After the Wonga Letters scandal, are there any alternatives to payday loans? | Sustainable business custodian
“People want payday loans, but then people want crack. That doesn’t make it a good thing to do.” Fiach Maguire, marketing manager of My Community Bank, is no man to mince words.
Coming in the week UK’s biggest payday lender Wonga agreed to pay £ 2.6million in compensation for sending threatening letters to clients of non-existent law firms, this is a comment that will appeal to many. Wonga insists that this practice is firmly in its past and that “everyone directly involved… is no longer part of the company”.
But that’s far from the only criticism leveled at payday lenders. The Archbishop of Canterbury, Justin Welby, smacked the likes of Wonga for pushing vulnerable borrowers into a “debt spiral”.
The industry is also facing tough new rules. The Financial Conduct Authority, which took over the regulation of payday lenders in April, is set to impose price caps on the overall cost of a loan and demand more rigorous affordability controls.
Along with this public flogging, there has been a growing awareness of alternatives to payday lenders. Welby promised to “compete” with bankrupt Wonga using the Church of England to stimulate the expansion of community-run credit unions.
Credit unions have traditionally specialized in providing loans and savings products to the poorest people, and are seen as an alternative to banks, payday lenders and loan sharks. The cost of borrowing is capped at 3% per month and members must share a “common bond,” although organizations have found ways around this archaic rule.
My Community Bank, for example, is open to anyone living or working in the London Borough of Brent and nationally to anyone with a connection to the British South Asian community.
Capping borrowing costs, however, means credit unions need to be more selective about who they lend to. Payday lenders charge exorbitant interest rates and therefore have bigger pockets to cover potential losses due to bad debts.
Maguire explains, “In the world of payday loans, you can have a much riskier view of whether people can repay the loan. We can only lend to people we think are likely enough to pay it back.
A competitor closer to Wonga would be community development finance institutions, or CDFIs. These are social enterprises that lend money to individuals and businesses that find it difficult to borrow from the big banks. They are not subject to the same rules as credit unions, so they tend to charge higher interest rates, but they can take more risk with the people they lend to.
Fair Finance is a London-based CDFI, which has provided over £ 7.8million in loans, for amounts as low as £ 100, since its inception in 2005. Its loans are much cheaper than lenders on salary. Wonga says the average loan taken by his clients is £ 180 for 17 days, costing £ 37 in interest and fees. By comparison, Fair Finance is said to charge £ 5 interest and fees on the same loan over the same period, despite its shorter term loan being for 26 weeks.
Mark Hannam, chairman of the board of Fair Finance, says many of his clients have borrowed money from payday lenders and use his service to refinance those loans at a lower rate. “We also believe that the advice and support we provide to our clients makes our service more valuable to them, as it strengthens their confidence in managing their own money.”
The main challenge for CDFIs, he says, is that they operate on a much smaller scale than the big payday lenders. “In the long term, we aim to provide a fair alternative to companies like Wonga, but it will take many years to reach the scale that would allow us to offer our products to the growing number of financially excluded people in the UK. . “
It is a problem throughout the industry. The Community Development Finance Association (CDFA) conducted research last year which showed that demand for finance from individuals and businesses ineligible for traditional bank finance reached over £ 6 billion in 2012. This compares to funding estimated at £ 700million provided by the community. organizations the same year.
But in order to lend money, CDFIs must first raise funds, which is not an easy task in the current climate. Ben Hughes, chief executive of CDFA, says this is where the government could help.
“I think the role of government is not to be the only source of funding. I think it has a role to play in catalyzing the growth of this industry.” One way to do this would be for the government to equalize commercial investment in CDFIs on a pound-for-pound basis, thereby reducing the perceived risk of the investment.
Then there is the issue of awareness. Many clients find themselves in the arms of payday lenders simply because they don’t know the alternatives.
Hughes notes that Wonga has a marketing budget of over £ 10million per year. “They’re very efficient and smart marketers. The football stadiums, the TV commercials, the backs of buses; people see it all the time. CDFIs can’t compete with that level of market awareness.”
He believes that providers of community funding should seek a common brand in order to raise awareness. “We want a very simple model that connects existing suppliers into an integrated consortium, where no one does anything other than what they already do, other than presenting themselves as a whole.” The battle is far from over. But payday lenders are under increasing pressure, as community finance providers improve their game.
Maguire says: “It’s a long journey for this country. It involves financial education in schools, household budget management, simple life skills. If people had these simple life skills, they wouldn’t have need payday loans. ” Or, presumably, crack.
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