Why do mainstream financial institutions avoid lending to financially vulnerable customers — and what needs to change?
Mainstream lenders are not primarily held back by economics — they are held back by discomfort. Kate Pender argues that serving a very different group of customers is simply "an order of magnitude out of everyone's comfort zone." That is understandable, she says, but it is not good enough, and it needs to change.
The scale of the problem is not abstract. Fair4All Finance and Ipsos Mori research estimates that up to 3 million people in the UK are potentially borrowing from illegal lenders. Meanwhile, LEK research identifies approximately £2 billion of unmet lending demand that could be commercially viable, compliant lending — money that mainstream institutions are leaving on the table.
The gap, in other words, is not a lack of demand. It is a failure of institutional confidence to try something different.
The NILS pilot showed that regulatory anxiety was largely unfounded
The No Interest Loan Scheme (NILS) pilot, run within the FCA regulatory sandbox, offered a concrete test case. The team asked the FCA just three or four questions on behalf of lenders throughout the entire pilot process. Pender describes the regulatory support required as "a very light lift" — yet the mere existence of that sandbox structure significantly reduced lender anxiety and gave institutions the confidence to try something they would not otherwise have attempted.
The pilot lent £10 million to 14,000 people. Bad debt rates came in lower than most stakeholders had expected. The evidence, in other words, supported doing more — not less.
You can hear Pender walk through this in full on The Responsible Finance Podcast on Listenly.
"You shouldn't need blood pressure medication to be attempting innovation in financial services"
Pender's conclusion is pointed. Sandboxes are useful, but they are not the answer at scale. If lenders require a special protected environment just to consider serving vulnerable customers, the structural problem — the default assumption that this population is simply too risky, too different, too far outside normal parameters — remains completely intact.
What she calls for instead is structural regulatory clarity: a baseline environment in which attempting responsible innovation does not require extraordinary reassurance. The US offers a reference point — following joint regulatory guidance from four US regulators, six of the eight largest US banks began lending under small-dollar loans schemes (loans under $1,000), collectively delivering hundreds of millions of dollars in lending that simply had not existed before.
Joint regulatory guidance moved a market that individual institution comfort zones could not.
"You shouldn't need blood pressure medication to be attempting innovation in financial services."
Kate Pender — Chief Executive, Fair4All Finance.
Pender joined Fair4All Finance at its founding in 2019, initially on a part-time secondment to lead the pilot scale-up programme, making Fair4All's first investments into community development finance institutions (CDFIs) and credit unions. She subsequently ran the first phase of Fair4All's COVID grant programme before taking on a permanent role and ultimately becoming Chief Executive. Before Fair4All Finance, she spent a long career in economic development, running programmes designed to help SMEs and small businesses grow faster — experience that shaped her practical, systems-level approach to financial inclusion.
See also
How does Fair4All Finance balance impact measurement with risk when deploying dormant assets funding?
Fair4All Finance applies what Pender describes as a socially adjusted return framework, looking not only at return on capital but at the social value generated for underserved communities alongside financial sustainability.
What challenges has Fair4All Finance itself faced as a young organisation since its founding in 2019?
Pender describes Fair4All Finance as having been "kidnapped a couple of times": first by the COVID-19 pandemic in 2020, which diverted the organisation significantly from its original mission toward emergency grant-making.
How is Fair4All Finance attracting co-investment from mainstream financial institutions into CDFIs?
Fair4All Finance secured a co-investment agreement with Shawbrooke — Shawbrooke contributing £7.5 million and Fair4All £5 million — as a model for how blended finance structures can draw mainstream capital into underserved lending markets.
Key takeaways
- → Mainstream lenders stay away from vulnerable customers primarily because of institutional discomfort, not because the lending is economically unviable.
- → The NILS pilot demonstrated that regulatory risk was far smaller than lenders feared — the FCA needed only three or four questions from the entire team throughout the pilot.
- → Sandboxes reduce anxiety case by case, but structural regulatory clarity — not special environments — is what moves whole markets, as the US small-dollar loan experience shows.
- → Up to 3 million people in the UK may be borrowing from illegal lenders, while ~£2 billion of commercially viable, compliant lending demand goes unmet.