by Matthew Lawrence
Labour must be bigger and bolder if they are to tame the payday lending industry and make affordable credit a reality for all. Today’s announcement that it will impose a “Wonga levy” to fund the expansion of credit unions is a good step forward, particularly when combined with its commitment to cap the total cost of credit. However, as with other consumer markets that are currently failing, much more must be done to build a financial system that is more locally rooted, democratic and focused on value creation, not rent extraction.
Size matters. Miliband’s proposal to introduce a levy on the profits of payday lenders – which would double public funding to £26m for credit unions and other alternative low-cost providers – simply isn’t enough. Whilst the levy itself is a useful mechanism (and one that IPPR in its on-going research into the sector would recommend) in a market that is now worth over £2bn it risks being a drop in a ‘legal loan shark’ infested ocean.
This is particularly the case given that, as the ONS announced yesterday, the UK’s long wage squeeze is set to continue, the industry and its predatory practices are only set to grow. To be worthwhile, the levy must be set at a level to make a real difference within the market. But Miliband’s argument is sound: payday lenders should accept their responsibility for ensuring ‘affordable credit is available’. But Labour can go bigger and properly capitalise on alternative lenders through a windfall levy on the industry that has made hay whilst the sun has failed to shine on the average British household. After all, a “windfall levy” didn’t work too badly in 1997.
The second issue is that of boldness. Supporting the growth of credit unions is vital to building a fairer consumer credit market. But even with increased public funding, building the credit unions’ presence will take time, patience and a lot of trial and error – time that consumers who currently lack affordable credit alternatives don’t have. Credit unions don’t typically serve the same market as payday lenders and they don’t currently have the expertise to deliver the quick access to credit that people accessing payday loans require. When nearly 80% of payday loans are for vital necessities, speed is crucial, something that the credit union model is only now adjusting to.
Instead of just investing in credit unions, IPPR recommends using some of the ‘wonga levy’ funding to encourage local forms of innovation in lending. The UK’s peer-to-peer lending market has trebled in size in just three years. Can financial incentives encourage these enterprises to enter the payday market and undercut the record profits of these firms, some of which make as much as £1m a week? Another option would be refunding an equivalent of the Social Fund, with a renewed emphasis on speed and the offer of free debt advice if people in financial stress want it? Innovation, financial inclusion and fair competition are the long-term routes to more affordable credit. Relying on credit unions alone isn’t going to roll back the payday tide washing over the UK’s high streets.
Finally, greater imagination is also required. Despite the transaction appearing superficially horizontal, one between consumer and business, it actually reflects deep hierarchical imbalances in power between the creditor and debtor. This asymmetry is particularly acute in a market where the majority of borrowers earn less than £25,000. This matters because many payday lenders operate by trapping people in a cycle of debt. For example, Which? research shows a quarter of people with payday loans use it to repay other credit, whilst the average payday loan debt of a client of debt charity StepChange has risen to £1,657, often more than the monthly income of the people they are serving.
If people lack the power to escape their debts, there is an argument for collective action to spring the debt trap, for example through some sort of targeted ‘debt jubilee’. For example, quantitative easing has poured £350bn into the financial system, with the wealthiest 5% of households accruing 40% of all the benefits according to the latest Bank of England estimate. With a little imagination, a targeted intervention on a much smaller scale would help people break out of the debt spiral and empower people in the consumer credit market.
The banking sector is the hidden elephant in this debate. A serious review of the services mainstream banking offers to low-income customers – and the dignity with which they treat them – is well over-due. Ways to encourage a more pluralistic, inclusive banking culture should be pursued that better serve financially stretched customers. Investigating the uncompetitive charges banks apply for the use of unauthorised overdrafts is a good start. Payday lending, then, is only one part of a much bigger consumer credit market failure, a market that Labour should aim to reset.
Today’s announcement, then, is undoubtedly a positive step. A payday lending levy to encourage alternative low-cost credit providers is a useful mechanism, especially if used boldly. However, with living standards continuing their grind downwards, unless Labour continues to seek bolder and bigger solutions, the industry and its costs are only set to grow and it will be the economically vulnerable who pay the price.
Mathew Lawrence is a Research Fellow at IPPR.