By Niall Alexander , Moneyline
25.09.2014
The Chief Executive of the Consumer Finance Association (CFA) told me recently that payday lending will move from “sub-prime to near-prime”. He’s right. Peak payday has passed, the combination of new, and welcome, FCA rules, tougher compliance and the payday loan cap from January 2015 will see an estimated 160,000 consumers looking elsewhere or going without a payday loan.
Credit issued by payday lenders has already fallen dramatically, a 54% reduction in volumes from Q1 (2013) to Q1 (2014). Withdrawal from the market has started. Cheque Centre has closed 300 stores, other firms are considering their position.
The combined efforts of regulation, to clamp down on poor lending practices, such as the limitation on Continuous Payment Authorities and restrictions in rollovers alongside tighter affordability assessments will, alongside the proposed loan cap, see a significant shift in short-term, small-sum lending.
The cap, as proposed, is a pincer movement. Cleverly constructed it’s a daily cap of 0.8% within a total cost cap of 100%. So, a 7 day loan of £100 will cost (if repaid on time in full) £105.60. However, if the borrower defaults it could go as high as £200 (the 100% total cost cap) through default fee and added interest.
The cap will discourage very short term loans, and those over 4 months. Imagine, a £100 loan over 90 days. At 0.8% per day the interest will be £72, leaving £28 for the lender to recoup if the borrower defaults. Risk and reward, too much of the former and not enough of the latter. There’s simply insufficient return for commercial investors. The FCA predicts only three online and one High Street payday provider will remain active. The credit bar will be raised. Previous approvals, will now be declined.
Arguably, the customer previously “just approved” by payday shouldn’t be accessing short term loans in any case, it’s proven that those payday consumers who were “just approved” are financially worse off three months later than a group who were “just declined”.
Where will consumers, on the lowest incomes, in the most disadvantaged neighbourhoods, with the poorest credit histories go for the small sums they need? Home credit? Remember them, are unaffected by the cap proposals, but they too are refusing new business. Provident Financial Group (PFG) shed 300,000 customers last year, concentrating on repeat business.
The FCA think that the declined payday group will go without, or turn to friends and family, that illegal lending will not rise. Hmmm.
Moneyline serves a low income consumer through twenty branches in England and Wales. Relationship based, face to face, unsecured, lending. Overwhelmingly, Moneyline provides loans to young women, with dependents, renting their home, in the most disadvantaged neighbourhoods. Two in three not working, and four in every five loans issued within the 20% most deprived neighbourhoods. Moneyline advances nearly £10m a year from 20 branches.
Moneyline is hidden in plain sight, with no budget for advertising, and, in any event, lacks the capital base to meet the latent demand. The desire exists to service the market with fair, affordable products and service. However, there is no great appetite for commercial lending into the not for profit space.
Moneyline takes a year to lend a sum that payday will advance in two days. The laudable efforts to protect consumers by reducing access to unaffordable credit must also be accompanied by support to assist them to access affordable credit.
Niall Alexander is Development & Communications Director at Moneyline