The announcement that the payday loan industry will – finally – see a cap on the cost of credit is good news. But any belief that this simple step will wipe out the industry would be wrong.
For starters, the cost cap on a payday loan introduced by the Financial Conduct Authority (FCA) is well below industry trends. Take the problem with what has been called the “far west” of the payroll industry. While companies such as Wonga.com or Kreditech are well-known companies operating only on the Internet, the “wild west” refers to companies that go under the radar. They may be operating from overseas and trading in the UK market, or are set up to appear as a payday loan website when in fact it is a brokerage firm taking an application in line and sells it to a lender. This particular trick means that a borrower bears the cost of the loan and any associated additional fees, but also the brokerage firm’s fees.
What is starting to happen more and more, somewhat stimulated by the larger presence of online businesses, is that the payday loan trade associations are suggesting that there is a “them and us” situation on the market. market. Some associations are trying to convince the FCA that they should focus less on regulating the “nicer” part of the payday market, and more on these “Wild West businesses” online and even offline.
The artificial distinction between the online and offline worlds of payday loans is really about the inability of regulators to monitor compliance in the retail credit industry. For every settlement, there is a workaround: for example, payday lenders can change the length of the credit agreement to avoid falling below the cap. There are no friendly policemen on the main street or knocking on doors on websites to make sure the rules are followed.
Back to the streets
Carl Packman’s work on the sector revealed evidence of this schism attempt as well as the absence of any united front among lenders in the UK or any other country:
Interestingly, more and more payday companies are ditching the Internet, despite the fact that many consumers are migrating to online loans. Some lenders fight to appear nicer, better and more responsible and effectively say to the regulator “go regulate someone else, leave us alone; we are doing everything right ‘.
In some ways, this is a simple response to stricter regulation; an attempt to focus attention elsewhere. A hijack attempt, you could call it. Packman notes that this trend has already started to appear in the United States:
What I’m guessing is that as the regulations in this country get a lot stricter, especially with the payday lenders themselves and the move towards more consumer-friendly regulation, then I think we’re going to assist. to a back-migration from the Internet to offline… especially since some of the largest companies in the United States are doing it right now.
From bottom to top
Lenders have not only been subject to regulations imposed from above. There have been localized initiatives to shake their influence – as well as the bizarre heavily focused satire. However, looking at grassroots efforts, we actually see more evidence of a viable future for the troubleshooting industry.
In addition to efforts by politicians and national activists to make sense of a previously poorly regulated industry, some UK local authorities have been keen to take a strong stand against the industry. In 2012, Lewisham council passed a vote that pledged to promote credit unions in the borough, while deter people to take out loans from payday lenders.
In 2013 Medway Council decided to block payday loan company websites from all board computers, including public libraries. Other measures taken by Medway included banning loan advertisements on board-owned billboards and free advertising for Medway Credit Union. Newham’s council, meanwhile, agreed to ban payday lender advertising on its property.
Credit unions as alternatives
Oddly enough, until the cost cap on payday loans goes into effect, slated for January 2015, their benevolent cousin, the Credit Unions, remains the only financial institution in the UK where a price cap is mandatory. Credit unions were constrained by law to an interest rate cap of 26.8% (or 2% per month) which rose to 42.6% (or 3% per month) from April 2014 to give them more leeway to compete with the short term at high cost. retail credit providers, such as the payday and home loan industry.
In fact, credit unions are the most regulated retail credit providers and provide proof that a cap does not kill an entire industry. As part of the Credit Union expansion project initiated when the Archbishop of Canterbury Justin Welby vowed to “surpass Wonga” there are still many more restrictions on how credit unions operate.
Efforts to give credit unions more freedoms as community development finance institutions seek to better serve those who otherwise depend on payday lenders and other forms of high-cost credit. But we are still a long way from realizing Welby’s ambition. UK CDFIs – which include all credit unions and other forms of CDFIs – still only serve around 4% of the retail banking market.
The big challenge is to create a level playing field between the different segments of the retail banking industry. Those who want to use finance to improve the lives of communities and individuals and are content to make a reasonable profit, such as community development funding and social enterprise, should not be at a regulatory disadvantage compared to companies that believe in maximum profits, whatever the costs. .