ICT Views

Where DO all the people go?

by: (Associate Director, Research and Development) on

Picture me holding a balloon. I squeeze one end. What happens? Does the air escape? Nope – it moves. It’s got to go somewhere after all…

Why am I squeezing a balloon? Well, it’s an old analogy, but a good one.

Let’s apply the balloon theory to financial services - particularly in the case of Wonga – as it seems there is a suggestion that their type of business may go ‘pop’ (pun intended, sorry).

Payday Lending

LostOver the last 5 years, there’s been a massive growth in ‘Payday Lending’ firms in the UK. (I’m not sure if this is solely a UK phenomenon, but would be interested if anyone wants to let me know).

In a nutshell, the gist of it seems to be that I can borrow anywhere from £100-£2000 for ‘life’s little emergencies’ and repay over a period of my choosing. The downside? What could reasonably be described as extravagant interest rates, spiralling up into the 1000s of percent. They’ve come down a bit of late, but around 1200% APR still seems a pretty consistent pricing set up.

For a while payday lenders were outside the ‘mainstream’ regulatory environment in the UK. But that changed a year ago when the Financial Conduct Authority (FCA) took over regulation.

What’s Gone Wronga?

In a story published this week, it was revealed that Wonga reported a £37.3m loss for 2014. And it’s not alone. The Consumer Financial Association (CFA) suggests there has been a 58% fall in the number of stores offering short-term loans since 2013, and the volume of payday loan approvals has shrunk by 75% from its 2013 peak.

The interesting bit of the story for me though isn’t so much the drop on the level of provision, but where do all the people go who still want/need to borrow money?

Unless the actual customer demand for loans decreases, the borrowers will need to turn to a new source. With the potential for loan sharks to fill that gap.

Sounds Familiar

Now let’s expand this out and chuck in the word ‘de-risking’. It seems to me there is a clear comparison between the Wonga case and the broader examples of recent changes in financial service firms’ business models due to money laundering concerns. The key players are all here: we have a provider, we have a customer and we have a regulator.

The regulator impacts the provider which affects the customers. The intentions are good (financial integrity), but is the overall outcome (in view of financial inclusion)? Does the end justify the means?

If I can no longer transfer money to my family in Somalia via mainstream banking, where do I turn? They’ll still need the money. So who can arrange it for me…?

I suspect a similar thing might happen with payday lenders. And, as outlined above, this allows the less scrupulous (and certainly less well overseen) into the market – once again highlighting the inherent inter-relationship between financial integrity and financial inclusion.

So back to my original question. Where DO all the people go when they can’t access the facilities they need?

I guess that remains to be seen – the balloon is being squeezed, we’re just not sure where it’s going to expand as yet.

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