High Cost Short Term (HCST) lenders have been facing several challenges within the industry and there is no sign of this of easing. As such many HCST lenders are looking to diversifying into alternative markets. In this blog we will explore how the industry has changed and what new fraud strategies HCST lenders need to consider as they look to enter new markets.
Rewind seven years and Wonga, one of the most visible HCST loan providers, was considering to float on the New York Stock Exchange (NYSE) at a value of £1.46bn. Fast forward to 2018 and Wonga called in the administrators after being inundated with compensation claims and pressure from the regulator.
Tough market conditions didn’t just affect Wonga. In February 2019 Curo Transatlantic Limited, trading as Wage Day Advance announced they too were calling in the administrators. It is unlikely that these will be the last lenders to encounter market difficulties as data shows that grievances driven by Claims Management Companies (CMCs) more than tripled in the second quarter of 2018. The Financial Ombudsman Service received 10,979 new complaints about payday loans between April and June last year, up from just 3,126 in the same period last year.
CMCs aren’t the only issue for lenders, interest caps are also narrowing margins. Prior to 2015 HCST loan providers were charging interest rates as high as 5000% and were perceived to be taking advantage of Britain’s household debt crisis. This was a period before scrutiny from the Financial Conduct Authority brought in interest charge caps. In recent years interest rates have been capped at 1500% and lenders are encouraged to lend responsibly to customers who are borrowing within their means.
TransUnion have been working with HCST lenders since our inception in 2006. In this time we have have helped clients meet competing objectives and remain highly competitive. By operating exclusively via online channels, many lenders in this marketplace have had to stay ahead of the curve and actually use speed of service and access to funds (based on decisions enabled by our data and software capabilities) to bolster customer experience, whilst mitigating the inevitable fraud attacks. So as new challenges emerge, TransUnion are perfectly poised to assist clients as they begin to diversify.
By diversifying into more near-prime lending, providers will no doubt face different fraud challenges, ranging from higher value losses, to increased levels of application fraud. If we take a credit card for example, there is a risk of Account Take Over (ATO). A type of fraud that one time lenders would not have encountered previously. ATO is particularly prevalent in online lending as Cifas figures show that 36% of all facility takeover fraud was via an online channel last year. By working with TransUnion, lenders can bolster their fraud defenses whilst ensuring seamless customer onboarding, as we offer a blend of rich market leading services which can be applied adaptively into an application process whilst also ensuring ongoing authentication of genuine customer can be achieved with minimal friction.
Customers in the credit card and near-prime markets have better access to lending and expect transactions to be quick, secure and seamless. iovation, a TransUnion company, can provide robust fraud checks throughout the customer lifecycle supporting multi-factor authentication and risk assessment. Helping you to balance between positive customer experience and robust fraud checks.
TransUnion have supported several clients through the HCST market challenges and have the solutions, tools and market knowledge to ensure HCST lenders looking to diversify can do so, whilst maintaining customer experience and reducing fraud losses.
Find out more about our TransUnion Fraud & ID solutions or get in touch with one of our fraud experts to see how we can support you through your transition into new markets.