Everyone in the UK who reads a newspaper (or catches TV or radio news) has heard of payday lender Wonga. That company has had its fair share of negative publicity in recent years for astronomic interest rates and dubious business practices. Most British politicians have vowed either to close them down or, at the very least, to clip their wings. Today Wonga is again in the news because they are about to declare a loss of £35m, having had their interest rates and their charges (such as overdue fees) capped since January 2015. Many other payday lenders are said to be quitting the market because it's become much more difficult to get authorised by the regulator, the FCA.
The big question is: where will the cash-strapped customers of these payday loan companies go? It's my guess that they wouldn't have agreed to pay interest rates in the thousands if their credit history had been good enough to get finance from high-street lenders. And if you're in that cycle of debt crisis it's hard to get out of it quickly.
One possible alternative is credit unions, which are non-profit organisations providing loans that don't depend on a perfect credit history. However, I suspect that most members of the public haven't heard of them; and I wonder how many of Wonga's tens of thousands of customers know where their nearest credit union is located.
"Jumping the Shark", a 2014 report by the Institute for Public Policy Research (IPPR) said ministers should provide a capital injection to support the credit union sector.
The document called for a £450 million levy on the UK's £180 billion consumer credit industry ("That's 0.25%: doesn't sound too draconian" - Ed.) to create a new generation of not-for-profit affordable lenders based on credit unions, with enough capital to compete with the established payday lenders.
Archbishop of Canterbury Justin Welby had previously said he wanted to "compete Wonga out of business", saying that the credit union sector should be expanded to provide an ethical and affordable alternative. The Church of Scotland came out with the same message. According to Kate Devlin writing in the Herald Scotland, 'the Kirk' supported the IPPR's call for an expansion financed by a windfall levy.
These not-for-profit lenders could be partnered with church parishes, said the Church of Scotland. Alternatively they could be hosted in Post Office branches.
Providing credit unions with £450m of capital could help them support over one and a half million loans. The "new generation of lenders" should charge a maximum of 3% interest a month, or 42.6% APR, the IPPR recommended. This would allow customers to pay just £3 to borrow £100 for one month. A similar loan with Wonga, whose APR is 5853%, costs more than £30 at the time of the report, though it would be lower now. The credit union network is, however, still limited, both in capacity and in geographic spread.
The IPPR report also said the expanded network of affordable lenders should cap the ¬maximum loan at £250 (the average size of current payday loans), limit customers to one loan at a time and stop lenders "rolling over" loans.
IPPR Research Fellow Mat Lawrence then said, regarding the gradual evidence of growth,
"A return to rising living standards will reduce households' reliance on debt, but it will not eliminate their need for it. The payday lending industry has grown in large part because of a gap in the credit market that mainstream banks are unwilling to fill.
"Regulation can reduce the harm done by payday lenders but it alone cannot ensure that the public interest is properly served in the provision of affordable credit.
"Britain needs an initial capital injection to expand the provision of affordable credit. We need a strategy for spreading capital, building the assets of communities, and engaging citizens in forms of local democratic finance in which power and control resides with them, rather than with government agencies or unaccountable financial institutions."
Amen to that: I wait developments with interest, if that's the right word in this context.