The Archbishop of Canterbury wants to compete payday lenders out of existence. There are three things he needs to get right.
The comment was tucked away in a 5,000–word interview.
Speaking to Total Politics magazine in July, the Archbishop of Canterbury, Justin Welby, said he wanted to use competition, not legislation, to put Wonga “out of existence.” To that end, the Church of England will be “putting our money where our mouth is” and developing an alternative to payday lenders.
Plenty of headlines followed, and most of the reaction was positive. Then came embarrassment when it emerged the Church of England had – inadvertently and indirectly – invested a tiny part of its pension fund in Wonga itself.
Amid all the noise and hot air, very little has been said about how the Church could actually go about competing with Wonga. Is the ambition the right one? And how might it succeed?
The plans as they stand
The Archbishop’s ideas revolve around boosting credit unions as an alternative to the payday providers. While the plans still appear to be embryonic, in one big thing they are right: they focus on boosting supply, not criticising demand.
In an ideal world, nobody would run short of cash. In reality, millions do every week. Payday lenders help to get the car fixed, the flat heated and the children fed. Decisions aren’t driven by APRs or best buy comparisons. They’re about borrowing £100 now and paying back £120 at the end of the month.
Some new regulation may be needed to curb excesses and protect the vulnerable. But legislating payday lenders ‘out of existence’ wouldn’t make demand go away – it would push it underground, including to rough doorstep lenders. Creating new competition is therefore much wiser than trying to ban Wonga, QuickQuid and Wizzcash.
To succeed with a new offering that competes in this market, the Church of England (or any entrant), must get three things right.
First, go national
Wonga has done this, and with great effect. Though only founded in 2006, and not launching to the full market until summer 2008, Wonga has rapidly become a household name with high levels of recognition across the UK.
Above and beyond that, the firm has become synonymous with its sector. Wonga is the brand that gets to meet the Archbishop; it is the name the headline–writers most use. It’s not true that all publicity is good publicity – but every controversy does help cement Wonga’s name in the minds of consumers. QuickQuid, Wizzcash et al can only look on with envy.
By contrast, consider the credit unions. Can you name three? Would you turn to one if you ran short of cash? Google ‘personal loan’ or ‘short–term lending’ and you won’t come across them. Even Martin Lewis’s Money Saving Expert has them hidden away.
Credit unions are overwhelmingly small. Most are dependent on volunteers. Their marketing and communications are poor, with little capability online. Crucially, they’re also exclusive – open to those from a particular town or industry, and firmly closed to everyone else.
Take the credit union nearest our studio in Shoreditch, for example. It’s only available to people in six of London’s 33 boroughs plus those who work for a random–looking list of companies including a nursery, a newspaper and a housing association.
As a result, credit unions today are not real competition for the payday lenders; they’re a peripheral distraction that can be safely ignored.
To turn this situation around, a credit union (or unions) must be serious about creating a national brand and achieving name recognition. In personal finance, there are huge advantages to being big with great returns to scale. Among other things, a national credit union could:
- Become the first place people think of when they run short of money. It could displace Wonga from the front of consumers’ minds.
- Analyse and use data as well as the payday lenders do. Lending decisions could therefore be automated, without default rates soaring. Volunteers can’t do this on a Wednesday afternoon.
- Invest in technology to allow customers quick and easy access to money online. This could replace the need for lengthy application forms or face–to–face interviews, which put most people off.
- Create a simple and straightforward user experience that’s as good as Amazon, Asos or First Direct.
Second, be clear on the offering
Wonga is extremely clear on its proposition. It targets adults who need access to cash in a hurry. And it offers them up to £400 within 5 minutes of a loan being approved. Everything is automated and available online and on mobile, 24/7.
What about credit unions? The offering varies from union to union, and one or two are experimenting with the payday model. But, for the vast majority, the emphasis is on longer–term lending, funded by members’ savings. The ethos is one of membership and participation, not suppliers and consumers. Almost all credit unions exist for needs that can be measured in months, not minutes.
Which brings us back to Justin Welby’s ambitions. If I need cash tonight or tomorrow, Wonga can help me, a credit union can’t. As a result, credit unions aren’t going to compete Wonga ‘out of existence’ because they’re not even competing in the same space. They may be an alternative source of funds, taking a part of the market, but most demand will be left unmet.
For any new entrant or existing player, this raises some fundamental questions about their proposition. Is it about instant cash at lower interest (which may be impossible, given the high level of defaults)? Is it sticking close to the existing credit union model? Or is it creating a new model entirely (perhaps combining easy access with longer repayment terms)?
Third, celebrate what’s different
Credit unions have huge potential and each should have a strong story to tell.
They’re democratic, based on ethical principles, and profits are shared out among members. They help people get out of debt, can be an alternative to mainstream finance, and their loans are affordable, with interest rates capped at 26% (compared with payday loan rates that exceed 5,000%).
And yet …
In the US, a credit union recently rebranded with professional help but little original thought. The credit union’s research showed that a name change made sense and would help overcome confusion in the eyes of consumers. But the new name they’ve chosen is a boring amalgamation of two dull words. The values identified were generic – Trust and Integrity. The new logo and visual identity are also easily forgotten. Overall, the rebranding exercise lets the credit union down.
Non–profits in the UK can learn from these mistakes. To compete with Wonga, they need to shun predictable language and imagery to identify an essence that is authentic and bold.
Brands must know their strengths, and celebrate their differences.