With the coronavirus having cut through the world’s population like a hot knife through butter, the fallout has had most Payday Lenders running for the hills while others have simply pulled down the shutters and gone into hibernation for the duration.
While no one is doing much of anything lending-wise (though a few are still lending) we thought it might be useful to give you a quick tour through the years of Payday Lending, otherwise known as High Cost Short Term Credit (HCSTC for future reference).
Background & Early History
The definition of a High Cost Short Term Credit contract as defined by the Financial Conduct Authority (FCA) is any loan with a term of less than 1 year and an Annual Percentage Rate (APR) of more than 100%.
A Quick Word on APRs
Annual Percentage Rates were introduced in the 1990s by the regulatory authority of the day, the FSA. Much like the FCA only with different initials and less sharp teeth. Back in the day when regulations didn’t exist, interest rates had a nasty habit of bouncing up and down from one week to the next leaving savers and borrowers not knowing how much they would be earning or paying 3 months from now. In came the idea of fixed rates for mortgages – good news.
Trouble was some lenders liked to advertise their headline rate of 1.99% but forgot to mention it went up to the base rate of 15% at the end of the fixed term of 6 months thereby leaving mortgage holders with a nasty surprise they didn’t see coming. Hey presto! The introduction of APRs allowed borrowers to see the actual cost of repaying their loan over the course of a year regardless of if it started the year at 2% and finished at 8%.
Fast forward 10 or so years and the advent of HCSTC meant lenders suddenly had to advertise an interest rate over the course of a year when their loan only ran for 6 months. The problem is that in order to arrive at an APR figure you have to assume the borrower keeps paying their loan for an extra 6 months even though they’ve finished paying for it after 6. Makes sense right?
We once did a £100 loan for someone which had an APR of 33,000% even though we actually only added £50 onto the loan thereby making a true interest rate of 50%. The loan was for 10 weeks but to arrive at the APR which by law we have to state, we had to pretend she was going to keep paying the loan for another 42 weeks even though it had finished. And that’s how you arrive at figures in excess of 1000% for payday loans. It’s just a shame there’s never enough time or space to explain that properly. Back to our history.
America
The general consensus is that Payday Loans by name came into existence in America in the late 1800s to early 1900s. Back in those days this type of lending was called a ‘salary purchase’ whereby the lender literally purchased a worker’s salary days before he or she was due to receive it for less than the actual salary amount. These early payday loans were structured so as to avoid state usury laws which had been in force since the early days of America.
With the exception of pawnbroking this was one of the very few ways working class Americans had of gaining access to credit. Very few people had bank accounts and banks were organised more along the lines of a private members club than a money service to all.
Usury laws had been brought in to counter pernicious lending practises and illegal collection methods and meant that many states had interest caps of between 3-10%, rates which sound like hell on earth to a payday lender. The unforeseen consequences of the caps was to make the lenders find ways of circumventing the usury laws by whatever legal and sometimes dubious methods they could find.
By the 1930s cheque cashing for a daily fee against a post-dated cheque was gaining traction in the States. You leave your post-dated cheque to the value of your wage with the lender who advances you the full amount minus their commission or interest.
Leave out the cheque part of the transaction and ‘voila!’ we have a payday loan. And it was the cheque cashers who began offering payday loans in the early 90s once the U.S. 1980 Depository Institutions & Monetary Control Act had taken effect and loosened many financial controls from the lending market.
Unfortunately, along with deregulation came more regulation in order to counter the boom in consumer lending it had spawned. Deregulation led to many more financial ‘freedoms’ (like the freedom to get into even more debt) for consumers and companies alike and for a while it meant interest rates were allowed to ‘float freely’ and a measure of stability found its way into the market. However, once the regulators decided to implement a price ceiling, inevitably the squeeze there led to some of the biggest US lenders setting up shop here where there were no such limits.
The American owned Money Shop started out in the UK in 1992 with no presence at all but by 2009 had 273 UK retail and 54 franchised outlets. In 2016 5 of the biggest 7 payday lenders in the UK were American owned companies. Fast forward to 2020 and since the FCA took a sledgehammer to the market in 2014/15 there seem to be none left.
The market has halved since 2013 (10 million loans made in the payday sector in 2013 compared to 5 million loans made in 2018) and all the biggest players have left the building. While it’s good riddance to the worst of them, the problem for consumers will be when there’s no one left to lend in the sub 1 year market and that’s approaching quite quickly.
The problem for the regulator will be policing the loan sharks who will happily fill the boots of the lenders leaving the legal market. Squeeze over here, pop up over there. On the plus side, the FCA’s new(ish) rules mean you can no longer be made to pay more than twice the original amount you borrowed. There is a maximum daily interest rate of 0.8% of the amount borrowed and you cannot be charged more than £15 in default fees.
