Errol Damelin and Jonty Hurwitz, entrepreneurs of South African descent, could not have imagined the impact they would have on the 120-year-old payday loans business when they set out to disrupt it in 2006.
The founders of Wonga established the company to help cash-strapped borrowers just when the UK was on the verge of economic collapse in 2008. But the notorious company, which charged some vulnerable consumers interest rates exceeding 5,000%, spurred a regulatory crackdown on the UK’s predatory payday lending business before its collapse in 2018.
Since then, Wonga’s market share has decreased by nearly half. More than fifty businesses have failed or closed voluntarily. Since then, no new payday loan companies have been granted a license to operate, leaving less than 40 high-cost, short-term lenders in the business.
While consumer advocates have applauded their gradual death, doubts have been raised as to where the nation’s most vulnerable households might turn next. Amid the cost-of-living crisis, some industry insiders believe a more strictly regulated payday loan industry could play a role.
Financial Conduct Authority (FCA) regulators, the City’s watchdog, expressed worry earlier this year about the relatively small number of high-cost lenders remaining on the market for borrowers who do not meet standard bank lending requirements.
At their May meeting, FCA board members stated that the decline in high-cost lenders, coupled with growing inflation, was expected to generate a lot of pinch situations in which customers require immediate access to funds but have few options.
With the demise of the payday lending industry, it was hoped that credit unions and non-profit community development financing institutions could fill the void. Concerns exist, however, that they will be unable to scale up rapidly enough to assist everyone in need of financial assistance in the coming months.
Concerns have been made that more individuals may resort to illicit loan sharks to make ends meet. According to the Centre for Social Justice, a think group co-founded by the former leader of the Conservative Party, Iain Duncan Smith, over one million people in England are currently using illicit lenders.
Others are turning to unregulated but legal types of lending, such as buy now, pay later (BNPL) programs administered by companies such as Klarna, Clearpay, and Laybuy. Although buyers are frequently not charged interest on their purchases, they nevertheless run the risk of incurring excessive debt. When things go wrong, the companies are not compelled to grant forbearance or compensation.
Mick McAteer, a former FCA board member and co-founder of the Financial Inclusion Centre research organization, states, “This cost of the living problem is probably the most alarming I can recall in my 25-plus years as a campaigner.” Therefore, the likelihood of individuals turning to loan sharks may grow.
“While BNPL may not have the same extreme, exploitative conditions and fees as payday and other subprime loans, the product promotes excessive borrowing. This is detrimental to customers in the long run.
In June, Barclays Bank and the debt charity Stepchange released research indicating that nearly one-third of BNPL borrowers reported that their debts had become unmanageable and drove them into problem debt. According to the findings, BNPL users financed an average of 4.8 transactions, nearly double the 2.6 purchases in February.
Despite years of alleged mis-spelling of loans to vulnerable consumers, some high-cost lenders assert they offer safer options for borrowers as concerns about illicit and unregulated lending increase.
Jason Wassell, the head of the Consumer Lending Trade Association, a lobbying group for high-cost credit, asserts that private lenders still have a position in the market. “At this stage, demand already greatly exceeds supply,” he argues.
“Over the past few years, we have witnessed the exit of several lenders. This has led to a loss in access to alternative finance, which is problematic for families across the United Kingdom, especially those who have been mistreated or poorly served by banks in the past.
Executives at the guarantor lender Amigo, which allows friends and family to vouch for and agree to cover any unpaid loans for cash-strapped borrowers, say they have learned their lesson after a flood of affordability claims nearly brought Amigo to its knees, forcing it to halt lending at the beginning of the coronavirus pandemic.
Chief customer officer of Amigo, Jake Ranson, states that his team is “not apologists for Amigo’s former methods or products,” which included marketing unaffordable loans to consumers who were charged an average of 49.9% APR.
Now, he believes the FCA will give them the go-ahead to commence lending under a new brand, RewardRate, as early as September, with additional features such as lower interest rates for on-time borrowers.
“We will conduct weapons-grade affordability testing, utilizing open banking and ensuring that customers speak to a real person… “They must comprehend the responsibility that comes with possessing the commodity,” adds Ranson. “This is a pretty unique proposition.”
However, consumer advocates are concerned. Even after the regulatory crackdown, Debt Camel blogger Sara Williams is skeptical that the wider high-cost lending business is safer or more acceptable for vulnerable people. “Debt is rarely advantageous in this circumstance,” she argues.
She argues that rather than a relaunch of the payday lending business, more government assistance for suffering families is essential. In the interim, consumers should consider debt management strategies for any outstanding debts.
According to StepChange, 4,4 million people in the United Kingdom borrowed money to make ends meet last year. Seventy-one percent of respondents said using credit hurt their health, relationships, or ability to work, and two-thirds said they were only able to keep up with payments by skipping housing or utility bills or cutting back to the point of hardship, putting them at risk for further financial harm.
StepChange stated that the risks faced by vulnerable borrowers were not due to a shortage of high-cost lenders on the market. Instead, it highlighted the absence of alternatives when consumers were faced with expensive bills or unanticipated expenses.
“Turning to subprime lenders should be a last resort,” argues McAteer, adding that it is troublesome that the United Kingdom has failed to establish a “bigger nonprofit lending industry” to combat the current situation.
Non-profit social enterprises lend only £25 million annually and service an average of 35,000 customers. According to the FCA, despite their dwindling presence in recent years, payday lenders nonetheless managed to lend approximately £60,400,000 in the first quarter of 2022, while home-collected creditors lent approximately £95,000,000 in the last quarter of 2021.
“There is encouraging growth in the number of individuals using credit unions and other nonprofit lenders. Membership in credit unions has now surpassed 2,1 million. “But it’s not enough,” argues McAteer. “There is a danger that commercial subprime lenders backed by private financial institutions may outgun NGOs financially.
“Immediate steps are required to help households survive the crisis, followed by medium- to long-term measures to help them build financial resilience against future shocks. Since the 2008 financial crisis, we have made essentially no progress in developing financial resilience. Will we learn from our mistakes?”
