Millions of people in the UK apply for loans every year and with some looking for money for emergency purposes, they are looking for money to be transferred to their account as quickly as possible. Naturally, online lenders have to run a number of checks to ensure that you are suitable for a loan. This includes things like affordability checks to match your income and amount you requested to borrow and of course, credit checks.
But otherwise, we have faster payment systems that can send money from one place to another almost instantly or within 15 minutes using BACS.
At best, in the high cost short term loan industry, customers may receive funds within the hour. There were some big online lenders that used to promise funds within 15 minutes – but this is because they were not carrying out adequate checks and this subsequently lead to fines including a whopping £220 million to payday giant Wonga.
So in the world where people are looking for instant payday loans – how is this going to be feasible?
Pooling the best customers
Those customers with the best details such as the best credit records, employment statuses, incomes and affordability should be able to access funds quicker, in theory. This is because they present a lower risk of default. Similarly, customers that are homeowners may present a lower risk of arrears since they have likely been through the rigorous process of credit checking in order to get access to a mortgage. This may not always be the case as some homeowners can have second or third mortgages and be heavily in debt.
Nonetheless, online lenders can have their best criteria determined and provided that they can run instant checks, they can pool these strong candidates together to provide immediate funds.
For repeat customers that have already repaid loans successfully, they can potentially bypass the regular checks of showing a payslip, bank statement, utility bill or taking a phone call – since they have already done it and repaid their loan on time.
Still, lenders need to make sure that the customer’s financial position is not getting worse, otherwise, they are potentially lending irresponsibly. But provided that they have a credit scoring and underwriting procedure in check, the good quality repeat customer can potentially receive the next loan almost funded immediately.
This is quite common for customers applying for bank overdrafts or increases in their credit limits. The bank already has a history of your repayments and your details, which is why when you might request an overdraft or credit limit increase, you get an instant decision.
Faster payments may not need to be in the form of loans, but they can be in the form of overdraft facilities, as mentioned above. We have noticed a wave of new short term loan products that allow for an overdraft facility, letting you pay and top up at any time, within your affordability. With such flexibility offered by the likes of Stepstone Credit and Sunny, it can provide you with the access to money that you could be looking for.
Finally, the role of blockchain is likely to completely transform the way lenders conduct faster payments and indeed individual consumers use payments too. Blockchain is a new technology and concept based on using a ledger to record information and since it gets signed off every step of the way, it provides security and potentially faster processes to our current methods.
RBS have attempted to replicate a domestic clearing system – such as the UK’s Faster Payments – using a blockchain distributed ledger. The test results evidenced a throughput of 100 payments per second, with six simulated banks, and a single trip mean time of three seconds and maximum time of eight seconds. This is the level appropriate for a national level domestic payments system.
Blockchain is definitely the future, but understanding it is quite complex. So it may take several years to become mainstream and used by online and high street lenders – but it will certainly take things to the next level.