Will competition in the payday loan industry help to bring down prices? How will increased competition help payday lenders and their borrowers? Read on with Payday Loans Net to find out of increased competition in the payday loan industry is a good idea.
In this article, we consider how competition in the payday loan industry is affecting the market with an examination of:
- Competition in the payday loan industry – the dilemma
- Competition in the payday lending market, post-regulation
- Inclusion on a price comparison website to encourage competition
- Limitations of using price comparison sites
- Why few payday loan customers use comparison sites
- Price isn’t the only criteria for competition; speed & availability of the loan; range of financial products on offer
- Competition from credit unions & banks
Competition in the Payday Loan Industry – The Dilemma
The FCA took over responsibility for overseeing the payday loans UK industry from the now-defunct OFT in April 2014. Their main objective was that the abuses of the previous years should come to an end. Regulations like a price cap would ensure that loan providers treat borrowers fairly and they would lend responsibly. At the time, the new regulatory body confidently predicted that many unscrupulous lenders would leave the market. This is because their days of raking in the money with extortionate late fees and rolling over loans would be over. They foresaw that the market would be reduced to a ‘handful of borrowers’.
At the same time, the CMA (Competition & Markets Authority) were looking at the structuring and operation of the payday lending sector from a different angle. Their primary concern was that anti-competition practices in the industry were keeping fees and charges artificially high. And it was also discouraging other lenders from entering into the market.
You can, of course, see the immediate dilemma. One organisation was actively predicting the market would shrink while the other was trying to open it up. What exactly happened and how did it have a direct effect on competition?
Competition Post FCA Regulations
An estimated third of direct payday lenders didn’t apply for authorisation in the wake of the FCA’s tougher regulations. What they didn’t foresee was that the market didn’t shrink as much as they’d predicted. In fact, many new lenders decided to enter the short-term lending market for the very first time.
When the FCA first implemented the price cap in January 2015, many lenders treated it with extreme caution like any innovation in any industry. Lenders tended to straddle the interest rate set by the cap. This was until they had a better idea of how the market and borrowers would react. Since then, however, there has been more of an effort to charge below the maximum amount allowed to attract customers. What has shifted to make the idea of price competition a selling point for payday lenders?
Price Comparison Websites
One of the later key changes in the industry came into effect in June 2017. This was when all direct lenders had to be featured on at least one price comparison site. Also, a link to the site should feature prominently on their own website. Originally recommended by the CMA after their 20-month investigation into the industry (which was released in February 2015). This measure was intended to permit consumers to compare the final prices of loans and would be an incentive for lenders to reduce their final costs.
Not only does the price comparison site allow would-be borrowers to search according to the amount and duration of the loan. It also allows them to directly compare key pieces of information such as the representative APR, the total amount payable and the size of the monthly instalments. The way that the company presents the information makes it easier for consumers to make an informed decision before going to the website of the lender they have chosen.
Limitations of Using Price Comparison Sites
Whether you use price comparison sites to look for flights or to change your insurance provider, it’s undeniable that such sites have their limitations. One limitation affects all such sites while one is specific to the payday loan industry.
In general, price comparison sites can’t compare all service providers, so it’s a good idea to use more than one to get a sense of what’s available on the market and check the range of their market coverage. Although such sites should be objective, there are concerns that they may give prominence to companies which pay for additional advertising fees or extra commission.
The other limitation which only affects customers looking for the best online loans is that would-be borrowers are reluctant to use them. Why is this so?
Few Payday Customers Use Price Comparison Sites
Such sites are relatively new on the market. Therefore, people don’t compare prices so much . Also, the fact that many borrowers often remain loyal to the same payday loan company, many consumers aren’t concerned about how much they’d have to repay when they need the support of a payday loan.
Although the CMA estimated that borrowers could save £30-£60 on each loan if they researched the market, they don’t tend to use these criteria when comparing loans from different companies. If you compare such a loan to another financial product such as a mortgage, you’ll immediately see why the two forms of lending are chalk and cheese. When someone applies for a short-term loan, their circumstances often mean that their overriding concern isn’t ‘How much will I have to repay?’ but rather ‘How quickly can I get the money in my account?’. Perhaps their car has broken down, and it urgently needs to be fixed for work. Or they need to replace a domestic appliance, many simply can’t or don’t want to wait.
The CMA recognised this aspect of the payday loan industry in their original report when they commented:
‘We found that customer demand responded weakly to prices. Where lenders changed their prices, this did not result in a significant customer response. Lenders that offer substantially lower rates have not been particularly successful in attracting new business.’
So if the price is only part of the story when it comes to payday loans, how else can they keep a competitive edge in the marketplace?
Price isn’t the Only Criteria for Competition
Available and Quick Loans
Think about when you go shopping for clothes; price isn’t the only factor to take into account. You might also look at the quality of the clothes, their material and whether they’re machine-washable. All of these factors will play a role when you decide what to purchase.
In the same way, when would-be borrowers look at payday loans, they might focus on the speed and availability of the loan. This is a factor to bear in mind when we consider the issue of competition in the payday loan industry. Lenders must know that speed should never come second place to the necessity of rigorous affordability checks. Which is there to ensure the borrower can afford to repay the loan. However, with advances such as real-time data sharing, this will become less of a concern as the technology evolves and improves.
Range of Financial Products on Offer
There is another innovation we’ve seen in the payday loan sector since increasing the FCA regulation. It is a variety in the range of financial products available from these lenders. From the typical 30-day loan to tide people over until their next payday, more and more companies are offering short-term loans which are paid back over instalments lasting on average of 3-6 months. Who knows what other innovative loans lenders will offer in the future? For a market to function well, it needs to be able to adapt to changes in the marketplace; competition over the range of financial products to suit different borrowers’ circumstances can only benefit both consumers and lenders.
Competition from Credit Unions & Banks
In a September article published by the Competition Enterprise Initiative in the USA, they suggested that allowing American banks and credit unions to enter the payday loan sector would do a great deal to improve competition in the marketplace.
Considering the different history and legislation regarding payday loans in the two countries, this would be of limited use to the realities of the sector in the UK. Not only are credit unions already an alternative to instant payday loans here but banks have different issues. Not only are they less willing to offer lines of credit to high-risk borrowers. They are also already making enough money from charges associated with high-interest credit such as unauthorised overdrafts and credit cards. Most of these financial institutions would be reluctant to overextend themselves by offering short-term loans as well.
When considering the question of competition in the payday loan industry, the price is only part of the picture. Considering the nature of short-term loans, lenders also have to think about competing concerning speed in processing the loan application and diversifying. This is so they can offer a wider range of products. Adapting to meet the needs of borrowers would ensure a thriving market. It would be beneficial for both lenders and consumers alike.