The economy is not always based on a demand-supply model that assumes that consumer buying decisions are rational until the last. Behavioral economist Dan Ariely in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions. “Through experiment proves that people prefer the goods, not only in absolute prices, but also – and perhaps even to a greater extent – the value of goods compared relatively with other, similar products.
In this article, we will look at SMS credit as a service, both rationally and irrationally, and try to understand why SMS credit has become so popular.
SMS Credit Alternatives
To understand why this type of credit is so popular, one has to look at what the direct and indirect competitors of SMS credit offer. By its very nature, it is a short-term credit, so pawn shops and banks should be mentioned as their closest competitors.
Pawnshops offer mortgages on assets, with about 18 to 26 percent credit per month. Overdraft is offered to bank customers at interest rates ranging from about 17-30 percent a year. Let’s try to figure out why consumers prefer SMS credit when the pawnshop rates are the same or lower, but overdraft is supernaturally cheap compared to SMS credit?
Pawnshop or SMS credit? Lombard has two major disadvantages compared to SMS credit: the dubious atmosphere and the need for collateral to receive money. Quick credit concedes to a pawnshop in terms of risk, because in pawn shops one can only lose things, not fall into debt. But on the emotional plane, SMS credit is much more attractive. You don’t have to leave the house to get it, it has no compressed space and no intrinsic guards or yelling behind a glazed window.
Overdraft, on the other hand, is a banking service, but SMS credit has little to do with banks, at least in people’s minds. Even if the consumer has an overdraft contract, in a time of urgent need of money, this stranger will rarely come to mind, but SMS credit is a quick rescue, especially if you can give back as much as you borrow. In principle, SMS credit advertises itself as a salvation in the event of financial problems, and quite rightly separates itself from banks, overloaded with bureaucracy and paperwork.
The popularity of SMS credit
It seems safe to say that SMS credit is popular because it is a much better deal than a pawnshop, is fast, easy to use, private. SMS credit providers know how to advertise their services better than banks do, although short-term bank loans have never been very popular in Latvia. Perhaps the fact that consumers are opting for SMS credit rather than paying for themselves by pre-applying for an overdraft is just one more indication that banks are becoming less trusted these days?