The payday loan sector in the UK has repeatedly been at the centre of debate and has continuously been scrutinised and reprimanded for charging high extortionate rates of interest by politicians, the media, other traditional banking lenders and even the religious hierarchy. At its peak, the industry had over 200 lenders profiting on the those at the lower end of the income scale.
Today, the sector is much changed; a combination of strict FCA regulation and compensation claims has weeded out the more disreputable players. Several companies like Wonga, have been forced to close due to an increase in claims for ‘mis-sold’ payday loans whilst others who have managed to weather the storm, have seen their applications for payday loans soar.
How did the industry get here in the first place?
Increase in government regulation
In 2015 the FCA introduced strict measures for the high-cost lenders including a rigorous authorisation process for new and participating lenders and brokers (something that caused around half to leave the industry), a daily price cap of 0.8% of interest charges and a cap on default charges to £15.
These cost measures were brought in to ensure that a borrower never repaid double what they asked to borrow, limiting top-ups and extensions too.
The result of these measures led to a more ferocious competitive market, with lower profit margins and reduced the number of lenders from 200 in 2013 to 50 by 2019.
Increase in compensation claims
A subsequent consequence of the stricter FCA regulation was the surge in borrower compensation claims for being mis-sold their payday loans. The majority of claimants successfully argued that they were provided with a high-cost credit without the lender carrying out adequate checks and in reality, knew that they could not repay, for example, loans were granted to applicants with CCJs, adverse credit histories, unemployed and on benefits.
In the case of Wonga, it was not only these claims, yet the bullying and underhanded tactics the company used to extract payment from those who were unable to pay. After issuing more than £220 million worth of compensation, Wonga fell out of profit and into administration where once it was the market leader in payday loans, to closing down and is not permitted to take applications.
Other market leaders that fell in this bracket of high-compensation claims were Quickquid who was made to repay £1.7 million, and The Money Shop that has over £5 million in claims.
Increase in responsible lending
For those lenders who were not tarnished by these high-cost loan compensation claims or unscrupulous tactics began to ensure that led the market in responsible lending by setting an example and joining the Consumer Finance Association charter like Peachy, Sunny or Satsuma.
What does the future hold?
The future for the payday loans sector is still buoyant and doesn’t show any signs of abating. Merely that lenders (rightly so) need to be extra meticulous and more transparent in their dealings with borrowers – to avoid falling foul of the regulator and to open themselves to a raft of compensation claims.
Subsequently, lenders appear to move away from the archetypal payday loan scenario to more flexible and more extended repayments terms, for example from three to 12-month instalments to repay the loan. The concept behind this is that lenders are aiming to improve the borrowers’ financial management by giving them better structure in borrowing credit, as opposed to insisting the loan is repaid at the month’s end as with a typical payday loan.
Elsewhere, with the FCA cap on what payday lenders can charge it would seem that these lenders will experience a drop in profit. However, that does not seem so, for two reasons. First, with competitors being placed out of business due to stricter regulation and increased compensation claims, those who remain are benefitting from accruing these customers as an alternative.
Secondly, whilst living costs are rising and wages stagnating, households are still feeling the pinch of the credit crunch and are those with adverse credit history are still struggling to make ends meet. As traditional banks overlook them due to their poor credit management, it is only payday loan lenders who can lend to those who desperately need it.
The payday loan sector has learnt its lesson; critics still deride the industry for existing, yet until households can access traditional forms of credit or take advantage of other credit alternatives. It is hard to see this industry disappearing.
David Bailey-Lauring is a single father of three boys so he knows what it takes to stretch a budget when it comes to family finance! David is a small business entrepreneur and regularly writes about entrepreneurship, tech, sport and personal finance in the UK, USA, and Europe.