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You can find the current article at its original source at http://www.theguardian.com/society/2015/jan/14/innovative-lending-replace-wonga-payday-lenders
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| We need innovative lending services to replace the Wongas | We need innovative lending services to replace the Wongas |
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| While it is too early to see the real impact of the price cap on payday lending, some smaller players have already left the market and the main lenders, Wonga, Quickquid and PayDay UK all now charge the price cap level. So, APRs (annual percentage rates) are no longer 4,000% but are now 1,200%, although the actual costs for a typical payday loan of £200 taken out for two weeks has only dropped by a pound a week. | While it is too early to see the real impact of the price cap on payday lending, some smaller players have already left the market and the main lenders, Wonga, Quickquid and PayDay UK all now charge the price cap level. So, APRs (annual percentage rates) are no longer 4,000% but are now 1,200%, although the actual costs for a typical payday loan of £200 taken out for two weeks has only dropped by a pound a week. |
| The consultancy Policis reported on the experience of payday loan caps in the US. It found they have limited the supply of credit, but haven’t reduced demand. As such, online illegal lending is booming with six in 10 loans made illegally or by unlicensed lenders. As more of the US payday lending market moves online, it warns this will increase. | The consultancy Policis reported on the experience of payday loan caps in the US. It found they have limited the supply of credit, but haven’t reduced demand. As such, online illegal lending is booming with six in 10 loans made illegally or by unlicensed lenders. As more of the US payday lending market moves online, it warns this will increase. |
| Some 80% of the UK’s payday loan market is already online. The Financial Conduct Authority accepts that price caps will limit some people’s access to finance; but it hopes many will be able to count on friends and family to help out. The Policis research suggests this a not a credible position; and warns of the danger to UK consumers of an illegal credit market developing. | Some 80% of the UK’s payday loan market is already online. The Financial Conduct Authority accepts that price caps will limit some people’s access to finance; but it hopes many will be able to count on friends and family to help out. The Policis research suggests this a not a credible position; and warns of the danger to UK consumers of an illegal credit market developing. |
| Unfortunately, credit unions and microfinance organisations are far from providing a viable alternative. The Church of England’s initiative to compete Wonga out of business is encouraging credit union take-up. Yet it won’t be a solution or alternative to the financial problems people face. The current focus of credit unions is the government-funded £40m credit union modernisation project. It aims to make them sustainable, develop a broader offering, including mortgages and automate more of their processes. This is intended to help credit unions reduce costs and shift their client base to more affluent borrowers. | Unfortunately, credit unions and microfinance organisations are far from providing a viable alternative. The Church of England’s initiative to compete Wonga out of business is encouraging credit union take-up. Yet it won’t be a solution or alternative to the financial problems people face. The current focus of credit unions is the government-funded £40m credit union modernisation project. It aims to make them sustainable, develop a broader offering, including mortgages and automate more of their processes. This is intended to help credit unions reduce costs and shift their client base to more affluent borrowers. |
| The London Mutual is the only credit union offering a payday alternative. It is much cheaper than the payday lenders’ version. However, evaluation by the Financial Inclusion Centre reveals that it loses money on each new loan made. If the borrower becomes a long-term member and saver, the costs of this first loan can be covered; but it does raise questions about its viability. | The London Mutual is the only credit union offering a payday alternative. It is much cheaper than the payday lenders’ version. However, evaluation by the Financial Inclusion Centre reveals that it loses money on each new loan made. If the borrower becomes a long-term member and saver, the costs of this first loan can be covered; but it does raise questions about its viability. |
| A handful of microfinance organisations, including my organisation, Fair Finance in London, Moneyline in south Wales and north-west England and Five Lamps in the north-east are scaling up and moving to profitability but are still regional and undercapitalised. | A handful of microfinance organisations, including my organisation, Fair Finance in London, Moneyline in south Wales and north-west England and Five Lamps in the north-east are scaling up and moving to profitability but are still regional and undercapitalised. |
| But the problem is bigger than this. Since 2007, real wages have shrunk in the UK, incomes have become more variable, people have less to budget with and their finances are more complex. They need financial services that are responsive, flexible and quick enough to match these changes. These are the reasons payday lending is worth billions and serving millions. As banks come under increasing regulatory pressure to lend conservatively it may force more people to use this sector. | But the problem is bigger than this. Since 2007, real wages have shrunk in the UK, incomes have become more variable, people have less to budget with and their finances are more complex. They need financial services that are responsive, flexible and quick enough to match these changes. These are the reasons payday lending is worth billions and serving millions. As banks come under increasing regulatory pressure to lend conservatively it may force more people to use this sector. |
| We need a new type of service to address this problem. US innovations between regulators, tech firms, investors and community groups offer good ideas, such as the interest-free payday budgeting service, online savings groups or small dollar lending programmes. This is not happening in the UK – it is unclear if it will. | We need a new type of service to address this problem. US innovations between regulators, tech firms, investors and community groups offer good ideas, such as the interest-free payday budgeting service, online savings groups or small dollar lending programmes. This is not happening in the UK – it is unclear if it will. |