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Payday loans: not a black and white issue (in reply to Chris Dillow)

Nothing excites me more than a myth busting exercise on payday lending – it certainly beats what we read in the papers about it – and this is exactly what Chris Dillow has done today. However I have one or two comments I would like to make about it.

Chris sets up three issues on the matter of payday lending contrasting “statists” on the one hand and “libertarians” on the other. Matter 1 is a non-starter. No one arguing against payday lending today argues between occasional high cost credit and no electricity. Instead, we argue that, in order for bills to be paid, why should the worst off pay the most for their credit? There is a statist v libertarian angle here, but also a third way in the form of statist v libertarian v responsible banking. I’ll explain.

The statist here may say government can provide a civic minimum to a person and assume they survive well, hoping that because they have closed down payday lenders that short-term loans can be extended by the state if needed. The libertarian may keep the payday lender if the electricity being paid for is done without nannying by the state.

But the third way, responsible banking advocate, reminds us that around 1.75 million UK adults go without a transactional bank account, whereas in France that figure is between 500,000 and 1 million, and in Germany 500,000. In the UK, there are 7.7 million accounts without credit facilities, nearly four times the number of Germany (2 million at the end of 2006) and France (2.1 million in 2008), while 9 million people cannot access credit from mainstream banks in the UK, as opposed to around 2.5 million in Germany and between 2.5 million and 4.1 million in France.

Banks are no more broken there than they are here, so why can they extend credit facilities and better banking options to poorer people than we can in this country? All the while our debt profiles grow, even with risk-averse banks and dip in mainstream credit, and the payday lending industry market grows from £100m in 2004 to £2bn in 2012. Matter 1 is not quite as black and white as Chris has made it out to be.

Matter 2 is simple: the business model for payday lenders, like other businesses, is to keep people coming back. John Lamidey, the former chief executive of the Consumer Finance Association (a payday lender trade body, if you will) was uncharacteristically canny about this, saying his clients want return customers like M&S does. Nobody against payday lending is looking to protect people from themselves (this is for another time but there can be rational justifications for things like home credit) but rather protect people from an obvious part of a payday lenders’ business plan.

After all, we cannot expect the market to do this as the high streets are flooded with these shops, the internet is awash with different companies, and the rates are still extraordinarily expensive.

The government u-turn yesterday represented not a desire to protect people from themselves, but from an industry where market rules (more market entrants, price reductions) seem not to apply.

As for matter 3, Chris rather simplifies critics of the payday lending industry and their proposed solutions. I’ve written a book on these lenders and my recommendations were very rounded, not piecemeal, and I have scarcely met another who is against these companies’ practices and who wants only ceilings on interest rates, for example.

This goes for Stella Creasy (who Chris calls “one of the great scourges of our age”). I’ve never met anyone, for example, who felt banning payday lenders would be good in itself. People (social democrats and gradualists included) are aware that if you knock out one player you leave users in a worse-off position, possibly even in to the hands of illegal lenders. Instead they, like me, want to see:

  • Wages that don’t necessitate borrowing to keep up with the cost of living (43 per cent of British households have experienced financial difficulties with their household bills or credit commitments at some time in the past 12 months; 65 per cent of people taking out payday loans do so to pay for bills or food);
  • Banks in hock to wider society and not just shareholders, similar to the community reinvestment bank;
  • Stronger regulation of the market and not just guidance, including caps on the cost of credit;
  • The reinstatement of the social fund and crisis loans;
  • Better credit unions.

Being concerned about the practices of payday lenders does not preclude desire for radical reform.

6 Comments

  1. chris says:

    Thanks for that reply. Some quick points.
    Re matter 1. You ask “why should the worst off pay the most for their credit?” It’s because they are the worst risks. One reason for this could be that our welfare benefits are especially mean. This could be one area where the welfare state and markets are complements; a stronger welfare system would help make the poor better credit risks, thus making banks more willing to lend to them.
    Matter 2: OK, their business models want repeat business. But that’s no reason in itself why customers should oblige them.
    Matter 3: you might want more than caps on lending – rightly so. But the government’s approach is less rounded; some of them seem to be calling only for caps. If they want the reinstatement of the credit fund and better credit unions, they’re keeping quiet about it.
    Oh yes. I didn’t call Ms Creasy one of the great scourges of our age. I said she’s sound on one of the g ss of our a.

  2. Philip Walker says:

    Stella Creasy (who Chris calls “one of the great scourges of our age”)

    Did you ever do reading comprehension at school?

