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.