It’s been a challenging few years for people across the UK, and there is little indication that things will be improving any time soon.
A recent report from the National Institute of Economic and Social Research (NIESR) shows that Britain’s poorest households have suffered a £4,500 hit to their finances since the start of the Covid pandemic, with those on low incomes bearing the brunt of the cost-of-living crisis.
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Household finances are at breaking point, and people are increasingly turning to credit to stay afloat. Without a savings cushion, millions of people have no option but to rely on short-term credit to pay bills or meet unexpected costs. But alarmingly, many are facing more expensive credit options or even pushed towards illegal lenders as their thin credit file locks them out of mainstream borrowing.
This needs to change, and fast.
Repairing the reputation of the credit sector
Historically, it’s fair to say that lenders have had a poor reputation and are often seen as predatory, taking advantage of people’s financial situation for profit.
As well as a lack of transparency, too many credit products come with confusing terms and conditions, with some lenders deliberately offering misleading information to encourage people to take on more debt which generates higher profits. The industry is also plagued with hidden, or unexpected, fees which further fuel consumer mistrust and pile misery upon already suffering consumers.
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By GlobalDataIt doesn’t need to be this way. Credit isn’t inherently bad. It is an essential part of a person’s financial life, from helping them to get on the property ladder, to funding a dream wedding, to supporting them in the face of an unexpected cost. The stigma around borrowing – particularly short-term borrowing – must be removed, and the way to do this is to increase access to fairer and more transparent sources of credit.
Last year, the Financial Conduct Authority (FCA) introduced its new Consumer Duty rules, which aim to set higher and clearer standards of consumer protection across financial services, requiring lenders to put their customers’ needs first.
This is a good start – but it’s only a start. It marks a key step in the journey for lenders to realise they have a duty to support customers, lend responsibly, and ensure that consumers are equipped with the skills and information needed to make more informed financial decisions.
As it stands today, credit is far too complicated. The complex language used by lenders is likely to test even the most financially savvy of borrowers, especially technical jargon like APRs. They need a simpler approach so that they can easily understand the true cost of borrowing. They need new, transparent lending models to which they can truly relate.
And it can look to other categories for inspiration – including the high street.
Providing familiarity through subscription finance
This is where subscription finance comes in. It’s a simple model – used by consumers every day in Pret or on their Netflix account – but one that the financial services sector has not fully leveraged.
I believe it’s the solution to the seemingly endless credit crisis; it’s much more relatable and makes things easier for consumers to understand. It can help to drive more responsible lending, transform our broken system and rebuild the trust this part of the market has lost over the last few years.
Using Creditspring’s model as an example. People pay a small, fixed monthly subscription fee, and can then access up to two no interest loans per year, to use as they need. It’s a radically simple approach.
But it’s an approach that means our members know exactly how much they are going to pay the moment they apply. A fixed membership fee eliminates the need for confusing small print about APRs, interest rates and hidden charges, but – most importantly – it removes the risk of debt spiraling uncontrollably. It truly lives up to the ambitions of Consumer Duty.
Credit must be safe, affordable and transparent
Amidst continued talk of low financial literacy levels in the UK, it’s also important that forward-looking lenders help consumers to increase their knowledge so that they can build up financial resilience. That’s why we also give people free access to custom tools and tips that they can leverage to improve their financial circumstances.
Credit is a crucial part of a functioning economy and the need for it won’t go away – but it must be safe, affordable, and transparent, particularly during periods when demand is so high.
I believe subscription finance can be a difference maker and provide people with a more transparent short-term credit option they can dip into when they need it. One that feels familiar and reflects other experiences in their lives, whether that’s popping into Pret for a coffee or picking a film on Netflix to help them unwind.
It’s fairer, safer, and easier to understand. And we know it can empower people to improve their financial prospects.
Sabrina Loi is Chief Product Officer, Creditspring
