Breaking point?

After a 75 percent contraction in the payday lending market, there are estimates that 600,000 consumers cannot access these short-term loans. As the Financial Conduct Authority investigates the effects of a price cap, Credit Strategy queries if even the largest lenders in this sector can survive

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The payday lending sector has shrunk by 75 percent since 2015, according to trade body the Consumer Finance Association (CFA).


With only 60 active lenders left in the market, there are real, growing fears across the industry that any further restrictions to the high-cost short-term credit (HCSTC) sector, such as an adjusted price cap, could cause detriment to both consumers and suppliers.


Jason Wassell, chief executive of the BCCA, a trade association for short-term lenders, pointed out that the reduction of lenders is easy to notice, by looking at high street loan stores.


He said: “The Bureau of Investigative Journalism mapped about 1,500 stores in early 2014 across the major brands. Today’s figure is closer to 500 across those same networks.”


The CFA said further regulation could close the door on new entrants to the market, which is only partially open now. It believes there may be a further reduction in lending through high street loan stores, but conversely said there may be new entrants to the online market.


It also said further restrictions would create uncertainty with investors, potentially stifling growth and innovation. More restrictions, it claimed, would create an imbalance in a competitive market where other high-cost products are not subject to the same scrutiny.


At the crux of industry concerns is whether there will be further movement in a price cap set by the Financial Conduct Authority (FCA), following its review.


The FCA published the Call for Input: High-cost credit in November 2016 to review the price cap on payday loans and other high-cost products such as overdrafts.


Setting the bar
Wassell said it isn’t purely the price cap that has caused a change in the market but additional regulation such as the authorisation process.


“The change has taken the forms of fewer firms - serving fewer customers, more applicants rejected and revenues dropping for the remaining firms.”


The CFA found that 42 percent less payday loans had been sold between January and April 2016 than the same period in 2013.


It said this could not only be the result of the price cap but tighter affordability checks too. The CFA has also seen payday loans evolving to instalment loans of three to six months.


Speaking exclusively to Credit Strategy, Stuart Howard, chief executive of Dollar UK (which itself is up for sale), said the lender has moved away from very short term payday loans towards longer term loans since the price cap.


The CFA also estimated that more than 600,000 consumers have been affected since the price cap was introduced and have been denied credit as a result.


Howard admitted that the price cap has affected Dollar UK as well as other regulatory measures.


He said: “These changes have made a difference to our approach to affordability and have led to an increase in the number of customers that we can no longer lend to.


“As an industry, there has been a move to provide lending only to the ‘right’ customers – those who can afford to repay without difficulty.”


But it hasn’t all been negative. The CFA explained how the price cap has had a positive impact. It described how consumers are now paying half the additional fees that were previously imposed before the cap and that the cost of credit has reduced by a third.


Dawn Stobart, director of external affairs at Christians Against Poverty, said the price cap has provided “valuable protection” to those in the grip of financial hardship.


Stobart said: “Our experience suggests that HCSTC is no longer the main culprit of disproportionate borrowing costs faced by those in financial difficulty.”


She explained that some of these main culprits include the banks levying charges on products such as credit cards and unauthorised overdrafts.


On another lender-specific level, Dollar UK said further regulation could impact the lenders’ ability to continue providing a retail based service to customers throughout the UK.


Across the market
The call for input will encompass a study of payday lending, illegal lending and overdrafts. The FCA will specifically review unauthorised overdrafts and soon begin mining data on how these charges and costs are determined.


Simultaneously during the review period, a report for consumer group Which? was published and found it cost nearly eight times more to go £100 into an unauthorised overdraft, than it would to do so with a payday loan.


Fiona Hoyle, head of consumer and mortgage finance at the Finance & Leasing Association (FLA), said the questions included in the FCA’s call for input assume it is possible to lump together different products on the basis of price.


She said: “The FCA needs to ensure the regulatory regime is proportionate and fact-based, and for example – does not assume that measures designed to mitigate specific problems in once sector can be rolled over to others.”


Denied customers
With estimates of 600,00 consumers becoming dislocated from financial services, the question remains: Where have they gone?


Trade bodies such as the BCCA are concerned the proportion of individuals denied credit and using loan sharks is larger than predicted.


A clear picture here is, naturally, very difficult to draw. The National Illegal Money Lending Team (IMLT) said there isn’t any evidence to suggest the price cap has caused an increase in the number of people approaching loan sharks.


As part of the call for input the BCCA has urged the FCA to find out what happens to the individuals who are denied credit and no longer served by the payday loan market.


Demand and dependency
Research from the CFA, YouGov and the Social Market Foundation (SMF) found almost a third of all consumers who bought loans in 2015 would have to go without essentials like food, petrol and heating if they were unable to access a loan.


Russell Hamblin-Boone, chief executive of the CFA, said: “The regulators have struck the right balance with the current regulations. The market should now be given time to adjust to the changing landscape.


“There is evidence of a strong demand for HCSTC and further restrictions could impact on the viability of firms to meet the demand. This could lead to even more consumers being financially excluded.”


Wassell said: “Firms need to have the time to be able to execute their strategies, develop marketing plans, create new products and find the funding required to make it work.”


Howard said this would enable the current rules to bed in across the industry while starving out unscrupulous operators whose practices will be unable to survive the current regulatory regime for any length of time.


The call for input has now closed and the FCA will review and assess the evidence and publish its results mid-2017.

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