Once a thriving and growing sector, the UK’s payday loans industry was once valued at around £2 billion per year. Fast forward to 2019 and the industry is worth barely £200 million and every week we hear about more payday lenders going into administration.
The biggest shock came in October 2018 when payday giant Wonga fell into administration. Years before, it had been hailed as a thriving tech company and was on track for a £1 billion floatation, but regulatory action and compensation claims have since seen the start-up fall into the abyss.
Wonga’s exit was swiftly followed by rivals The Money Shop, WageDayAdvance, QuickQuid, 24 7 Money Box and Piggy Bank. As more and more payday lenders are expected to leave the industry, just why are so many going into administration?
Strict FCA regulation
The FCA took over from the Office of Fair Trading as the City Watchdog in 2014 and implemented a number of new measures in January 2015. Payday lending was top of the regulator’s list and strict reforms were put into place including a daily price cap of 0.8% per day, strict affordability measures and caps for default rates at £15.
A strict authorisation process was put into place for any new payday lenders looking to enter the market. The rigorous process would often take up to 18 months to become fully authorised and came at quick a large expense too, creating a strong barrier to entry. Many lenders and brokers exited the industry in the first two years, simply because they could not meet the expectations of the regulator.
Since 2015, the FCA have continued to crack down on payday lending and have been carrying out individual investigations of each lender and reviewing their affordability checks. Further restrictions and fines have been granted to those lenders for not meeting affordability criteria ? and it means that the criteria for future loans becomes even harder to justify.
For many lenders, they simply cannot afford to run. If they have not been fined already, they cannot make the business model profitable given the stricter price cap and eligibility requirements.
Compensation claims
One of the biggest factors that has led to payday lenders going into administration is the role of compensation claims. The Financial Ombudsman opened the floor for anyone who has previously had a payday loan and struggled to repay and has given them the opportunity to claim compensation for the full loan amount.
Wonga alone had to refund over £400 million, although sources suggest that this could have increased to £1.6 billion. Quickquid were not far behind with over £50 million worth of claims.
For those claims not dealt with by the lender, individuals could apply for a reclaim through the Financial Ombudsman Service and the lender would have to pay an administration fee of £500, regardless of whether it went through or not. This could only add to their woes and lead to an inevitable demise.
The future of payday lending?
The future of payday lending looks bleak, with more lenders likely to also fall into administration over the coming weeks and months.
Those likely to survive will include the very small lenders, with very small loan books who will stay under the radar due to funding low volumes of loans.
Any payday lenders offering alternatives and stricter affordability checks (hence they will lend to less people) are still likely to face the test of time.
However, there will continue to be millions of people who need payday loans (around 4 million to be precise) and with the largest lenders out of action, they will need to seek other types of loans.
We can expect more borrowing amongst family and friends, the rise of different types of loans such as credit card overdrafts, guarantor and secured lending and unfortunately, we may see the rise of a black economy or loan sharking.
