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These days the use of cutting-edge technology tends to be equated with relevance to the modern economy and society. But beware of blind faith in digitalization.
Disrupting a tried-and-tested business model from the inside will not work well if customers prefer the older method. British sub-prime lender Provident Financial, founded in 1880, is a good example of these dangers. After regaining and then doubling its pre2008 share price between 2014 and 2016, Provident stock lost more than 80% of its value after a profits warning this summer.
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John van Kuffeler, |
The warning came as the firm missed loan collections and haemorrhaged clients and staff at its home credit division. In October, Provident said it was backpedalling on its strategy, effectively admitting to a botched and misled digitalization push under Peter Crook, who resigned as chief executive in August. Provident had long used community-based self-employed agents – many of them former customers – to sell and collect credit at people’s homes.
Crook saw a chance to use technology to boost profits and shareholder value. Earlier this year he completed a shift to new routing and scheduling software, so that a smaller number of full-time employees could cram in as many client visits as possible.
Down to earth
This enthusiasm for the digital age seems to have developed after the late 2013 departures of veteran chief executive and chairman John van
Kuffeler and consumer credit managing director Chris Gillespie. Crook was soon ploughing money into new online payday lender, Satsuma. Crook, who the Evening Standard described in 2015 as a “jolly, down-to-earth sort”, might have a different outlook to Gillespie and van Kuffeler in other ways, too. Van Kuffeler has roots in Flemish and Dutch aristocracy, a background as a Grindlays investment banker and is close to the British royal family. His new Mayfair-based sub-prime group, Non-Standard Finance, is growing rapidly but is not known for its digital leadership.
This is not to say that Crook’s strategy was wholly wrong. Like the high street banks, UK sub-prime lenders can and do make good use of new technology. Crook moved to a less paper-based approach to logging customer data, for example. But when the digital hype clears, it is obvious that selling credit and collecting debt is very different to delivering pizzas and parcels – especially when the interest rates are sky high and credit histories are unreliable.
No one, let alone hard-up borrowers, will happily receive a stranger turning up at the door and hurriedly demanding money. Time for tea helped Provident’s agents assess the character and situation of clients. This approach also met the part-time agents’ need for flexibility – many were mothers with young children. There were technical problems too. Analysts covering the stock describe how the routing system had agents zig-zagging from one end of town to the other or arriving at a home their colleague had just visited.
Most institutions are bound to face glitches like this when deploying new technology; those problems can be solved. Much harder to fix can be a rash digitalization strategy’s dislocation to a client-facing business and to staff culture. Provident rehired Gillespie in August as debt collection rates plummeted. Now, according to October’s statement, Gillespie is rehiring 300 former agents as parttime staff and his division is: “Moving away from the overly prescriptive routing and scheduling of customer interactions.” Sub-prime lenders have more in common with the big banks than either are willing to admit.
Too much tech
Bigger banks can and do lose customers because of the overenthusiastic use of technology. Replacing professional decision making with a computer system will test client loyalty. Leaving aside the platitudes about following the customer, using technology to save money on more costly types of customer service exacerbates the mistrust of banks left over from the 2008 financial crisis.
This is not unique to the UK. The story is relevant to the bigger UK banks because, as Provident found, digitalizing an old business is particularly tricky in finance because finance is about managing risk. Lenders can lose money through defaults as well as through business costs. Moreover, sub-prime lenders are refilling pockets of demand that highstreet banks have shunned since 2008 and this is part of a wider ramping up of consumer borrowing in the UK. Speaking to Euromoney last month, van Kuffeler points to a Money Advice Service survey showing more than 16 million people in the UK have less than £100 in savings. That means a lot of demand for loans.
No wonder then that the Bank of England is getting worried about unsecured retail credit. If bigger lenders make mistakes similar to Provident, monetary and macro-prudential tightening in a slowing economy could cause a lot more disruption to banks’ fragile profitability.
