The Archbishop of Canterbury’s remarks on the “evils of high-interest personal loans” may have been spoiled by the revelation that the Church of England was an indirect investor in the online lender, Wonga, says Stian Westlake in the Financial Times. Nonetheless, Justin Welby is right that more competition, including that from a chain of non-profit credit unions backed by the Church of England, would be “excellent news for borrowers” and is preferable to banning payday lending.
But he should consider why Wonga is so successful, namely because it is “remarkably fast and straightforward”. Wonga approves or rejects loan requests almost instantaneously and gives borrowers their money within 15 minutes. Can ethical lenders really compete?
Not as they stand. While credit unions are “a fantastic resource in poor areas”, says Ally Fogg on Guardian.co.uk, they have limited resources themselves. Trained volunteers and a secure workspace for handling money require “hard cash”, but “ironically, that is the one thing credit unions rarely have”, due to limited council budgets and dwindling funding.
For borrowers, they offer a “much more attractively priced” deal, says John McDermott, also in the FT. Borrowing £500 for a year costs less than borrowing that sum for a month with a payday firm. But the sector is run in a fashion that makes it slow for consumers and much less profitable for the providers.
Loans are subject to caps on interest rates and processing fees, which can make short-term, low-value lending unprofitable. There are 300 fewer credit unions than a decade ago, and their total loan book is one third of the annual lending conducted by payday firms. “The government should support the archbishop through the liberalisation of credit unions and the tougher regulation of payday lending.”
Tighter regulations are vital, agrees Martin Lewis in The Daily Telegraph. Welby’s challenge to Wonga founder Errol Damelin – “We’re not in the business of trying to legislate you out of existence, we’re trying to compete you out” – implied that there is no need for this, and that is worrying.
Britain is a “crock of gold for payday firms… Costs should be capped, advertisements banned from kids’ TV, the application process slowed and mandatory credit checks enforced”. I “cheer” Bishop Welby inviting credit unions into churches, but that’s unlikely to scratch the surface of this problem.
And we do have a problem, which is why the Competition Commission referred the entire industry for a full-blown investigation last month, says Ruth Gledhill in The Times. Even if some people only use payday firms for short-term loans, interest rates that spiral to more than 5,000% APR can easily become a trap.
Research suggests that about a third of borrowers end up in “worse financial straits”, and the Office of Fair Trading calculates that 28% of loans are refinanced at least once, providing more than half of these companies’ revenue, says William Taylor in The Guardian. In other words, the business model is “based on the expectation that borrowers will default because they can’t pay back the principal loan on time and in full. This is usury in practice.”