After an eerily quiet year, payday loans are back in the headlines. The speedy demise of Wonga has sent shockwaves through the industry, and rumours of which firms may be next are spreading like wildfire.
So what brought the great bogeyman of the payday loans industry, which at one point boasted a fifty per cent market share, to its knees? Was it the years of media scrutiny, tougher regulation, or the rise of Credit Unions? It’s rather ironic that the once mighty Wonga has been brought down by the ambulance chasers of the finance world, claims management firms.
While other lenders may not want to admit it, they’ve all seen an uptick in legacy affordability claims. The problem with Wonga is that it’s a lot smaller now than it was back in its heyday, and so the cost of dealing with mounting legacy claims proved too big a burden to carry, even after a recent ten million pound bailout from its investors.
Newer entrants to the market, and those that haven’t experienced such large declines in their market share won’t find the avalanche of claims as heavy a burden to shoulder, although it remains a medium term risk of doing business in the high cost credit sector. In fact, by removing a top five lender, Wonga’s competitors are likely to see their application volumes increase, which in the short term should help them better handle these claims.
Just over a year ago I shared my thoughts about alternatives to high cost loans in an article for Spectator Money, and while high cost loans aren’t going anywhere, the firms operating in this sector should be held to the very highest standards. So putting the debate about consumer credit, and particularly payday loans back into the spotlight should be welcomed.
And here’s why. In my time at Smart Money People, I’ve come to see that many financial firms care about their customers but some simply don’t. Sometimes you can see it in the design of products, and sometimes you can just see the culture or DNA of a firm. What motivates the people at the top, middle and bottom of that firm, and how they choose to conduct business speaks volumes. If you really understand this, then you quickly cut through the luscious veneer of bullshit that some finance folk have mastered.
The inconvenient truth is that some lenders are better than others. It’s sometimes comforting to think that they’re all the same, but this is simply too glib. This approach also blinds us from spotting the truly bad, and delivering the sunlight they try so hard to avoid. And even though the landscape in 2018 is nowhere near as bad as the early 2000s, there remain firms that consumers should avoid like the plague.
The industry also has an obligation to work harder to enable customers to escape the debt trap. It’s evidently clear from credit reference data that a number of customers are falling back, time and time again on payday loans. If the ‘computer says no’ at one firm, customers will just try another, and another, until someone says yes, and they’ll always be someone saying yes. Innovative experiments that try to pull a few of these customers out of the debt cycle aren’t beyond the industry’s capacity.
And while there’s a growing range of lower cost alternatives, like Fair for You and ScotCash, it’s fair to say that a rich ecosystem of support has yet to develop.
They’ll no doubt be a few more twists and turns in Wonga’s dazzling downfall, but the bigger picture remains the same. The poorest in society pay the most for their credit, and it’s hard to see what changes this in the short term. Few choose a high cost loan to fund big dreams – say a wedding or even a new bathroom: they apply out of necessity. The firms that deal with these customers should be our best, not our worst.
Mike Fotis is the Founder of Smart Money People and a former management consultant.