Loan Rangers

What the regulation of payday loans means for retail banking.

The FCA's announcement of tougher regulations for payday lenders in the UK has already split opinion. Whether a welcome protection for the financially vulnerable, or a sure-fire way to drive them into the arms of even less scrupulous operators beyond the reach of the regulator, the debate will not be settled until the rules have been implemented and allowed to operate for several months at least.

It is often the case that the need for regulation in a market economy can be read as a symptom of systemic faults in how a particular sector runs its affairs. In turn, the resulting regulation is often more of a sticking plaster than a true cure. I'm quite convinced that such a pattern of events can be identified in the FCA's new regulations.

Some commentators have already pointed out that some users of payday loans may find themselves turning to even less savoury solutions if the market is forced to tighten its lending criteria. To prevent this, it's crucial that we look for and tackle the underlying cause of the condition.

Thankfully, a true cure should not be too difficult for the financial industry to prescribe. Payday lenders stepped in to fill a hole in the market left by retail banks, which have historically lacked the kind of detailed customer information needed to sustainably manage the kind of revenue generated from higher risk loans. They have also (quite rightly, given the reputational issues) been reluctant to charge the same kind of fees that enable some of the more prominent payday firms to lend with much looser criteria than would be usual in retail banking.

However, technology has moved on - modern revenue management and business assurance platforms can make it much easier for a retail bank to assess its customers' true risk profiles, and to provide loan products to a much wider range of customers. With the right middleware giving insight into customer information from all the different sources of data that a bank has access to, banks can design algorithms that generate relationship based pricing structures applicable to a greatly extended range of customer types.

This can allow a bank to combine an acceptable risk profile with a more widely accessible loan product range. As payday lenders feel the squeeze from the regulator, the opportunity is there for banks to extend their customer base while providing responsibly priced support to those most in need of sound financial assistance.