Curbing payday lending is a fool's errand

As the ethical debate around ‘payday loans’ continues, local councils have begun to rally against these lenders. Plymouth Council recently became the first local authority in Britain to ban payday companies from advertising across their billboards and bus shelters, while other councils are looking at following suit.  Councils such as Plymouth City, Newcastle, Dundee and Cheshire East have also already blocked access to the top 50 payday loan websites across their public networks of buildings, libraries and  community centers.

This is partially a response to the Office of Fair Trading’s (OFT) report citing widespread regulatory non-compliance throughout the industry, including a prevalence of irresponsible lending. Whilst the new Financial Conduct Authority is soon to start a consultation over beefing-up industry regulation, the OFT has also instructed the Competition Commission (CC) to look for evidence of any prevention, restriction or distortion of competition within the industry. Last week, the CC announced they would be studying the market for evidence of  “impediments to customer’s ability to search, switch and identify the best value product” and any “significant barriers to [firm’s] successful entry or expansion”.

The CC is probably expecting any anti-competitive behavior to stem from firm’s actions or the market’s structure. However, by restricting consumer’s access to information and erecting new barriers to entry, local councils are themselves making the market anti-competitive.

Blocking payday websites in public buildings means that those needing public internet to research loans are prevented from exploring the range of options open to them. These are generally the people most likely to benefit from discovering lower rates of repayment and flexible deals — and the kind of vulnerable people the council’s actions are designed to protect. Furthermore, banning advertising is simply likely to entrench the market share of current top providers who have an established image — regardless of the merits of other companies. The FCA is currently contemplating a cigarette-style nationwide ban on payday loan advertising , which would further compound this problem. Council’s actions may be designed to hurt the loan companies, but they end up harming consumers too.

It is interesting to see what, if anything, the CC will say about this impediment to effective competition. Given current public opinion it seems likely that any action taken to obstruct the publically-defined ‘predatory’ loan companies is here to stay, even if it were to negatively impact on the most vulnerable.

Instead of banning adverts and adding tighter regulation — both of which are designed to make it harder for these payday companies to operate — there are more effective ways to address the rise of payday loans.

Whilst currently only a small source of finance Credit Unions provide a viable and ethical alternative to payday lenders. However, they currently face a monthly interest cap of 2% and are often a loss-making venture. Easing the restrictions on Credit Unions would better allow them to make profits, grow in scope and effectively compete with payday companies.

Secondly, making the benefits system simpler would provide some with greater financial certainty and could eliminate some of the reasons for resorting to a quick loan.  A benefits system better at tracking changes in people’s situations would reduce the delays people face to get the correct benefits and would reduce the number of people having to pay back over- payments. Similarly, tapering the withdrawal rate of benefits in a gradual way would ensure that people entering work aren’t suddenly hit with unexpected surprises and bills.

Tackling what we deem a worrying trend in society doesn’t always require bans and regulation. It is possible to create alternatives to payday loans and reduce the need to use them without demonizing or blaming the lenders themselves.