Fintech for all: how the UK is making credit affordable

Technology can improve access to financial support for low-income people and challenge the dominance of exploitative, high-interest lenders.

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The United Kingdom’s fintech sector is the envy of the world. Last year saw £15bn invested in UK fintech firms. It’s now the best-performing part of the UK tech industry and this year we overtook both San Francisco and New York with the number of investment deals we attracted. 

Fintech firms are putting more power into our hands over how we manage our money. The government has supported this through initiatives such as Open Banking, which builds on advances in technology and enables access to a range of new and innovative financial products that are more tailored to our needs. And companies like Starling and Monzo have shifted the entire banking process to something that can be done through a smartphone screen.

Our high streets banks are taking notice and are already playing catch-up to implement many of these innovations into their own services. This can only be a good thing for consumers, giving them more choice and control over their hard-earned money. 

While fintech has helped improve financial inclusion for many people, there are still some who are shut out of the financial process, unable to take out a loan or even set up a bank account. There is a role here for government in harnessing the potential of fintech to help tackle this.

When I joined the Treasury at the beginning of 2018, with responsibility for overseeing the UK’s financial services sector, what really stood out to me as a concern were the ways people around the country were struggling to get access to the credit they need. Things many of us often taken for granted, like getting a loan or credit card from a bank, or making regular savings, were out of reach for so many.  

For people affected by this, expensive alternatives like high-cost credit were the only way they could access some sort of borrowing. Credit provides an important function, including helping us to deal with unexpected one-off costs. These loans are often used to deal with simple unforeseen occurrences but can attract rates of interest of well over 100 per cent.

Over three million people in the UK use high-cost credit and there are some who use this as their main, regular source of accessing credit. This is concerning, as these high rates of interest make it incredibly difficult for people on low incomes who use it regularly to get their finances under control.

Everyone should have the right to affordable financial services. Since 2014 the FCA has cracked down on bad practice among high-cost lenders, including capping the cost of payday loans and rent-to-own products. At the same time, the Treasury has increased funding for the teams that take action against illegal loan sharks, who prey on the most vulnerable.

But there is more we can do. Many people still feel they have no choice but to turn to high-cost credit. We need to ensure that people with lower incomes have greater access to more affordable sources of credit. And one way we are doing that is by helping responsible lenders reach more people through the power of fintech.

Despite serving almost two million people, many don’t know about community lenders – such as local Credit Unions. They can offer a cheaper loan than high-cost lenders and see their role as supporting their customers and local community. However, they often cannot match the speed and convenience that the higher-cost alternatives are able to offer.

We believe that digital technology can play a big part in improving this. Bold ideas and innovation have already transformed the way we bank, as well as how we work and how we talk to each other. Why can’t it make it easier, safer and cheaper to access credit?

That’s why, this summer, in partnership with Nesta Challenges, we launched the Affordable Credit Challenge. This will bring together Credit Unions and other social lenders in cooperation with the UK’s booming fintech sector.

We want to stimulate the creation of innovative products that will allow social lenders in towns and cities across the UK to compete with the higher-cost payday and guarantor loans. This is a Dragons’ Den-style competition, backed by a £1.5 million prize fund for the innovations with the biggest impact.

I want the best and brightest of Britain’s fintech minds to help and work with community lenders to build on what they do well and make it even better through technology.

Is it new, more flexible ways of repaying loans that respond to unexpected changes in income? Is it ways of enabling people who lack a credit history to demonstrate they can pay back a loan? Is it ways of helping community lenders reach people when they need credit most so they don’t resort to high-cost alternatives? The Challenge will be seeking out those innovations that will help community lenders to become a real alternative to high-cost credit.

The UK is already at the forefront of innovation and pioneering discoveries in financial technology – way ahead of our nearest rivals in New York and Paris. It’s now up to us to direct this technology towards the challenge of affordable borrowing – a great example of using technology for social good and a challenge I know the UK’s fintech sector will rise to.

John Glen MP is Economic Secretary to the Treasury.