ACCA (the Association of Chartered Certified Accountants) has launched a unique report on payday lending looking specifically at its business model.
Called Payday lending: fixing a broken market, the authors Sarah Beddows, an independent consultant, and Mick McAteer from the Financial Inclusion Centre demonstrate, through economic modelling and analysis of publicly available data, that the business model of payday lenders relies on repeat lending for profitability.
The report says that consumer detriment, in the forms of default, repeat borrowing and the taking of multiple loans from different lenders, appears to play a highly profitable role in existing business models.
The report was launched at a high-level roundtable session which brought together regulators, think tanks, charities and the Church of England – key stakeholders with a policy concern about the payday lending model.
The issue of payday lending has remained high on the political agenda with numerous reports being published, but this is the first to offer an analysis of the business model which is integral in assessing appropriate regulation.
Payday lending: fixing a broken market backs the Financial Conduct Authority’s (FCA) decision to have a cap on the total cost of credit and existing regulation on rollovers, but further suggestions were deliberated at the roundtable including: workplace loans, credit unions and a discussion around whether charities could team up with banks to benefit from their infrastructure and economies of scale.
Mick McAteer noted at the roundtable that: 'Whilst there are small schemes across the country which have been successful, we need to develop an infrastructure that allows alternatives to enter the market and compete.'
Ewan Willars, director of policy at ACCA, commented: 'When considering in 2012 borrowers spent over £900m on payday loans, with £450m spent on loans which were subsequently ‘rolled over’, you begin to understand the magnitude of the market.
'Consequently ACCA has also commissioned a video to coincide with the announcement of the report. While ACCA does not necessarily think short-term lending is innately harmful, the current payday lending format exhibits clear signs of market failure. As part of our Royal Charter, ACCA is committed to acting in the interest of the public to highlight where improvements can be made and enter into meaningful discussions with all parties to make improvements.
'We need to find a more responsible way to meet the needs of short-term borrowers. This will take better regulation and innovation amongst providers of credit.'
ACCA will be hosting a further debate in partnership with the Church of England in the House of Lords in June 2014, and will also be submitting recommendations to the Financial Conduct Authority in the July consultation.