Problem addressed

Across the United Kingdom, roughly 1.71 million adults do not have access to banking services, and a further 4.1 million reported that they were in ‘financial difficulty’ in 2018. Facing income uncertainty and low wage growth, disadvantaged adults often find themselves denied the use of mainstream financial services. They may be excluded from bank services by industry algorithms that undertake stringent credit referencing checks. This, in turn, excludes them from other service providers who require them to provide banking details to access services. Exclusion from mainstream services may drive people into the hands of payday lenders at extortionate rates of interest, further exacerbating the problem.

Innovative solution

The main objective of Fair Finance, a UK organisation, is to increase the financial resilience and security of individuals by improving their financial literacy and debt management. Fair Finance provides responsible and affordable personal and small business loans to clients with complex and multiple financial needs. Unlike mainstream financial services, whereby credit history is considered a prime indicator of the risk to the issuer, Fair Finance establishes a trust-based relationship with the client and collects qualitative data from the beginning in order to inform its lending decisions. It captures upfront, accurate information about the client’s challenging financial situation and what loan, if any, they could benefit from. By lending to people who other lenders will not support, Fair Finance helps clients to gradually build a better credit profile, and eventually move into mainstream financial services in a sustainable way.

The organisation considers all aspects of an applicant’s circumstances. Experienced loan officers interview all clients face-to-face (when clients can travel to one of the three London branches) or by phone, to understand their needs. They are then asked to complete an income and expenditure exercise to ensure that they are not in need of debt advice, and to assess affordability to determine whether they have enough surplus income to service a loan. Lending decisions are then made on an affordability basis.

Clients who are over-indebted and unlikely to qualify for a loan by Fair Finance are offered a referral to Fair Money Advice (FMA), a registered charity offering specialist debt advice services and preventative financial capability programmes, or an external provider if they prefer independence. FMA advisors provide information on budgeting, income maximisation, negotiation with creditors and assistance to remove or challenge unlawful debts, after completing a full needs assessment of each client. 

This personal, ‘trust-based’ approach to providing loans to new clients yields lower default rates and lower acquisition costs in comparison to other mainstream lenders. This, in turn, enables Fair Finance to charge less to customers, constituting a self-generating commercial growth model.

Key results and benefits

Fair Finance focuses on the most financially excluded individuals and households, with 75% of their customers living in the 30% most deprived areas of the UK. Approximately 65% of beneficiaries are women, and over half of all beneficiaries are of African descent. Many beneficiaries are single mothers, victims of financial abuse, individuals with disabilities, and small businesses owners operating in under-served areas.

Since launching, Fair Finance has extended GBP 25 million (around EUR 27.5 million) to those excluded by traditional finance, helped 55 000 people with advice, loans or support, managed and advised on GBP 61.9 million (around EUR 68.1 million) worth of debts, provided GBP 81 million (around EUR 89.1 million) worth of community benefit through business lending, and achieved GBP 10.4 million (around EUR 11.4 million) in savings for customers by refinancing people out of high-cost lenders.

The initiative actively promotes and contributes to fostering an evidence-based approach to lending. It publicly discloses data, such as its annual turnover, the mapping of its clients’ demographic and the number of loans it provides. By lobbying for greater accountability in lending, and sharing ethical lending knowledge with other companies, Fair Finance’s knowledge sharing serves as a tool for policy makers involved in tackling financial exclusion and helps in changing the mindset of the industry. By working with Housing Associations, for instance, Fair Finance has contributed to a significant culture shift, with virtually all Housing Associations now implementing financial inclusion strategies in their core business objectives. Fair Finance has also completed an evaluation and a ‘lessons learned’ exercise as part of a Digital Advice pilot with Pariti, a Financial Technology company. 

Potential for mainstreaming

The initiative received funding from the European Regional Development Fund (ERDF) between 2000 and 2005 (when it was a microfinance start up), which supported the formal creation of the business in April 2005. In 2012, the initiative received GBP 2 million (around EUR 2.2 million) in social investment from individuals, foundations, and the European Investment Fund, with commercial finance from UniCredit, allowing the business to set up a dedicated lending team and create Fair Business Loans. Since then, Fair Finance has become almost entirely self-reliant, receiving support only from socially motivated companies that wish to commercially associate with the initiative. Through its online service, available across the whole country, and a new GBP 1 million (around EUR 1.1 million) lending facility, Fair Finance is set to escalate its national reach beyond South-East England, with potential for replication in other European countries.

Fair Finance is the first business in the UK to demonstrate that a socially conscious lending model is commercially sustainable to the extent that it now competes with mainstream lending services. Similar to other experiences with microfinance in other parts of the world, Fair Finance shows that providing  people in vulnerable situations with accessible and socially conscious financial services is a viable business model, and can empower them economically and socially to achieve their desired goals. By fostering an evidence-based approach to lending, it also actively contributed to a positive culture shift in the industry, putting the need to tackle financial exclusion at the core of public policies aimed at tackling poverty and exclusion in the UK.

The success of Fair Finance’s approach has been acknowledged by numerous awards, including from Credit Today, Responsible Finance, the European Microfinance Network and Accredited London Living Wage Employers.          It is also recognised as a Certified Social Enterprise. In 2013, the UK Prime Minister awarded Fair Finance a Big Society Award for outstanding contribution to the community. The organisation has been elected to the Presidency of the European Microfinance Network, the Europe-wide membership body representing microfinance across the region.