The PR battle in the payday loan market continues to fascinate.
In many ways payday loan firms couldn’t get worse coverage. For example at the start of Oct the Sunday Times magazine ran a critical cover story on the sector and the Guardian also had a hard hitting piece.
Chief amongst the attacks on payday lending are the high interest rates – not least because lenders are obliged by regulation to quote annual percentage rates despite the fact the loans are short term. These APRs are often in the thousands of percent. The practice of lenders rolling loans over, and also of not reporting data to the credit bureaux (so lenders can’t see how many loans a customer has outstanding) also come in for attack.
Yet, despite all the coverage the payday loan market is booming. Wonga has quickly built a brand presence with clever sponsorships and many US firms are still opening stores in high streets around the UK. And it seems that every TV ad break has at least one payday loan advert. As high street banks and credit cards firms have restricted lending through tougher acceptance criteria and interest higher rates so the payday lenders have filled the void.
So how have lenders reacted to the rising tide of media criticism? Well largely, as their sales boom, they have hunkered down against the media onslaught. With the exception of Wonga, which has engaged with the media and critics directly, the reaction from other payday loan firms seems to be to kept their heads down and hope the media will go away.
A few messages from the payday loan firms have got through. For example they have managed to communicate that in some cases it may be cheaper to take a payday loan than to slip into an unauthorised overdraft and incur charges. And Wonga, for one, has a pretty fair policy of dealing with customers who do run into financial difficulty (although generally its customer service is seen as poor). Wonga is also working hard to differentiate itself from other payday loan firms, although only partially succeeding.
A number of the firms have come together to form a new trade body, the Consumer Finance Association. In the media at least this attempt to self-regulate has mostly been met with derision.
The real battle, however, is largely behind the scenes and is about regulation. One of the reasons that many of the US firms have focused on the UK market is that they have been severely restricted in their domestic markets. New rules dictate how many loans a customer can have a year and even restrict lending to armed forces personnel. In some cases these have left lenders with a “broken” business model.
It was noticeable that the payday lenders were out in force at the party conferences. The CFA was in much evidence and Wonga appeared on panels at a number of fringe events.
Against this the MP Stella Creasy has fought a high profile and effective campaign to “end legal loan sharking”. Whilst her own Private Members Bill made little progress she has forced some concessions from the Government.
The Government’s own research, however, has been mixed on the value of restricting high cost lending. It is aware that capping interest rate could leave a chunk of consumers unable to borrow from regulated lenders and, as a result, at risk from unregulated loan sharks. Credit Unions are often cited as an alternative – but as most are membership organisations they can’t compete on fast turn around of loans.
So the battle lines are drawn up. It seems likely that regulation will increase – perhaps with lenders forced to report to credit bureaux and restrict rollovers. But the high interest rates themselves will stay – as will the critics. But as the Independent Commission on Banking’s recommendations are implemented it seems likely that high street banks will withdraw still further from servicing less prosperous customers. And payday loan firms will continue to fill that void – despite the negative headlines.