Facing up to the payday lenders

Much has been made in the media of the announcement of the latest results of short-term, high-interest lender Wonga, which has reported a 68% increase in lending – up to £1.2 billion – and a 35% increase in net profits.

The company, which describes itself as “one of Britain’s most successful technology companies”, made four million loans to more than a million customers in 2012, with net profits of £62.5 million.

It says that it turns down more than 60% of all applications, and in an interview cited on Wikipedia it is said that its technology can predict to 93% accuracy the ability of a customer to repay a loan.  (Presumably the current Competition Commission investigation will demonstrate how this squares with the Office of Fair Trading finding that payday lenders derive up to 50% of their revenue from default payments - rollovers, additional interest and other charges.)

You will struggle to find mention of payday loans on its website; it says its loans are for people who are “short of cash due to an unexpected bill, emergency or opportunity you can’t miss”.  And its representative example shows the total cost of a loan of £150 for 18 days at £183.49, with a representative APR of 5,853%.

So far, so clear – and so successful. 

Payday loans are a relatively small part of the credit landscape.  An analysis of 285 clients’ debts in September last year showed they had 104 payday loans between them – but they also had 767 credit cards, 455 loans, 290 overdrafts, 135 catalogue accounts and 121 store cards.

So looking beyond the outrageous APRs, what is the real problem here?

The first point surely is the gulf between the short-term lenders' rose-tinted view of why their customers are borrowing the money and the actuality that debt advisers are hearing every hour up and down the country.  

This isn’t about grabbing a sales bargain before your salary goes into your account – it’s about families who are seeing the bills going up and up, and their income at best staying the same.  They are borrowing one month and keeping their fingers crossed that somehow there will be more money left over next month to pay it back.

The second point is the power of advertising.  Night after night on our screens we see grannies knitting breakfast cereal one minute and grannies selling us short term loans the next.  The short-term loan companies tell us they are quick, easy and convenient.  Their ads are cosy, comfortable and comforting.  Some marketing on the fringes of the payday loans industry suggests you are entitled to the purchases you want, as soon as you want them.  All are design to lull us into believing that credit in general, and this loan in particular, is right for us – whatever our bank balance says to the contrary.

The third point is the very success that Wonga is reporting.  They have spotted that holy grail of commerce, the gap in the market.  In our time of instant access, smartphone technology and immediate gratification, they are providing a service which appears to tick all today’s boxes. 

So what do we actually want to happen instead? 

Credit unions which provide low-cost loans via an app at half an hour’s notice?  Unlikely.

A return to the 1950s when people put money in a tin for a rainy day and borrowing money was considered shameful? Hardly.

But we can look to the example of the marketing of cigarettes and see a pattern that could be replicated.  It is in this arena that the moral and ethical issues of the promotion of instant credit can best be addressed.

Certainly we need rigorous controls of the kind being promoted by the new Financial Conduct Authority and investigations into the sector as the Competition Commission is current carrying out.  

And we need our banks to take the fear out of finance, to provide services which help us budget and which send useful warning signs before we get into trouble.

But we also need a major clampdown on advertising, so that loans are not sold on lifestyle promises.  And  perhaps a levy by which high-interest lenders fund community-based services like credit unions and major financial awareness programmes.