always adhered to. While we know payday lenders profit from repeat customers, and that only between 50 and 60 per cent of loans from payday lenders are notified with credit reference agencies, even some in the industry say that moving to a culture of data sharing would ensure that the risks attached to lending money are reduced, as well as some of the front end costs.

What are the risks?

The big risk is that credit scores could make it more difficult for a person to obtain credit.

The government, on this, have said that while they appreciate the need for credit scoring, they do take into consideration the “unintended consequences”, such as to those with no, or "thin", credit rating struggling to get loans.

However in addition to better quality lending decisions, it would be worthwhile for mainstream credit providers to be less needlessly risk averse when considering overdraft and credit applications to low income customers who may otherwise rely on a high cost payday lender, where the average loan can cost around £30 per £100 borrowed.

What policy makers should do

Two things: set criteria for what is meant by responsible lending, such as setting a minimum level of disposable income a borrower is left with after taking on a loan; and oblige lenders to refer high risk customers to credit unions, where they can receive budget management advice and borrow money at far cheaper prices.

Furthermore, payday lenders should be obliged to implement a system of five roll-over loans per customer. Credit checks will provide the data for customers who reach this point.

Credit scoring and data sharing, implemented properly, can be the lifeline borrowers need at a time when personal debt is growing and the payday lending sector is seeing its profits soar.

Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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An unmatched font of knowledge

Edinburgh’s global reputation as a knowledge economy is rooted in the performance and international outlook of its four universities.

As sociologist-turned US Senator Daniel Patrick Moynihan recognised when asked how to create a world-class city, a strong academic offering is pivotal to any forward-looking, ambitious city. “Build a university,” he said, “and wait 200 years.” He recognised the long-term return such an investment can deliver; how a renowned academic institution can help attract the world. However, in today’s increasingly globalised higher education sector, world-class universities no longer rely on the world coming to come to them – their outlook is increasingly international.

Boasting four world-class universities, Edinburgh not only attracts and retains students from around the world, but also increasingly exports its own distinctively Scottish brand of academic excellence. In fact, 53.9% of the city’s working age population is educated to degree level.

In the most recent QS World University Rankings, the University of Edinburgh was named as the 21st best university in the world, reflecting its reputation for research and teaching. It’s a fact reflected in the latest UK Research Exercise Framework (REF), conducted in 2014, which judged 96% of its academic departments to be producing world-leading research.

Innovation engine

Measured across the UK, annual Gross Value Added (GVA) by University of Edinburgh start-ups contributes more than £164m to the UK economy. In fact, of 262 companies to emerge from the university since the 1960s, 81% remain active today, employing more than 2,700 staff globally. That performance places the University of Edinburgh ahead of institutions such as MIT in terms of the number of start-ups it generates; an innovation hothouse that underlines why one in four graduates remain in Edinburgh and why blue chip brands such as Amazon, IBM and Microsoft all have R&D facilities in the city.

One such spin out making its mark is PureLiFi, founded by Professor Harald Haas to commercialise his groundbreaking research on data transmission using the visible light spectrum. With data transfer speeds 10,000 times faster than radio waves, LiFi not only enables bandwidths of 1 Gigabit/sec but is also far more secure.

Edinburgh’s universities play a pivotal role in the local economy. Through its core operations, knowledge transfer activities and world-class research the University generated £4.9bn in GVA and 44,500 jobs globally, when accounting for international alumni.

With £1.4bn earmarked for estate development over the next 10 years, the University of Edinburgh remains the city’s largest property developer. Its extensive programme of investment includes the soon-to-open Higgs Centre for Innovation. A partnership with the UK Astronomy Technology Centre, the new centre will open next year and will supply business incubation support for potential big data and space technology applications, enabling start-ups to realise the commercial potential of applied research in subjects such as particle physics.

It’s a story of innovation that is mirrored across Edinburgh’s academic landscape. Each university has carved its own areas of academic excellence and research expertise, such as the University of Edinburgh’s renowned School of Informatics, ranked among the world’s elite institutions for Computer Science. 

The future of energy

Research conducted into the economic impact of Heriot-Watt University demonstrated that it generates £278m in annual GVA for the Scottish economy and directly supports more than 6,000 jobs.

Set in 380-acres of picturesque parkland, Heriot-Watt University incorporates the Edinburgh Research Park, the first science park of its kind in the UK and now home to more than 40 companies.

Consistently ranked in the top 25% of UK universities, Heriot-Watt University enjoys an increasingly international reputation underpinned by a strong track record in research. 82% of the institution’s research is considered world-class (REF) – a fact reflected in a record breaking year for the university, attracting £40.6m in research funding in 2015. With an expanding campus in Dubai and last year’s opening of a £35m campus in Malaysia, Heriot-Watt is now among the UK’s top five universities in terms of international presence and numbers of international students.

"In 2015, Heriot-Watt University was ranked 34th overall in the QS ‘Top 50 under 50’ world rankings." 

Its established strengths in industry-related research will be further boosted with the imminent opening of the £20m Lyell Centre. It will become the Scottish headquarters of the British Geological Survey, and research will focus on global issues such as energy supply, environmental impact and climate change. As well as providing laboratory facilities, the new centre will feature a 50,000 litre climate change research aquarium, the UK Natural Environment Research Council Centre for Doctoral Training (CDT) in Oil and Gas, and the Shell Centre for Exploration Geoscience.

International appeal

An increasingly global outlook, supported by a bold international strategy, is helping to drive Edinburgh Napier University’s growth. The university now has more than 4,500 students studying its overseas programmes, through partnerships with institutions in Hong Kong, Singapore, China, Sri Lanka and India.

Edinburgh Napier has been present in Hong Kong for more than 20 years and its impact grows year-on-year. Already the UK’s largest higher education provider in the territory, more than 1,500 students graduated in 2015 alone.

In terms of world-leading research, Edinburgh Napier continues to make its mark, with the REF judging 54% of its research to be either world-class or internationally excellent in 2014. The assessment singled out particular strengths in Earth Systems and Environmental Sciences, where it was rated the top UK modern university for research impact. Taking into account research, knowledge exchange, as well as student and staff spending, Edinburgh Napier University generates in excess of £201.9m GVA and supports 2,897 jobs in the city economy.

On the south-east side of Edinburgh, Queen Margaret University is Scotland’s first university to have an on-campus Business Gateway, highlighting the emphasis placed on business creation and innovation.

QMU moved up 49 places overall in the 2014 REF, taking it to 80th place in The Times’ rankings for research excellence in the UK. The Framework scored 58% of Queen Margaret’s research as either world-leading or internationally excellent, especially in relation to Speech and Language Sciences, where the University is ranked 2nd in the UK.

In terms of its international appeal, one in five of Queen Margaret’s students now comes from outside the EU, and it is also expanding its overseas programme offer, which already sees courses delivered in Greece, India, Nepal, Saudi Arabia and Singapore.

With 820 years of collective academic excellence to export to the world, Edinburgh enjoys a truly privileged position in the evolving story of academic globalisation and the commercialisation of world-class research and innovation. If he were still around today, Senator Moynihan would no doubt agree – a world-class city indeed.

For further information www.investinedinburgh.com