It was reported by The Local (Swedish online newspaper in English) that Young Swedes trapped by the SMS loan debt. If I google “sms loans in Sweden” I get this news from a lot of sources, but what I was looking for how it actually worked and what it needed. So I found in a site that reports on new ideas popping out over the world (Springwise) how the Finnish service by Ferratum works. You just need to send name, birth date, bank account and address in 10 minutes you receive the loan (max 300 euro) and if its first time you have to wait 24 hours.

Main problem is that is too easy and there is no way for people to really compromise. It’s understandable that they want to make it easy enough so that the low income teens or young adult can do it in a breeze, but you steel need collateral. If there is no collateral then what you are providing is a “character loan”, similar to microfinance. At the end we see the same concept of microloan but for first world country citizens (without collateral).

As you can see they just though it was a good idea and tried it and failed to evaluated constantly. They forgot the famous Reality Test. (The reality test (RT) is the last part of a framework called DDART thought at my master.)

How to solve it? Natural reaction is to start to ask for collaterals and be stricter; but if they lose a most customers. That is because, as microloans in developing countries, they don’t have collateral. The Local reports that they have high interest rates, short payment period (30 days), low amount and 35.9% percent are from the age 18-25.  So what it’s needed is to create a culture of payment and that this is serious business. In comparison micro loaners in third world countries appreciate the small amount given and don’t spend it in shopping or traveling, they invest in their health, children’s education and their micro businesses.  

Solution

Deduct monthly payments from the loaner’s paycheck and calculate interest rate that fits the time the payment will be done. If the loaner has a small paycheck then the payment plan will be longer but with higher interest rate. If the paycheck is good enough for a 3 month payment, then interest rate goes down. To motivate for early payment, they could reduce the interest if paid earlier.

If the loaner doesn’t have a job, help them get one. If the person doesn’t have any competent skills, there is a lot of graffiti that needs cleaning. Also public transportation may need some cleaning. An entrepreneur could provide the service to the city, the city pays them, the entrepreneur gets a commission and the loaners have a job to pay.

If there is no entrepreneur that wishes to take on the challenge the government can do it. They hire people to clean their city cities directly. If there is enough cleaning to do, they could do other stuff or find companies that wish to higher temporary help (at lower wedges so it’s attractive enough).

This way we create a win-win-win-.. Situation, keeps a useful service for emergencies running, the culture of payment is established, and we clean the city. Finally the loaners pay back and learn their lesson, with a compelling story to spread around.