A Guide to the Evolution of Payday Loans – Are they Fit to Survive? – Chapter 1
The world of payday loans has changed a lot since they were first introduced in the UK. But is the payday loans market of today different to when payday loans came out a few years ago? Find out in this article from Quick Loans Express.
In this chapter, we will give you an overview of the most important shifts in the payday loan industry.
The Payday Loans Market of 2013 vs 2019
In order to provide an overview of the shifts in the short-term loan sector, it’s necessary to consider some aspects of the industry. Not only in terms of its monetary value and composition, but also how borrowers experience this product themselves. In this chapter, we attempt to answer the question: Is the payday loan industry of 2019 the same as that of 2013?
To get a clearer picture of the changes in the payday loan industry, we’ll compare what used to happen with what happens now. The basis of our analysis of past practices is the OFT 1481 report entitled ‘Payday Lending – Compliance Review Final Report’. The report was published in March 2013 before the FCA took over the role of overseeing consumer credit. When the FCA took over from the Office of Fair Trading, regulating short-term loans became their job.
To find an equivalent report for the present was problematic since its methodology needed to be as far-reaching as the sources used for the OFT report. Where did they find their information?
Methodology of the 2013 OFT Report
The OFT used a variety of methods to ensure that their report was as balanced and as impartial as possible.
Of course, their first stop was to investigate the payday lenders themselves. They inspected the 50 top lenders in the payday loans market at the time. These lenders were responsible for 90% of short-term loans by turnover. As well, they commissioned mystery shopping exercises involving 156 online and high-street lenders. Using this, they recorded the information, advice and service given to customers enquiring about a short term loan. They also analysed the websites and advertisements of 50 firms. The OFT gained quantitative analysis of the market from data provided by 190 firms. This included data about loan volume, turnover, whether loans were repaid, re-financed, etc.
To supplement their research, they analysed the results of 1013 questionnaires. 226 of these were from payday lenders. These were sent to licensees, trade associations, consumer representative organisations (including debt advisors) and local authority trading standard services. This was done to judge the awareness of, and compliance with, the law and OFT guidelines.
As far as complaints were concerned, they used data supplied by Citizens Advice, the Financial Ombudsman Service (FOS) as well as their own records.
An Impartial Analysis of the 2019 Payday Loans Market
Many have researched the payday loan industry, but often the conclusions which they draw can be startlingly different. The reason for this is that it seems to come from 2 different ‘camps’.
On the one hand, we have research carried out by organisations like Citizens Advice (‘Payday Loans After the Cap’). Included in this camp is also the Step Change Debt Charity research (‘Payday Loans: The Next Generation’). Both of these research studies were carried out in 2016. Although some of their conclusions can add to the debate about changes in the payday loan industry, they obviously tend to have more contact with people who have had problems with payday loans. These organisations deal less with satisfied payday loan customers. Hence, a lot of their evidence tends to be anecdotal and based on relatively small numbers.
On the other hand, there are reports commissioned by the Consumer Finance Association (‘A Modern Credit Revolution; An Analysis of the Short-Term Credit Market‘, November 2016). As the representative body for the majority of payday loan companies, it’s difficult to claim that their report is any more objective than those of debt advisory services or debt charities. It also tends to base its conclusions on quite small numbers of participants.
Instead of using either ‘side’ in the debate, we chose to use the recently-published FCA report. The report is entitled ‘High-Cost Credit & Review of the High-Cost Short-Term Credit Price Cap’ (July 2017). We chose this report as it was prepared with the voluntary participation of many organisations such as Citizens Advice, payday lenders themselves, their trade associations as well as Credit Reference Agencies.
Now, let’s compare the two reports to see what their research tells us about changes in the payday loan industry over the past 4 years and in light of stricter regulation of the sector.
Value & Composition of the Payday Loans Market
The OFT found that according to 2011-12 figures, the payday loans market had a monetary value of £2-£2.2 billion. In this period, there were 7.4-8.2 million new loans. The 3 largest lenders made up 55% of the market by turnover or 57% of the market by loan value. By 2013, this market had reached 10.3 million loans worth £2.5 billion (FCA figures).
However, these figures dropped dramatically when regulation came into effect. 188 firms which initially applied for FCA authorisation later withdrew their applications. This is because it became apparent that they wouldn’t meet the required standards. By 2016, the payday loans market reduced to 144 firms registered to provide short-term loans. 30 of these were actively lending in December 2016. This resulted in a corresponding drop in the number and value of loans. Our company, Quick Loans Express was born after the FCA regulations came into place. We have always lent responsibly and always will. We are proud to be part of the new era of responsible lenders and we look forward to thriving under the new guidance of the FCA.
The market share of the large companies has decreased while there has been a number of new entrants to the payday loans market post-regulation. Firms show a mixed picture of profitability with several firms trying to sell their businesses when the FCA report was being prepared in 2016. As a result, they predicted further changes in the payday lending market in the coming years.
According to the FCA, in 2016 there were 3.6 million loans, taken out by 760,000 borrowers, worth just under £1 billion. In total, this represents a 51% reduction in revenue for the market. The average number of loans that borrowers took out was 5. 60% of consumers were taking out 3 or more loans a year. 10% were taking out 12 or more short-term loans in a year.
The Cost of Payday Loans
When questioned, payday lenders told the OFT that the average cost for lenders was £25 for every £100. However, when OFT analysed the figures, they found that the actual price varied from £14-£51.
The most worrying trend that OFT discovered in their investigation into the industry was that the vast majority of the revenue for payday loan companies in 2013 came from the rolling over or refinancing of loans. 50% of their revenue came from 28% of loans which customers rolled over. 19% came from the 5% of loans which had been refinanced 4 or more times.
