Just a few years ago, payday lending – offering loans at sky-high interest rates to keep the borrower going until the next payday – was a tiny business. Today, it is worth more than £800m a year. Millions of our fellow citizens are so near the financial edge that they will accept absurd interest rates, paying, for instance, £37 of interest over 30 days to lay their hands on a quick £100. And that is before the default fees. This is old-fashioned usury on a grand scale, a mark of the desperation of too many in Britain and of the readiness to indulge pitiless capitalism.
So it was good news last week that the country’s biggest payday lender, Wonga, after negotiations with the newly created Financial Conduct Authority (FCA), agreed to write off £220m of debts from 330,000 of its borrowers who have been in arrears for more than 30 days. It was never going to get the money back and its new chairman, Andy Haste, accepted that the loans should never have been made to customers whose capacity to repay should have been better checked. Another 45,000 borrowers who have missed repayments will not be asked to pay interest.
In fact, Haste’s retreat was well judged, as was his acknowledgment that the company needed to change. Wonga had already decided it would have to write off £185m of debt before the FCA stepped in, so the additional £35m was a small price to pay to defuse some of the criticism.
Payday lending is an edgy business. The lender knows that many of its borrowers will never repay the loans. Usurious interest rates create the profit cushion that allows payday lenders to accept bad debts that normal lenders would find unacceptable. In 2012, a much smaller Wonga wrote off £126m and still made a handsome £84.5m profit (before tax). Even after these latest write-offs, it is still a very viable business.
Nonetheless, change is afoot. From next January, a payday lender will be limited to charging a maximum of £24 for every £100 of debt it lends over 30 days, along with a cap on default penalties, lowering Wonga’s margins by a third. It will also have to lend more discriminately, checking more thoroughly that borrowers have the capacity to repay the loan; and it won’t be able to keep on rolling over debt with all the attendant charges. The aim is that nobody should find themselves paying more in interest and charges than the original sum they borrowed, for which we are all expected to offer a collective sigh of relief. But these wolves remain wolves and the social realities that have brought them into being remain as acute as ever.
For, over its seven-year life, Wonga has managed to demonstrate almost every dysfunction in British society. There would never have been such a large market for what is euphemistically called “expensive short-term credit” if wages for most Britons had continued to grow in real terms. Wonga grew as real wages stagnated .
The experience of the under-30s, one of the most important markets for payday lenders, is even worse. Since 2008, real wages of 18-25-year-olds have dived 14% and for 25-29-year-olds by 12%. In desperation, hundreds of thousands of young people have turned to payday lenders to sustain their living standards. The tragic stories of individuals overwhelmed by debt are often those of twentysomethings whose plummeting income has forced them into the arms of a payday lender.
There has been no systematic response. The fall in real wages is blamed on EU immigrants, when the real culprit is more old-fashioned: workers in general, and young workers in particular, have not been organised enough to offer countervailing labour market power. It is not technology, globalisation or immigration that have triggered such a generalised collapse in real wages – it is the weakness of trade unions.
Nor is it the only weak British institution. Mainstream banks, stung by the credit crunch, have been pulling back their lending, supporting only good credit risks. Substantial social lenders, such as co-operative banks or mutual building societies, built up with great effort since the 19th century to support the credit demands of ordinary people on ordinary incomes, have withered on the vine. They have either lost their way, as the Co-op did, or been demutualised as directors have cashed out to enrich themselves. The last line of defence are 500 or so credit unions with around a million members.
Like payday lenders, they offer unsecured, short-term loans, but it is a different universe. The FCA proposes from next January to cap the interest rate payday lenders can charge at 0.8% a day: credit unions are only allowed to charge 3% interest a month! The problem is that to be eligible for a loan you have to join the credit union by showing a common bond with the other members – living in the neighbourhood, sharing the same profession or faith. And then you have to save for a period before being eligible for a loan: not much use to a hard-pressed twentysomething who needs money urgently.
Into the breach stepped the payday lenders. Wonga founder Errol Damelin, who stood aside from running the company in the summer, was careful to tick all the trendy pro-business phrases as he launched his company. It was a “disruptive” business challenging sleepy incumbents with clever algorithms that would process credit risk faster. In fact, his technology merely got money faster into applicants’ bank accounts, charging extravagant interest rates. His own shares were housed in the British Virgin Islands, and Wonga’s growth pleased his private equity and venture capital backers. It was an amoral world in which anything went, including famously hounding borrowers in arrears with threatening letters from imaginary solicitors.
Wonga has now had its wings clipped, proof that oppositional forces do still exist. Labour MP Stella Creasy’s campaigning on the ills of payday lending showed there was still some life in the Labour party, while Justin Welby did likewise on behalf of the Church of England. The FCA, too, has shown it has some teeth. But they constitute a very thin red line. For the underlying forces that create the demand for payday loans are as acute as ever and the owners of Wonga continue to want their pound of flesh.
If Britain wants to get to the root of this problem, it will have to act more profoundly. We need stronger unions, substantive social lenders, a more generous social settlement and business to accept it must have ethics – not all welcome in the current climate. But that does not mean we don’t need them. Wonga is a symptom, not a cause.