Wednesday, 12 March 2014

What next for Payday lenders?


There have been many scandals in recent years, but the rise of payday lenders is one of the worst. The industry has mushroomed in the past 5 years, along with the pawn industry. That the pawn industry is now suffering is partly due to its huge over-expansion and also the fluctuating price of gold making commercial decisions harder.

The Payday loans industry by contrast has grown and grown with 200 lenders now registered with the FCA as it now tries for the first time to regulate the industry as of today. Yup, you heard it, as it starts from today trying to regulate the industry. All these adds for Wonga etc that have been around have all been part of an unregulated industry.

Now, as Capitalists, we have a lot of sympathy here with people borrowing to make up short terms needs as they wish. It's a free country is a saying you don't hear so much these days for obvious reasons, but nonetheless, people should be free to make choices. However, when the choices come with 4 pages of font size 2 text and usurious rates of interest then it is not a free choice - its a bad choice. It's not good Capitalism to have those with capital freely pray on those without and its not a free market where the particpants are at such opposities in terms of power and competence. basic regulation is always needed to underpin fair markets in any system.

Long ago, the FSA as was had a principle of Treating Customers Fairly, this meant that firms could sell products but should seek not to rip people off blatantly - in fact this is the basis for many of the derivative and PPI mis-selling claims that abound.

My take on it is that the owners for Wonga et al are not long for this world and if I was them a swift use of share capital to acquire less opaque businesses would be the top of my agenda. Even the FCA are going to twig that 2000% interest rates are usurious and are effectively a rip off of the stupid and ignorant which is far from what should happen in financial services transactions.

The industry will as a whole survive as indeed people have perfectly legitimate reasons to need short terms lending from time to time (I know I do!), but I would expect some rather sharp changes in practice in the medium-term. One thing that is a shame is that with all the LIBOR and FOREX scandals going at full whack, I doubt the FCA has enough capacity to do the job effectively in the short-term

22 comments:

Demetrius said...

There was a time when the difference between Simple and Compound Interest was taught in schools. Shock horror, there was the suggestion that debt had moral implications and consequences.

dearieme said...

"There was a time when the difference between Simple and Compound Interest was taught in schools." Yup.

"Shock horror, there was the suggestion that debt had moral implications and consequences." Not in my school there wasn't, thank goodness.

Graeme said...

as far as I know, Wonga do not charge compound interest and stop accruing interest if a debt is more than 60 days overdue. Their profitability in recent years is about 27% - does that seem excessive in comparison with other lenders? In short, are Wonga really such bad guys as you seem to be asserting?

CityUnslicker said...

27% Graeme - umm...yes, when banks typically struggle to make 12% and people think they are a rip off...
when AMEX released its numbers in January and it made 15.3% profitand you know that's a rip off if you own a card of theirs - which I do.

I would posit they are charging about double. PLus their target market is those too ill-equipped to make rational decisions -its not a fair market as i say in the post to prey on those either too ignorant or desperate.

CityUnslicker said...

I am not proposing to Ban Wonga- just regulate them. howeer, my sneaking suspicion is that with even a light touch of fair regulation the industry will be hard hit.

Jackart said...

Wonga's often cheaper than the bank. There's a worked example in this post.

Their return on capital isn't excessive, despite low cost of entry. My guess is the cowboys will be forced out, but Wonga, fundamentally, is fine.

Microcredit can be extremely useful, and where available people can use responsibly. Banks simply lack the flexibility to loan a jobseeker £100 to buy a suit for interview. Wonga takes on that risk.

Clive said...

Blimey CU, have you been channelling Poly Toynbee ? :-) Not that I'm complaining. Agree 100% (which is a very modest figure by the standards of the payday lenders) with everything you say.

Great article.
(I normally think articles are great when they chime with my views too, so that's not actually saying much).

People shouldn't, generally, be spared from the consequences of their own actions. That's not a bad rule. But there's a difference between enforcing a contract against a sophisticated consumer who went into a deal with their eyes open (like if you bought a car on credit, you're not making the payments, so the lender wants the car back and they also want to recover the costs of getting it back) and some single mum on benefits who is desperate and needed 50 quid to put on the leccy meter because she couldn't heat her house or get a hot meal together.

If the former has to learn the hard way to live within their means, then so be it (generally, depending on the exact circumstances). If the latter is plunged into a vicious circle which ultimately means the (in this case) payday lender gets to grab her rent money, aforementioned single mother then shows up at the local authority needing a bail out from the hardship fund which we can't really as a society refuse to give (you might argue she should suffer -- I wouldn't, but it is an argument -- but a decent society shouldn't let innocent children get chucked out onto the street) then someone should, really, think of the children and put a stop to it. Agree too that I'm not sure the FCA, from what I've seen of that (cough) fine institution is really up to the job, but at least it is responsible for improving the situation and eventually it might just get there.

Okay, extreme examples, but I have witnessed the first with my own eyes and certainly seen the second reported in the media.

But do lay off the Poly Tonybee reading CU, otherwise I'll start to worry about you. And have no blog to write stroppy comments about.

Cheers

Clive

Blue Eyes said...

