The South African-born entrepreneurs Errol Damelin and Jonty Hurwitz could not have predicted the impact they would have when they set out to disrupt the 120-year-old payday loans market in 2006.
The founders of Wonga set up the company to serve cash-strapped borrowers just as the UK was heading for economic meltdown in the 2008 financial crisis. Wonga charged some vulnerable customers interest rates upwards of 5,000%. But the now disgraced lender became a lightning rod for controversy before its collapse in 2018. Since then there has been a regulatory crackdown on the UK’s unscrupulous payday loans market.
Since then, the market Wonga once dominated has almost halved. More than 50 firms have collapsed or voluntarily closed. No new payday loan providers have gained the permission of regulators to operate since. This leaves fewer than 40 high-cost, short-term lenders in operation.
Also many UK Payday lenders have had to pay back millions to customers and continue to do so. This is due to the large influx of customer complaints for unaffordable lending. These complaints have led to huge sums of money being given back to customers, something many lenders can’t afford.
The few payday lenders left in the market have also seen sales declining year after year. For example, Lending Streams sales are less than half what they used to be, according to companies house filings. Past customers can still claim a refund from Lending Stream, who is one of the few payday lenders not to report financial problems due to complaints.
While consumer advocates have cheered their steady demise, questions have been raised over where the country’s most vulnerable households might turn to next to make ends meet. Amid the cost of living crisis, some industry figures say a more tightly regulated payday loan sector could have a role to play.
Regulators at the Financial Conduct Authority (FCA), the City watchdog, aired concerns earlier this year about the relatively small number of high-cost lenders left in the market for borrowers who fail lending criteria for mainstream banks.
At its May meeting, FCA board members said the reduction in high-cost lenders, “with rising inflation … was likely to cause a number of pinch points where consumers will need access to money quickly and options would be limited”.
With the decline of the payday loans market, hopes were raised that more socially responsible options such as credit unions and nonprofit community development finance institutions could plug the gap. However, there are concerns that they will struggle to scale up quickly enough to help everyone who needs financial support over the coming months.
Fears have been raised that more people could turn to illegal loan sharks to make ends meet. According to the Centre for Social Justice, the thinktank co-founded by the former Conservative leader Iain Duncan Smith, more than 1 million people are now using illegal lenders in England.
Others are turning to unregulated but legal forms of lending such as buy now, pay later (BNPL) schemes run by firms including Klarna, Clearpay and Laybuy. Although borrowers often are not charged interest on their purchases, shoppers are still at risk of overextending themselves with debt. The firms are not required to offer forbearance or compensation when things go wrong.
Research released by Barclays Bank and the debt charity Stepchange in June found that almost a third of BNPL borrowers said their loans had become unmanageable and had pushed them into problem debt. Shoppers who used BNPL were paying off an average of 4.8 purchases. This is almost double the 2.6 purchases in February, the research found.
With concerns about illegal and unregulated lending on the rise, some high-cost lenders claim they offer safer choices for borrowers. This is despite years of alleged mis-selling of loans to vulnerable borrowers. It would seem to be the case of which is the lesser evil.
Executives at the guarantor lender Amigo say they have learned their lesson after a deluge of affordability claims. This almost pushed Amigo towards collapse. They were also forced to pause lending at the start of the coronavirus pandemic. Amigo loans let friends and family vouch for and agree to cover any unpaid loans for cash-strapped borrowers
Jake Ranson, Amigo’s chief customer officer, says his team are “not apologists for Amigo’s previous practices or products”. This includes selling unaffordable loans to customers, who were typically charged about 49.9% interest.
He now hopes the FCA will give them the green light to restart lending from as early as September. This will be under a new brand, RewardRate. They will be offering new features such as lower interest rates if borrowers make payments on time.
The High Court has approved Amigo Loans’ scheme of arrangement. This is where they pay a portion of customer refunds instead of the whole amount. This is needed when the company can’t pay all the customer complaints but can pay back more with a scheme than if bankrupt. The Amigo Scheme will provide redress to customers who are due it for being mis-sold loans and who raise a complaint. The FCA objected to Amigo’s previous scheme because they believed that a fairer compromise could have been offered to customers. It turns out they were right. They were happy to let the new offering to customers go ahead.
More Support Needed
However, consumer campaigners are worried. Sara Williams, of the Debt Camel blog, is sceptical that the wider high-cost credit industry is safer or more suitable for vulnerable consumers, even after the regulatory crackdown. “Debt is rarely helpful in this situation,” she says.
Rather than a reboot of the payday lending market, more government support for struggling families is vital, she says. In the interim, consumers would be better off looking at debt management plans on any existing borrowing.
Last year, 4.4 million people across the UK borrowed money to make ends meet, according to figures from StepChange. About 71% said using credit had negatively affected their health, relationships or ability to work. Also, two-thirds said they were only able to keep up with payments by skipping housing or utility bills or cutting back to the point of hardship. This puts them at risk of further financial harm.
StepChange said the risks vulnerable borrowers faced were not because of a lack of high-cost lenders in the market. Instead, it pointed to the lack of other options available when consumers were hit by unaffordable bills or unexpected costs.
Nonprofit social enterprises lend only £25m a year, and serve as few as 35,000 customers on average. Despite their declining presence in recent years, payday lenders still managed to lend about £60.4m in the first quarter of 2022, according to the FCA. This is while home-collected creditors lent about £95m in the final three months of 2021.
“We are seeing a welcome increase in the number of people using credit unions and other nonprofit lenders. Credit union membership has now risen above 2.1 million. But it’s not enough,” McAteer says. “There is a real chance that nonprofits will be outgunned financially by commercial sub-prime lenders supported by private finance institutions.
“We need emergency measures to help households survive the crisis, and then medium-longer term measures to help people build financial resilience against future shocks, which will come. We have made almost no progress in building financial resilience since the 2008 crisis. Will we learn the lessons?”