The UK’s unsecured lending market contracted post-financial crisis. While the sector has experienced a revival since 2012, traditional lenders have been slow to adapt to the demands of a digital marketplace.
With strong backing from private equity firms, tech-savvy payday lenders were quick to exploit this gap. Using technology to make rapid lending decisions, these providers became increasingly dominant from around 2012. Digitally powered decision-making enabled rapid customer acquisition processes and low cost to serve. As a result, payday firms grew fast and reaped attractive returns.
Precisely because the customer acquisition methodology was so quick, customers often failed to understand the terms and conditions linked to payday loans. This led to multiple complaints to the Financial Ombudsman Service and escalating dissatisfaction amongst customers. From 2013, tightening credit regulation of the unsecured lending market proved challenging, and around 50 percent of payday lenders exited the market. The remainder had to evolve fast.
As more people started looking for payday loan alternatives, non-traditional financial institutions took advantage of technology innovation to create new lending platforms (including peer-to-peer and crowdfunding sites).
This point of view highlights three areas non-traditional financial institutions have addressed and suggests how traditional lenders can learn from their success.
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