There is a simple truth in payments that is oft forgotten in the ivory towers of product management, end users will always do things in the way that is most convenient for them – regardless of your plans and use cases, cost, complexity or security.
This is why cash remains so pervasive for low value transactions – it is ‘free’ to the end user, allows full visibility of remaining balance, is anonymous at the point of service and is universally accepted (give or take foreign exchange).
What this often generates for developers of new products is a set of challenges in the first few months after launch as end users set off finding out how something new can really help solve their life problems. Take prepaid cards as an example – pretty simple, you load cash and then you spend what you have, the ultimate in non-debt payment. But look closer at usage models and you’ll see end users leveraging prepaid as a way to reduce the cost of cash withdrawals from other credit cards – typically a prepaid load plus ATM withdrawal will be lower priced than direct from the credit card and will also not attract the special cash advance interest rates. All-in-all, end users are great at learning our systems and using them to their advantage.
So back to our headline – what makes me think that faster payments are great news for payday lenders like wonga.com and their compatriots? It’s pretty simple – at the end of the month (or week) there are many people that run out of liquid cash and yet still have spending needs. Typically these are people that don’t want an overdraft facility as it will usually just end up getting bigger each salary cycle and spiral onwards never getting paid. So how do they cope? Well in the past one of the tools was this wonderful thing called a cheque. You write, present it to the person you owe and they get the warm feeling of being paid today while it doesn’t come off your account until a few days later. Et voila, a ‘free’ short term loan at the expense of the bank. Most students know precisely how long a cheque takes to clear – and how many bounced cheques the local hostelry will accept!
Cheques are also really handy as you can put them in the post, which adds a few more days, and even post-date them so your transaction can be anything from D+3 to D+∞. For end users of payment products, this is great flexibility and the 4,2bn cheques used in Europe in 2012 shows that they remain very popular, despite the fact that they cost a bank on average around 30 EUR to process. So what happens when banks make a concerted effort to get this cost off their books and drive down cheque usage. What you get is a market that becomes starved of service and the creation of a business space where new entrepreneurial companies can capitalise.
This is precisely what has happened in the UK – a strong effort to kill the cheque, with a failed attempt to eradicate them completely (here), but a major downturn in acceptance – has created a market hole. This hole is being filled by ‘payday lenders’ offering short-term loans to cover the 3-4 day gap in household liquidity. And of course those in need of these services worry less about the cost than about the convenience. The lenders open all channels for incoming applications – web, mobile app, phone, text, camel, pigeon – any way to take down details and then leveraging the new faster payments infrastructure can have the money in your account within minutes. I won’t discuss the moral or ethical components of this business line, but truly they are businesses filling the gap vacated by a traditional bank service.
So why has no bank created a cheque-like product to fill this gap? Probably because all they saw with cheques were problems – cost, liquidity, regulatory push for real-time payments – and looked no further than these. Payday lenders offer a more complex solution (I need to pay someone, so I borrow from you, pay them and then pay you later) than a traditional cheque (I need to pay someone, you guarantee them payment, I pay you later and you pay them later) and so lose the potential revenues available in this space using only clever combinations of their existing services.
And so until someone comes forward with a new clever product that generates a D+1 credit transfer to the payee while offering the payer a D+3 (or 4 or 20) service direct from their bank account at a price lower than a short-term loan, payday lenders still fulfil a necessary evil. But if you do invent that product, be aware that end users will soon surprise you with how they choose to use it!
- Drowning with the wonga debt sharks (socialistworker.co.uk)
- Payday loan TV commercials rocket to almost 400,000 in three years – Ofcom (theguardian.com)
- Wonga boss bites back and says its payday loans are more than fair (express.co.uk)