As usual CU I am in complete agreement. As a freedom kinda guy I am against nanny-statism removing personal choice and responsibility. But I think that at least some of these lenders are probably taking advantage of their customers' desparation and/or ignorance. When I need a "payday loan" I whip out the credit card and pay it off next month. But it is easy for me to borrow cheaply precisely because I don't need to.

It's very tough to know where the line is though. How do we know that these payday lenders are more abusive of their customers' situations than, say, the cartoon loan shark?

How do you regulate without snuffing out genuine one-off borrowing or overdrafts or the like? How do you tell the people who use these services that for a while they are just going to have to Do Without?

The longer term solution ought to be better financial education and local friendly society type short term emergency loans. But that takes longer than a pre-election headline-grabber to sort out.

Electro-Kevin said...

We live in a high debt society with an obesity epidemic. It is clear that people cannot control their spending nor their consumption.

Credit is environmentally damaging. It enables people to spend beyond their pay grade and beyond what they've produced. A natural brake on consumption is removed.

When people use phrases such as 'I'm gonna step up to the plate an' I'm gonna give it wun 'undred and ten pa-cent large' it says a lot about why we're in this sorry mess - especially if we're talking about people lining up at Hungry Horse carveries.

Incidentally. I'm surprised Harriet Harman hadn't thought of pawn shops with gambling machines by the exit doors.

It would have been a money spinner for large business, a boon for recycling and let to economic growth - or money churning, which is what politicians seem to deliberately conflate with growth.

Electro-Kevin said...

Drop 'let' from the last para and it makes better sense.

Blue Eyes said...

Agree EK.

Apparently the betting shops are really struggling with the benefit cap.

Graeme said...

does anyone know what the comparable rates of return are for the "break your leg" merchants?

Dicey O'Reilly said...

Graeme! My son! Have I got a deal for you? Ov cawse I have! Just step around the back here...

andrew said...

Graeme.

Accurate information on that topic will cost you an arm and a leg.

Electro-Kevin said...

Graeme - Rates of return are about once a week, until you pay up.

MyStatingTheObviousName...Again said...

Funny that I need the 'stating the obvious' name twice in one week here but hey-ho....

These lenders are a brilliant boon to the economy and economy watchers. What they provide is the real interest rate for subprime borrowing in the economy and indicate which areas of the economy are over priced.
IIRC most of this money is borrowed for housing, energy and food. Thus, the economy is royally fucked.
'Interest rates' at 0% is a total crock of shite, the figures for subprime as well as the newbuild 20% loan suggest that the true interest rate is (even for prime) is close to 10-15%.
It seems fuckwitted to me to call for their regulation when there are clearly no alternatives in the market (because the banks are fucked - well done Labour!) at lower price points.
This is calling for the poor to starve so the banks can survive. Crash the fucking banks and let the payday lenders take the whole market at a lower (albeit market defined) rate.
Schimples!

Blue Eyes said...

I disagree with that. I frequently receive offers to borrow at 0%. Credit cards, HP car offers etc. I reckon I could remortgage at 3% on a five year fix.

The wongas of this world are not competing with Teh Banks, they are competing with not buying stuff, as EK points out. Lots of people have forgotten that fags/booze/Xboxes are not human necessities. Lots of people think they *deserve* the same amount of stuff that the Joneses have.

MyStatingTheObviousName...Again said...

Thats nonsense. There are plenty of people borrowing for food, rent and heat.
Characterising this as 'money for playstations' - while probably true in some cases - is mostly bollocks.

The examples you give above arent from banks btw... they're from alternative finance co's and I dont believe you could remortgage at 3% any more than you do, otherwise you'd have done it already.

The economy is strangled, the 'discount' retailers are booming too. Want another name for the discounters... how about 'cash sales' outlets. We are in a full-on deflation. Anyone buying property or investing in this environment is a complete mug.

Jeremiah 5:21 - Hear this, you foolish and senseless people, who have eyes but do not see, who have ears but do not hear.

Blue Eyes said...

Lol. Well you know approximately nothing of my or anyone else's personal arrangements so I will take your bad tempered response with a pinch of salt.

However I would ask how it is that so many people are apparently borrowing to stay alive and yet you never see people walking the streets in rags and the only people who don't have smartphones are the elderly.

When was the last time anyone starved to death in this country (excluding in hospitals, obviously)?

I agree we are in a deflation. What has that got to do with payday loans?

Electro-Kevin said...

Sub-prime under any economic condition needs to be lent to at a higher interest rate - especially when the economy is booming.

Why ?

People who still need to borrow on pay-day arrangements in a booming economy are a greater risk, obviously.

Blue Eyes said...

EK absolutely right. I bought a Blu-ray player from an online pawn shop. It was unopened. Apparently what some people do is get a store-card or loan or whatever, buy stuff using the money and then take it straight to the pawn shop for cash, with no intention to repay the original loan.

Steven_L said...

Apparently what some people do is get a store-card or loan or whatever, buy stuff using the money and then take it straight to the pawn shop for cash, with no intention to repay the original loan.

A kind of poor mans arbitrage trade. On one had a glut of cheap money and cheap goods, on the other crap jobs, dear housing and energy. How very interesting.