Payday loans are a highly controversial product. With lenders charging around 1,000% in APR for these high cost loans, there are a number of people, including MPs and religious figures who would love to see these types of products completely obsolete. But following some very strict regulation by the Financial Conduct Authority and wave of compensation claims, this is starting to look more like a reality.
If we look back 10 years ago, payday was in its heyday. With the innovation of applying and processing loans online, the industry grew to enormous feats, worth around £2 billion per year in the UK at its peak. There were over 200 lenders in the UK, thousands of brokers and laws were being broken like the wild wild west. Late fees, poor checks, revolving credit cycles and loose data, the market was weakly governed and hugely exploited by its stakeholders.
Move forward to 2015 and the introduction of FCA regulation came in like a train. Strict authorisation laws, heavy checks and a price cap on the daily charges saw the industry almost shrink overnight.
The next five years were spent by existing lenders trying to make the business model work, only for many more to collapse or enter administration. In addition, it started a huge wave of compensation claims from former customers looking to get refunds on previous loans that they could not afford.
If you struggled to repay your loan, you could be repaid the entire loan, interest and compensation on time. The uphold rate of claims was significant (more than 66%) and this subsequently saw household names fall into administration including The Money Shop, Wonga.com and QuickQuid – paying more than £600 million in compensation to former customers.
If you look at the present day, there are only a handful of payday lenders that exist in the UK (less than 40) – and it is one step closer to becoming obsolete.
Dan Kettle, the founder of Pheabs, explained “The payday loans industry in the UK is certainly diminishing, but making the product obsolete is probably not a good thing. There are around 3 million Britons that use payday loans every year as an anti-poverty measure, so taking this away could be dangerous and playing into the hands of pawn brokers and loan sharks.”
“It is good to see a payday loan industry which is significantly cleaner and with better checks and more time to assess customers, the customer is a lot better off, even if it means that a large portion of applicants are denied.”
“To become obsolete, you might need to see some real innovation in payday loan alternatives. Getting loans from credit unions is a good proposition, but being non-profit, there is not the scalability that it needs to put payday out of business. Certainly, we may look towards the startup space, who are more likely to gain millions in investment to launch and scale a payday alternative – so this could be a space to watch.”
“One of the most promising alternatives is salary finance which allows employees to draw down their wages early from work at no extra charge. This could be an exciting space.”