HM Treasury is launching a £2 million challenge prize in partnership with Nesta Challenges to encourage UK FinTechs to come up with affordable credit solutions.

The Affordable Credit Challenge is offering to fund FinTech companies willing to partner with community lenders to design innovative services to help people access credit and avoid the need to turn to payday or guarantor loans providers.

Announcing the challenge, which is open for applications until 29 September, the Treasury and Nesta said that while high-cost credit has a role to play in the market, too many people are turning to these lenders when it has not been appropriate for their situation.

It highlighted research which revealed that half of those who borrow from high-cost providers have struggled to pay back the loan on time and a similar proportion said they had to borrow more money to pay back the loan.

Economic secretary to the Treasury, John Glen, said: “Most of us will rely on borrowing of one form or another during our lives, whether through loans, credit cards or a mortgage – however, millions of people struggle to access fair and affordable credit.

“I want to see more people benefit from the transformative power of digital technology, which is why we have launched the Affordable Credit Challenge,” he continued, adding: “This is a vital opportunity for FinTechs to work with community lenders to give more people control over their money.”

The challenge will award equity-free cash prizes to FinTechs and community lenders working together to find technology solutions that help community lenders better serve their customers.

Chris Gorst, head of better markets at Nesta Challenges, said: “Technology is already transforming how we manage our money every day, but our trusted community institutions - like the local credit union - have fallen behind in the use of technology.

“This means they often struggle to reach customers or compete with the speed and convenience offered by high-cost lenders – it’s now time for the FinTech innovators to unite with social lenders and transform the personal lending market for the better.”

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