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.