  3. Carl Packman says:

    Matter 1:

    It’s funny that Wonga say they sell credit to median income, tech-savvy individuals – £30 on a £100 (for a week, say) loan is really extortionate stuff. Do they really think these people are risks and charge them loads anyway, or do they lie about their client-base? Either way, mainstream credit facilities is not a step too far for our neighbours in Europe, and caps on the cost of credit have not boosted illegal lending either – but it is a commonsense approach too far for us. Seems odd you’re buying into this Chris. I get the risk factor, but it is a cruel irony that conditions in this country have made credit most expensive for those most vulnerable.

    Matter 2:

    No sure, customers should not oblige them, but I see no problem in protecting people away from businesses that try everything they can to get return customers, particularly given the conditions we find ourselves where consumers feel they’ve nowhere else to go. But then this very fact highlights why we can’t cap payday lenders’ capacity as a move in itself – must follow changes in banking and changes to the basic bank account.

    Matter 3:

    The government have agreed to the amendment yesterday in principle, but they do have a report from the PFRC on caps too, which they will have to consider. Anyone sensible knows that caps have to exist in an ecosystem of policies. That’s what I think, that’s what most people I’ve spoken to think, so we’re safe.

    And sorry about getting that Coldplay thing wrong; you’re absolutely right they are awful.

  4. Rob says:

    “I get the risk factor, but it is a cruel irony that conditions in this country have made credit most expensive for those most vulnerable. ”

    The problem is that the most vulnerable are also the people with the least money, and the people with the least money are least likely to be able to pay back loans. What you’re complaining about is that credit is most expensive for people least likely to pay the money back, and this isn’t going to change any time soon.

    There are two possible problems here:

    One is that poor people simply don’t have enough money, and the solution is to give them more money (Chris highlights the Basic Income idea), but this does not appear to be on the table.

    The other is that payday loans are (sort of) OK provided they’re reasonably priced. The complaint against Wonga is that they’re not reasonably priced – that is, Wonga could afford to offer cheaper loans or operate a less extractive business model whilst still remaining in business. If they won’t do so voluntarily, regulation may force them.

    As Chris alluded to in his post, if it were possible to undercut Wonga then we’d expect someone to have done this already. I’m not sure what I think about this.

    The thing is, Stella Creasy’s plan does somewhat depend on it being possible to offer ‘affordable’ payday loans, at some level of interest below a cap, whilst still running a (minimally) profitable business. If we go this way, we face another fork in the road: either the cap isn’t much lower than what Wonga currently charge, in which case it isn’t going to make much difference relative the political capital expended on it, or it’s set dramatically lower and potentially drives Wonga out of business. Few will shed a tear for Wonga, but then where do people who really need money and really don’t have it go in this scenario?

    For me, a better option would be to encourage credit unions and existing social lending operations to get into the payday lending game. As a representative of the Labour party, Stella Creasy speaks for ~190,000 party members and millions of affiliated union members, not to mention the 8.6 million people who voted for the party in 2010. Those people could easily form the basis of a well-funded peer-to-peer lending system similar to, say, Zopa. Why not put Wonga out of business by encouraging the formation of an institution capable of offering genuinely affordable payday loans? I mean, why not *actually* do it rather than talk about passing a law, as if passing laws ever solved these kinds of problems?

    I guess that puts me firmly on the ‘libertarian’ side of Chris’s division. But I also think that suggestions like this are more authentically left-wing – actually solving a problem, relying on mass participation of ordinary people – than the idea of having a financial services regulator set payday loan rates in a world in which that regulator will spend at least 50% of his or her time serving a boss who is a member of the Conservative party.

  5. @ Carl

    “£30 on a £100 (for a week, say) loan is really extortionate stuff.”

    But not entirely out of line with what any high street bank will charge most people for arranging a credit facility. That it is a low amount for a short period does not make the fixed cost of making the loan any less.

    And that, of course, is why the quoting of APR’s for these things is so unhelpful. Borrowers aren’t paying for the credit itself, they’re paying for the service.

    I don’t know if Wonga’s charges are extortionate, because I’ve never looked at heir accounts to see what returns they are making. I do have experience from several years ago of having access to the ‘inner financials’ of a ‘catalogue lender’ business, and they were making compelling returns in a deeply unsavoury way.. but certainly not the returns one might have assumed from looking at their APR’s

  6. Patrick Coates says:

    Credit Unions are a better way to save, the only problem they are bit slow, and need a more business like approach.
    The Co-op run one but I think the law needs changing, with all the Co-op Party members in Parliament, they could do it, I think there are more of them than the Lib dems.

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