A recent report by consulting firm PWC warns mainstream financial lenders that UK customers are increasingly being drawn to ‘payday loan’ providers and away from credit cards. One extreme scenario they have considered is that ‘payday loans’ overtake credit cards. How can a 'niche opportunity' grow so big?

Payday loans are well established in the US and UK, but less well developed in some other European markets where there is stricter regulation.

Payday loans have received lots of negative media coverage for their high interest rates – sometimes as high as 4000 per cent! Nevertheless, the market has grown rapidly.

Moral judgment aside, this is a great example of how small innovation opportunities can develop into much larger opportunities.

The Pressure for Big.

Typically in many companies the strategic and innovation planning process encourages managers to screen innovation opportunities so that the products or service that are brought to launch are the ones that are most likely to grab a large market share quickly, deliver significant revenues, have critical mass and therefore enable the development costs to be recouped rapidly. In other words innovation opportunities must be BIG. It’s the big opportunities that the board generally wants to hear about.

Ironically, this approach sometimes screens out the ‘big opportunities.’

Big opportunities are rarely sitting out in the market place ripe for picking. Fed–ex, Ebay and many other propositions were thought to be responding to niches when they were first launched.

The Importance of Customer Insight.

It seems that big opportunities often emerge out of market development. When a new proposition is  launched it can  impact upon the edges of the market and cause the market to evolve - sometimes quite quickly. This would seem to be the case in this example of the pay day loan.

Importantly, the payday loans companies designed a service that responded to a deep underlying customer need or insight, that they had identified in a segment of the market. After launch it has become apparent that a broader population have that same need or similar needs.

In the example of the payday loan, originally the loans were designed to respond to the needs of people who found it difficult to get credit cards and loans through mainstream providers. They had a poor credit rating and or an irregular income. In order to get short term credit they were prepared to pay a relatively high interest rate. Because they only borrowed on an ad hoc basis, and for a short term the high APR was deemed manageable.

However, through the heavyweight advertising campaigns people with different financial profiles have become aware of pay day loans. Some are attracted by the convenience; pay day loans can be arranged over the phone or internet and the money is available in a matter of hours. To many people this may seem easier than applying for a credit card and waiting for the application to be processed.

For other people, they may lack confidence about their ability to manage their finances going forward and therefore want to limit their credit to a short period. You could describe it as a type of “portion control” in the credit market – in the same way as some people buy one packet of snacks or chips at a relatively expensive price because they cannot trust themselves not to eat all of a larger but effectively cheaper multipack once they have it in their home.

Suggested Action.

• Resist the pressure from higher up the organization to focus only on the ‘big opportunities’.
• Defend your new propositions that seem to have only niche appeal by demonstrating how they respond to a deep underlying human need.

Read more about the growth of payday loans.

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