In 2016, this amount had more than halved with only 20-25% of payday loan revenue coming from late payments or default charges. The FCA pointed out that the overall cost of a loan had reduced as well. Whereas the average cost of a loan was £100 per loan before the cap, it now cost an average of £60 per loan.
Accessibility to Short-Term Loans
One of the key criticisms that the OFT made in their report was that there seemed to be a deliberate policy on the part of some payday loan companies to disregard (or not even bother to undertake) accessibility checks. When borrowers went on to have problems repaying, lenders encouraged them to roll over their loan instead of negotiating an affordable repayment plan. This, of course, led to increased profits for the firms concerned.
In their report, the FCA said that the presence of a price cap on fees had led to many companies tightening up their lending criteria. Giving loans to borrowers who wouldn’t be able to repay them was no longer profitable. This has meant that access to instant pay day loans is no longer possible for some people who previously managed to obtain a short-term loan. In separate research, the FCA believes that more rigorous lending criteria have excluded 600,000 borrowers from the payday loans market.
Why were there Fewer Applications for Payday Loans in 2015-16?
In their research, the FCA found that the drop in consumers with a payday loan hadn’t entirely been because of rejections. Rather, there has been a surprising reduction in the amount of applications. Since January 2015, the number of consumers applying for a payday loan for the very first time had remained stable at 20,000 new applications monthly.
Why are Payday Loan Users not Using Payday Loans as Much?
To understand this change, the FCA asked former users of payday loans why they no longer made use of this product. Although fear of rejection was one reason given by them for not applying, there were other reasons. 61% said that their financial circumstances improved while other factors which played a role were fears about the impact on their credit rating. Some people were attempting to stay out of debt or avoid the negative impact of loans. Others said that lenders rejected their previous applications and they have a generally lower level of trust in the short-term loan industry.
The FCA also pointed out that for many payday lenders, the cost of the authorisation process and developing new business models had reduced the amount of money and time spent on marketing strategies. However, they believe that the change in business models is reaching completion and the industry will then turn its attention once again to marketing, advertising and seeking new clients.
Change in Payday Loan Business Models
In 2013, the OFT estimated that the average payday loan was £265-£270 and the average loan duration was 30 days.
Since regulation, the FCA have noticed that there has been a diversification in the type of loans on offer from payday loan companies. Although they still offer the 30-day short-term loan, more and more companies are offering longer-term loans. With the longer term loans, customers have the option to repay the loan in instalments. You can pay off these loans off gradually over a longer period of time (usually 3-4 months). This makes them more affordable for consumers. Although the overall interest rates charged for such loans are higher because of their length, there’s also a degree of flexibility. Most lenders like Quick Loans Express even allow borrowers to pay their loan off early if they wish.
Although the FCA noted an increase in missed payments/loan arrears, they believe that the length of the loan made it more likely that borrowers might miss at least one payment. However, it seemed that these arrears tend to be temporary. Generally, customers manage to resolve arrears by the end of the loan period with fewer customers of longer-term loans defaulting.
Borrowers Struggling with Payday Loans
The OFT commented on the numbers of consumers who were struggling with multiple payday loans and who had been trapped by spiralling debt. Citizens Advice and Step Change Debt Charity had both noticed increasing numbers of consumers coming to them for debt advice regarding payday loans (10% and 17% respectively for the 1st quarter of 2012).
By contrast, in 2016 Citizens Advice said that they had seen a 60% reduction in consumers having problems with the HCSTC payday loans market. Meanwhile, Step Change saw a decrease of 30% in people facing difficulties over payday loans. The FCA saw this as a sign that their regulations had improved the situation of runaway debts. They said that people tended to present themselves earlier to such organisations for advice and therefore had lower debts.
Price Competition vs. Speed of a Payday Loan
After an examination of payday lenders’ websites as well as their advertising, another complaint that the OFT had at that time was that firms tended to compete over the speed of the approval rates for their loans rather than over their prices. They thought this was another reason why lenders didn’t invest time and effort to ensure there were comprehensive affordability checks. Lenders felt that if they took too long in approving a loan, they’d lose out on customers.
The FCA found that the borrowers’ perception of payday loans hadn’t changed much in 4 years. Most judged a company by how soon it would make the money available to them. In their research, only 9-12% of borrowers chose a loan on the basis of which was the cheapest; the best interest rates or by whether it was the best offer on a price comparison site.
Following the ruling that from June 2019, all payday lenders have to appear on at least one such site and include a link to one price comparison site. We can only wait and see how much this will change consumer attitudes. Once this happens, there might be corresponding changes in how companies market their loans.
This brief comparison of the payday loans market in 2013 and 2019 clearly illustrates how much the industry has changed over the past 4 years. Not only in terms of the value of short-term loans and their cost to the borrower, but the very composition of the industry itself. Applying for FCA authorisation led many unscrupulous lenders to leave the market. It became apparent that not only would they not meet the criteria, but that legislation like the price cap means they could no longer be able to charge extortionate default fees and related charges. The price cap itself has resulted in cheaper payday loans as well as fewer borrowers struggling with repeat borrowing and spiralling debts.
Regulation was expected to block some people’s access to a direct lender loan, but no one expected falling numbers would be due to a drop in applications for short-term loans. The availability of alternative loans to the 30-day model is an example of another shift in the payday loan sector. We could not have predicted this dramatic in 2013.
In general, the picture painted of the payday loans market in the 2013 OFT report bears no resemblance to what it looks like today. Of course, with new regulations – like having to appear on a price comparison site – the industry continues to evolve and improve. Who knows what changes the next 4 years will bring. For now, we are here for you. We provide fast loans, but without compromising any regulations or measures for your safety.