By Carl Packman
There were celebrations at the start of the new year by many who have been campaigning against the unscrupulous behaviour of the payday lending industry: at last the regulator has taken decisive action and made firms in the payday market subject to new and more rigorous rules.
New rules include an initial cap on the cost of credit which will be set at a daily rate of 0.8 per cent of the amount borrowed, amounting to a lender not being able to charge more than £24 for every £100 borrowed (compare that to the market average previously which was £29.99 for every £100 borrowed), and a total cost limit which means that a borrower will never have to pay a payday lender back more than 100% of the total amount they borrowed.
It says a lot about an industry, however, that has to be told not to charge someone over 100% of what they borrowed. And that’s why these reforms have been so crucial. It also says a lot about the industry, and how it made its money, that around 99% of the lenders who were in the payday market have left. That’s a considerable amount who have reacted to stricter laws by saying count us out.
It is perhaps for this reason that the major companies who are left in the payday market, Wonga, The Money Shop, to name the biggest, are secretly pleased. For all the restrictions that have been placed upon them, the size of their market share has just increased.
But what happened to the other lenders? After all there were once 400 lenders in this market, where will they go? The answer is a good deal of them will revert back to financial products they led on before, such as cheque cashing, pawnbroking, or currency exchange. While these new reforms have been effective, they did not cover all high cost credit, just payday lending, which means that similar forms of credit like expensive overdrafts or sub-prime payment cards will not be restricted, meaning payday companies who also offered these products on the side will leave the payday market and concentrate on them.
And importantly, what will happen to the borrowers who now have fewer lenders to choose from? Firstly, the key thing here to say is that while borrowers looking for a payday loan once had more options (companies to choose from include Payday UK, Payday Express, Mr Lender, Peachy Loans, Pounds to Pocket, Quick Quid etc etc) there was little competition on price. In 2012/2013 according to the Office of Fair Trading most high street payday lenders charged around £25 for a loan of £100. Up January this year the price of a payday loan averaged at £29.99. Despite the large volume of lenders in the market none were competing on price.
With the payday market more concentrated after those reforms, and after a cap on the cost of those loans has been put in place, for a short term loan all lenders charge the maximum amount they can for a loan. Much like universities who, when told they could charge £9,000 for tuition fees, suddenly all charged the maximum amount, so payday lenders when told they could only charge £24 for a loan of £100 suddenly did so: there is still no competition on price, which means consumers don’t get to favour one lender over another on price. Until the state stepped in consumers were not going to benefit.
What we haven’t quite figured out what to do is build an alternative to payday loans. Paying people more and giving them job security is the most important alternative, but the provision of affordable credit cannot be overlooked. There has been a DWP modernisation fund set to boost credit unions, which are widely seen as an alternative, but there is a healthy scepticism around whether credit unions will increase their membership by 1m by 2019 as intended. More thinking on this is needed.
Payday lenders in the US have before been compared to the Beast of Hydra, the mythical beast that grew two heads for every one cut off, which made it near impossible to kill. The reason is simple: while regulators think up one way of restricting its odious practices, the industry is already working out ways to circumvent them. Despite new rules, I don’t think the fight is over yet.
In my new book I’ve predicted a rise in longer term expensive loans, or ‘instalment loans’, from payday lenders that get around the rules of short term payday lending. High-cost credit cards will also resurface in large numbers. This industry will not go away without a fight.
Credit unions are only one part of the solution. We have to look further as well including the return of government-backed interest free loans, to mainstream credit lenders offering small loans at lower interest. It benefits only a very small number of people to live in such a highly indebted country, and tackling payday lending, even after reforms, must be a priority in reversing this.
Illustration: Dan Farley