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Provident struggles with changing landscape, sees share price tumble

Provident, the UK-based sub-prime lender, saw its share price plummet over 66% earlier this week. The news was followed by the resignation of the company CEO, Peter Crook.

The drop was caused by the recent announcement made by the FTSE 100 lender, in which issued its second profits warning, following a February restructure. Provident changed its doorstep lending business, but collections weren’t coming in consistently due to an issue with agents and recruitment. As a result, the company had to cut its profits guidance for the business by £100 million in just a few weeks.

A faulty restructure

The new plan means that only employees on the payroll, rather than part-timers working on commission, had to collect the debts in some of UK’s poorest areas. IBS reached out to industry experts, who speculated that digitisation of information may have been an issue for the agents who had a consumer base already established.

This led to many agent resignations, which took the rate of collection from 90% of payments to 57%. Nearly half of the money owed to Provident is not being collected, with weekly sales £9 million down on the comparable period last year. Some customers may have a case for not repaying loans as “the Provvy” may lack paperwork from its former debt collectors.

This doorstep division is expected to experience loses before exceptionals of between £80 million and £120 million.

Luckily, today’s session brought a markedly rise in the share value of 20.06%. This quick recuperation is even better given that the share value went up nearly 10% in yesterday’s session being the biggest riser in Europe, according to the FT.

Rethinking the business model

One of the reasons why agents had been a key factor in the business is the level of trust and safety that Provident and its agents inspired in customers. However, when IBS reached out to industry experts, many thought that the lack of digitization eventually took a toll in record keeping, plus the fact that customers are finding digital channels more convenient and reliable.

In another conversation with IBS, Frederic Nze, CEO of Oakam, said that he believes that these events are not foretelling on the state of the industry in micro loans, but rather, the way consumer and operational trends are changing. Even though Oakam is a mobile first service, the first contact is through retail stores – in the case of Provident, the lack of diversification in this aspect may had had something to do with its downfall.

The operational costs of door-to-door lending are just too high. Nze is proud of Oakam’s cost-to-income ratios, which he explains that, due to running mostly on mobile, are significantly lower than the sector’s 50%+ average, while also enabling the application of AI and machine learning to customer data, leading to better underwriting and risk management.

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