It’s interesting to note that the peak of the payday industry seems to have been 2012 when 10.2 million loans were written (a lot to the same repeat customers) with a value of £2.2billion. Sounds like a heck of a lot until you realise that in the same year we put £55billion on our credit cards. A fraction of the amount and the payday loan market has been steadily reducing year on year since then with the fastest deceleration after the FCA caps came into force in 2015 when around a third of the lenders simply shut up shop and left the market.
Great Britain
My mother is 92 years young and we were from North London at the time of her growing up. She was born at the end of the 1920s and as her father was a chef and her mother a sometime machinist, money was sometimes tight. I was intrigued to know what they did for money if they were short one month or week. Unsurprisingly there were very few options. In fact, legally there were 2. Use a well-known doorstep lender or go to the pawn shop. And that was it.
Nobody outside the upper middle classes had a bank account and unless you knew the manager there was no way they were going to be in the business of lending you money anyway. Let’s not forget the British public had a very different attitude to debt back then and the phrase ‘neither a borrower nor a lender be’ was lived by many people.
Being in debt was seen as being something people most definitely did not want to be in. In fact it was probably second only to being in receipt of some form of charity in a list of things you wouldn’t want anything to do with. Being in debt, like being in receipt of charity, meant you had failed to provide for yourself and were therefore a failure to some degree or other regardless of the circumstances which may have led you there.
How those attitudes have changed, or rather how they’ve been changed for us. Up until the Debtor’s Act of 1869 Britain locked up 10,000 people per year in debtor’s prisons and while that number fell after the Act, in 1905 there were still over 11,000 people in UK jails for debt. As a point of general interest the most famous of these jails was called ‘The Clink’ in Stoney St, London from where you can derive 2 of our most famous slang words, one for being broke and one for being in prison.
Deregulation
From the 1930s to the 1970/80s little changed in the world of consumer finance, loans and banking, largely due to the fact that that world hadn’t yet been invented. 1979 saw the arrival of Margaret Thatcher and the advent of Thatcherism, which ‘freed up’ the British banking and finance industry by removing the checks and balances grown organically over the course of a few hundred years and the rules and regulations put in place post WW2.
Why were they there in the first place? The biggest advances in consumer finance up til then had been the introduction of cheque guarantee cards at the end of the 1960s and the arrival of Bank of America/Visa/ Barclaycard credit card which inspired our own flexible friend – Access in 1972 (now Mastercard).
Once deregulation had been effected it cleared the way for cheque cashers to become a regular feature on our High Streets but it took the coming together of 3 separate developments to advance from there to arrive at our current position. 2007 saw the release of the very first Iphone.
2008 was the year of the Credit Crunch which turned into a major recession and at the same time one of the world’s first fintech (financial technology) algorithms was released which amongst other things, enabled the move from desktop to mobile. Over the course of the next ten years one could clearly see how things had changed from getting a loan in your bank or building society, having to be physically present, to applying for and receiving funds while sat in your armchair at home. With those 3 pieces of the financial puzzle slotting into place the stage was set for the explosion of credit we have come to know as the Payday Loan industry.
Explode it most certainly did. When need meets greed, mountains can get moved quite quickly it seems. On the flip side though, the demise of the Payday industry has been almost as fast as its rise. As previously stated, the halving of the market between 2013 and 2018 is almost directly related to the actions of the FCA in 2014/15. When a third of the market simply leaves said market and the remainder are allowed to be retrospectively sued for supposedly not checking a customer’s affordability criteria thoroughly enough, where does the regulator suppose customers are going to find a lender prepared to lend them short-term finance?
Maybe the point is to get rid of short-term finance, especially the more costly end of the market. That’s fine as long as there are banks and mainstream lenders prepared fill the gaps and pick up the slack. The problem is that they aren’t lending and it’s nothing to do with the coronavirus. Let’s not forget that there’s no such thing as a Payday Loan or a Bad Credit Loan, an Instalment Loan or a Short-Term Loan. There’s just loans and loans are all defined by the length of the loan, the amount borrowed and the rate. And that’s it. They could all be classified under Personal Loans and allow the customer to adjust the term and amount to suit their needs but that would be too simple. In this industry like most others, where there’s demand, supply will appear to fill it regardless of any adverse lending conditions.
In the brief history of the Payday Loan industry it took the coming together of 3 disparate strands to ignite the fuse which led to its boom. As High Cost Short Term Credit staggers into a new decade it remains to be seen how much longer it can survive in its current form, if at all.
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