Two new launches have summed up the state of the finances of the UK population over the past week or so.
The first was Marcus, a new online bank from Goldman Sachs that offers accounts paying interest of 1.5%. So desperate are savers in the UK for yield that this genuinely pathetic offering seems to have caused something of a stampede. Inflation in the UK as measured by the Consumer Price Index is knocking around 2.4%, so even with Marcus you’ll be down a percentage point in real terms by the end of the year. But pretty much everyone I ask has either signed up or intends to. I fall into the latter camp.
The second has been rather smaller scale and tells us not about the misery of savers, but about that of financially distressed borrowers and their inability to get their hands on loans at reasonable prices.
Creditspring has announced itself as a new lender “that doesn’t charge interest”. Its founders have, they say, put their minds to “inventing a radically different solution designed specifically to provide financial protection against the unexpected” to those who have no financial safety net.
The result is a system where those who pass the initial “eligibility” tests get to set up a monthly direct debit to Creditspring for £6 a month. This then entitles them to borrow £250 twice over the 12 month period they are signed up for. When they do, there is no extra charge (hence “no interest”).
This is all OK. It isn’t cheap. You can call the £6 a month whatever you like, but it is still a cost of borrowing. Borrow the full £500 over a year and your effective cost of borrowing is 87%. Borrow £250 once and it is obviously rather more. Borrow nothing and you just paid £72 for insurance you turned out not need for a product you could perhaps have got cheaper elsewhere. The Vanquis credit card, for instance, is designed for people with dismal credit ratings and charges an APR of just under 40%.
That said, the deal does come with some nice touches. You don’t get rolled over at the end of the 12-month period, as you have to sign up again – so you don’t get stuck in someone else’s subscription business model indefinitely.
Also the repayments are direct debited from your account in four equal amounts. This means that, unlike with a credit card or overdraft, you can’t get caught in what Creditspring calls “the toxic trap of spiralling debt” by making only minimum payments and hence staying in debt for longer than you intended. All in all Creditspring is definitely better than Wonga-sized gap it hopes to fill – better, perhaps, than all of the other offerings in this nasty but necessary little space.
Both Marcus and Creditspring address a clear need and it’s depressing that the need exists. But both businesses should do well.
“Ethical” is too broad a term to mean anything
Still, here’s the thing that is bothering me about these launches and an awful lot of others: they are terribly pleased with themselves. Marcus crows about putting “customers at the heart of all we do” which we must, I think, assume they mean in a good way. Whether you are nice to your customers or not they are always at the heart of what you do – they have the money and you want the money. The Goldman offshoot waffles on about value and transparency, while performing the standard savings bank trick of boosting its headline rate with a “bonus”.
Creditspring goes further. It calls itself “ethical”. Hmmm. It’s pretty clear that Wonga was not ethical – although it did pioneer the early version of the fees not interest model that Creditspring is using and I was impressed by that clarity when it launched. But is not being actively unethical the same as being ethical? Or does not being actively unethical just make you a normal business with a perfectly reasonable plan to avoid brand implosion and to operate for the long term? I’d go for the latter.
This distinction matters to the financial industry at the moment, because it is working very hard on diluting words such as ethical, green, socially responsible and sustainable down to a level of complete meaninglessness.
Take ethical investing, the vogue for “impact investing” and the endless talk about the importance of environmental, social and governance (ESG) criteria when investing. I’m all for this in theory (the question of who wouldn’t be is another column altogether). But what might it actually mean to invest ethically?
It could, as it turns out, mean anything at all. It can be about negative screening: simply refusing to invest in anything that the managers of any one fund consider to be bad. This is subjective, of course, but depending on your views you can find an awful lot to screen out.
There’s also the positive sort, where you can invest in things that are imperfect and use your votes and voice to make them better, an approach that can be used to shoehorn absolutely every investment of any kind anywhere in the world into an ethical definition of some kind of another. Depending on your parameters there is nothing that can’t count.
Fund managers engaging in ESG issues and attempting to improve their own cultures are good things – the best fund managers now have excellent ESG criteria deeply embedded in their processes and get better at it all the time. But the bar for claiming to be ethical needs to be set a bit higher and a bit more precisely than it is.
There has been some effort here but nothing comprehensive or, crucially, comprehensible to the average client. Think of the way in which the Soil Association manages the word “organic”. Just as not actually being horrid to your lambs doesn’t automatically turn you into an organic farmer, not viciously exploiting your customer and not turning a completely blind eye to slavery in the supply chain of the firms you invest in doesn’t necessarily turn you into an ethical financial provider.
It is time for the industry to come up with some proper definitions of the words it increasingly bandies about.
• This article was first published in the Financial Times