The recent headline in the payday loan industry has all been about a lender – CFO Lending – being forced by the industry watchdog, the FCA, to write off £31.9 million in outstanding loans and pay back £2.9 million in fees to customers. CFO Lending (which used six different brands), was found to have taken money out of customer accounts without authorisation, sent threatening correspondence and charged exorbitant and unwarranted fees.
But what is less far less publicised is the extent to which Britain’s payday loan industry has cleaned up its act over the last two years. The efforts lenders have made to comply with rules laid down by the FCA and improve self-regulation have resulted in an industry that many commentators insist provides a valuable service to hundreds of thousands of customers and people on low incomes.
How payday lending bounced back
In early 2015, new rules governing payday lending were introduced by the FCA. These governed the interest rates that lenders were allowed to charge and the number of times that they were allowed to ‘rollover’ repayments by customers.
When the rules were introduced, many financial experts predicted that they would signal the end of the sector. Despite these warnings, not only is the payday loan sector still functioning, many argue that it is on a firmer financial footing than at any time in its history.
The main reason that people predicted an end to payday lending were the restrictions on rollovers. Many economists believed that without month-after-month delays on repaying the full value of these loans, the sector would be so unprofitable that virtually every lender would pull out.
In the event, nothing of the sort happened. Instead the unscrupulous lenders were driven out of the market leaving the more responsible lenders with better business models.
The caps on rollovers achieved more than simply driving unscrupulous lenders out. They also forced the companies that remained to change the way that they did business by forcing them to cut costs. This led to a far greater emphasis on online applications and approvals rather than the payday lending shops which were once a common sight on the high street.
Many new lenders have also now sprung up online and all of these are forced to adhere to the FCA’s regulations
But what has also become clear is that consumers – not just the industry – appreciated the ease with which they could borrow money quickly and without fuss online.
The introduction of rollover restrictions and interest rate caps also changed public attitudes. Instead of destroying pubic trust in the industry, the introduction of the new regulations has actually improved confidence in it according to several recent surveys of public attitude.
The restrictions have also changed the way that lenders lend – they have moved away from riskier decisions to basing credit approvals on sound affordability assessments. As a result, these companies are declining more applications from customers seen as too high a risk and have consequently been able to afford to offer lower interest rates to those that they do approve.
The future of the payday loan industry
Just like the economic predictions in the immediate aftermath of the Brexit vote have proven to be way too pessimistic, so too have predictions of the death of the payday loans sector. We are now nearly two years on from the FCA’s new rules and, instead of an implosion, what we are actually seeing is a growing industry based on a sound business model able to lend to people who are more likely to stick to their repayment agreements and not get into difficulty.
It’s likely that there will be further consolidation in the payday loan industry as lenders with weaker business models and those who exist on the edge of the FCA regulations are driven out. What will be left will be a stronger and fairer industry which will still be able to trade profitably while at the same time servicing the genuine needs of hundreds of thousands of people who use payday loans responsibly.
It’s important to remember that there is nothing inherently wrong or immoral about short-term lending to people on low or erratic incomes. Such lending is as old as the hills. What a cleaned-up payday lending industry does provide is a legal and regulated firewall against unscrupulous loan sharks and others who will always try to prey on the most vulnerable people in society.
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