Research conducted by both Durham and Newcastle university exposes the numerous techniques that high-cost credit providers use to lure in borrowers. The leading researcher for the study was Newcastle University’s Dr James Ash, who presented his findings at China?s Xi?an Jiatong-Liverpool University last month.
The two North East universities looked into companies they defined as ‘high-cost short-term credit’ (HCSTC), and examined how they designed their online presence ? e.g. smartphone apps and websites. Throughout the course of the study, the researchers explored how these loan providers managed ‘frictions’, a term used to describe issues that stopped people online applying for their loans. This was done by discussing such frictions with 11 different website developers.
The research concluded the following from the results ? The first thing users were typically found to encounter during the application process was a “playful” slider feature. This feature usually has the same basic layout, with one slider relating to the total sum of money customers wanted to borrow and the other relating to the length of time they would like to borrow this for.
The results showed that the sliders are designed specifically to be “playful” and entice users to play with the two bars, which once played with makes a person more likely to apply for the loan. In addition to this, the design of the sliders also makes the whole application process more effortless and therefore making borrowers more inclined to both start and complete the application.
A conclusion that was drawn from this study was such slight design alterations as the colour of the ‘apply now’ button. Dr James Ash and his team found that when one of the HCSTC providers changed their ‘apply now’ button from red to a softer colour (in this case orange) there was an increase in applications of 8%.
Additionally, the study found that the loan provider websites designed their application forms to look easy and short, as it was believed that using documents that looked “official”, and therefore intimidating, may stop people from going through with the application.
Overall, the findings from this study provide a fascinating insight into the carefully crafted design of high-cost short-term credit loan providers, with Dr James Ash concluding that: “The borrower thinks they are in control but in fact, they are being cleverly guided through the whole process. This has led to this market growing at a high rate in recent years.”
The high cost industry has been under criticism for several years, with not only luring customers but charging interest rates that are often usurious. Transparency in the industry has improved significantly in recent years following the introduction of new regulation by the Financial Conduct Authority.
All lenders and brokers in the high cost lending industry must clearly present their representative APR and repayment examples next to every call-to-action button and be featured on at least one price comparison website. Whilst there were around 200 payday loans direct lenders originally in the industry, this has decreased to around 40 and the number of brokers has diminished significantly (find out more). There has also been a trend towards moving to a more instalment loan product that is repaid over 6 or 12 months.
