How much is the UK’s lending industry adapting and changing to meet the unique needs of different types of customers?
There are strong pockets of innovation. Like the first-time mortgage borrower market, where there is a clear need to help people grab onto that first slippery rung of the ladder. For example, in February, Own New launched a mortgage product that will enable borrowers to take out a loan with an interest rate under 1% for those buying new builds. The Rate Reducer scheme allows the buyer to benefit from cheaper repayments for the first two or five years of owning the house.
But years before they are even ready to buy their first home, younger lenders can already benefit from a whole industry of fintechs that speak their language and offer features designed for Gen Z lifestyles.
Opportunities to innovate
Of course, financial choice must be accessible to all customers, regardless of age. There certainly aren’t as many fintechs innovating for older customers, at least not as a priority user base.
But age aside, there are other groups that need tailored financial access and products, particularly those that we would characterise as vulnerable. Our recent national borrower survey, conducted in January, showed people from some vulnerable groups, such as those with mental health conditions (54%) and cognitive disabilities (51%) are most likely to have borrowed money in the last 12 months. This compared with 42% for the entire survey base.
This is sometimes likely linked to ‘survival borrowing’ – compounded by the cost-of-living crisis – as poverty and financial hardship is more prevalent among these groups.
Thanks to the FCA’s new Consumer Duty requirements, there is more of a spotlight than even on supporting customers, particularly those who are considered vulnerable.
Our research showed that vulnerable people are more likely to use Buy now, pay later: more than half of those who have a mental health condition (55%) or cognitive disability (52%) have used BNPL. This compares with 33% of people with no mental health condition and 36% of those with no cognitive disability.
As well as a nationally representative survey, we wanted to find out more about the impact this BNPL use might have on vulnerable people. We heard from Money Wellness, an organisation providing free debt help, who warned that BNPL poses a particular risk to people with mental health problems, who are often more prone to impulsivity and memory loss. Keeping on top of payments is a struggle, especially if they’re juggling several at once.
Positive friction
So, clearly vulnerable people need extra support. This is where lenders have an opportunity to explore innovation and greater personalisation. Our research could be a source of inspiration: 36% of survey respondents said lenders should provide counselling support for vulnerable borrowers. In this scenario, a lender would partner with a charity to provide free counselling support to vulnerable customers.
We also delved into other interesting approaches with survey respondents. For example, the development of medi-lending solutions, designed specifically to support people through medical diagnosis and treatments, was backed by 32% of people. An ageing population and increasing strain on the NHS could drive innovation in financial solutions like this.
Other options that garnered support included parent lending plans, specifically designed to support parents at key stages throughout their child's life; and pre-loan meditation, whereby borrowers would take a minute of meditation before being allowed to take on a loan - the idea being it might deter some credit decisions made on impulse. Consider it positive friction in the lending process.
What other groups in society might lenders support with tailored solutions? Some respondents to our research supported translending (11%), developed to support borrowers as they transition through gender reassignment surgery, from diagnosis, hormonal therapy and surgery.
If you’re sceptical about demand for such tailored products, bear in mind that people are already borrowing for reasons that might not be considered ‘traditional’. For example, alongside the usual home, car or holiday, our research found reasons to borrow money included: paying for a private diagnosis for neurodivergence (3%); IVF treatment (2%); gender reassignment surgery (2%); cosmetic surgery (2%); and spray tans (2%). While these may seem like small percentages, this nationally representative sample of 2,400 people in the UK is equivalent to between 1.2 million and 1.8 million people.
Creative lending
Creative options like free counselling and pre-loan meditation might not become reality; and I’m not arguing for specific products to help people save for spray tans.
But the interest in these types of approaches do illustrate the sort of direction we expect the industry to take: powered by technology like AI and Open Banking, a major drive towards greater personalisation and specialised lending.
People want solutions that are tailored to their unique circumstances and uses, so lenders need to put themselves in their customers shoes and get creative if they are to match their expectations.
Download the full report here