Why are so many payday lenders going into administration?
“There will only be four major payday lenders operating in the industry.”
That’s what the Financial Conduct Authority (FCA) said in 2014, as I sat in a crowded seminar room, surrounded by other lenders and brokers. With the FCA taking over from the Office of Fair Trading that year, many in the industry expected a reshuffle as directors of payday loan companies and I huddled in that room to try. to get an overview of pending regulations.
Of course, we scoffed at the idea of an industry with just four players. At this point, payday lending was a booming business with a market valuation of £ 2 billion, over 3 million loans funded per year, around 200 lenders and over 200 brokers, easily. The industry was full of playboys on yachts, international millionaires and soft regulation – how was that going to be changed so drastically?
Fast forward five years later and the controversial industry has changed dramatically with more and more lenders entering administration. The biggest victim was the market leader Wonga, which closed its books in the fourth quarter of last year, slowly followed by The Money Shop, Cash Genie and recently Payday advance. But the question is, how did these once great companies come down? And why do they enter the administration?
Payday loans by the numbers
In 2013, the payday lending industry called for more regulation. The number of complaints steadily increased, making headlines, drawing criticism from politicians such as Stella Creasy and religious figures such as Archbishop Justin Welby, and lenders were accused of charging usurious rates of up to 5,000% APR. .
As of January 1, 2015, the FCA introduced a price cap on the amount lenders could charge at 0.8% per day, meaning that on average a customer will pay back a maximum of £ 124 per £ 100 and will never pay back double the amount they requested from to borrow. Other introductions included a maximum default fee of £ 15 per missed repayment and a strict authorization process required for lenders and brokers to operate.
The initial costs and lead times for authorization were too onerous for many brokers and lenders to handle, with dozens leaving immediately, despite the fact that many were offered “provisional authorization”.
The introduction of a price cap, higher compliance costs, and tighter regulation have resulted in lower margins for lenders and a desire to apply more stringent lending criteria to ensure maximum repayment.
While many lenders have continued to negotiate, some simply have not been able to make the business model work, believing the margins are too tight and the operating costs too high. For them, leaving the industry has been the safest option, and in 2019 we only have 40-50 payday lenders and a similar number of brokers.
Strong growth is catching up with them
While the payday loan industry was booming before regulation, many lenders were lending aggressively and growing exponentially. Wonga has been notoriously cited for a £ 1 billion valuation.
However, this exponential growth came at the expense of providing loans to clients who could not necessarily afford them, with flexible affordability controls and funding based on more behavioral underwriting and collection practices. aggressive than traditional underwriting credit checking and affordability practices.
The result? Millions of loans have been made to clients who are unemployed, on benefits, with no income and no way to repay their loans. Now this group of debtors has a strong claim to claim compensation, and it is now a thriving industry.
With the end of PPI claims in August of this year, the role of payday loan compensation claims takes its place. Those who got a loan that they thought was missing checks can claim compensation for hundreds of pounds.
Wonga has been the lender most affected by this and has repaid over £ 200million in compensation claims over the past four years – the process that has brought them under administration.
Additionally, the cost of raising a complaint requires a £ 500 fee from the Financial Ombudsman Service regardless of whether it is a strong complaint or not, making compensation claims much more expensive.
There are a number of traditional small lenders that have been around for over 10 years that weren’t lending large volumes before the FCA price cap – and these companies are now reaping the rewards. Companies such as Wizzcash, Uncle Buck and MY POT have the knowledge, resources and financial skills to continue to trade and prosper. As by statistics below, there are 10 lenders who account for 85% of new loans – and as the number of lenders decreases, loan volumes increase.
The future of payday loan
Payday loans will always have a role in UK society. It is an important anti-poverty measure that provides a very important service to the 3 million people who request it each year – and its existence decreases the risk of black market economies and usurious lending.
While we initially laughed at the idea of just four payday lenders operating in the market, the increase in administration from well-known lenders makes this a real possibility.
Beyond payday loans, there is an opportunity for new alternatives to enter the market that may offer more flexible products, including app-related banking, flexible overdrafts, and installment loans.
A flaw in payday loan is that all customers are subject to a high interest rate, regardless of their credit rating. Thus, those with an average or good credit rating are still inclined to pay the same high rates as those with a bad credit rating. If there is a lender who can strike that balance, by offering affordable payday loans for good credit and finding a way to accommodate customers with bad credit, they will be able to break into a very complex market.
Written by Daniel Tannenbaum.
Tannenbaum is a UK based marketing consultant with over seven years of experience in the short term loan industry.