In a summary of its provisional findings published today, the group of independent CMA Panel Members investigating this market says that the absence of price competition could be adding £5 to £10 to the average cost of a payday loan, relative to a typical loan of £260 taken out for just over 3 weeks. Given that customers take out around 6 loans a year on average, a typical customer could save between £30 and £60 per year if the market were more competitive. Some customers may be getting a worse deal still, given that the gap between the cheapest and most expensive deals for a month-long £100 loan is more than £30.
The size of the payday lending sector, which has grown rapidly in recent years, suggests the market-wide impact of greater competition could be substantial: the CMA’s indicative estimates suggest that total savings for UK customers from greater competition could be more than £45 million a year, relative to total revenue earned by payday lenders of around £1.1 billion. The CMA will now look at potential ways to increase price competition, including the establishment of an independent price comparison website, clearer upfront disclosure of borrowing costs if a loan is not paid back in full and on time, as well as requiring greater transparency about the role played by lead generators.
These measures would work alongside changes already being made by the Financial Conduct Authority. Moves by the FCA to strengthen consumer protection will mean closer regulation of lenders over issues such as limiting rollovers, restrictions on the use of Continuous Payment Authorities to recover debt from a borrower’s bank account, carrying out proper affordability checks and sensitive treatment of debt problems – and will be followed by the introduction of a price cap at the start of 2015.
Simon Polito, Chairman of the Payday Lending Investigation Group and CMA Deputy Panel Chair, said:
"If you need to take out a payday loan because money is tight, you certainly shouldn’t have to pay more than is necessary. While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least. This can particularly apply to late payment fees, which can be difficult to predict and which many customers don’t anticipate.
"It’s not surprising that payday lending customers tend to focus more on availability and speed rather than the cost of loans but even for those who do shop around, it can be very difficult to compare prices, given the difference between products, the lack of transparency on additional fees and charges and the shortage of effective comparison tools. There is a substantial gap between the cheapest and most expensive loans, so borrowers could benefit if we can help them compare prices more effectively, which in turn would stimulate greater price competition and lower costs."
"We are also aware of the problems facing the minority of payday lending customers who get into difficulties repaying their loans. So alongside the competition issues we are looking at, the FCA’s work in protecting customers is particularly important. Our measures can work alongside the FCA’s to ensure a better deal for borrowers. By providing the most comprehensive picture of the sector to date, our investigation will also help consumer groups, debt advice charities, regulators and those seeking to improve financial education to address these wider issues.
"We now want to look at what measures will work most effectively in helping to tackle the issues we have identified. Given the problems with price competition, we believe that the creation of an independent price comparison website is a particularly important option – as those that exist at the moment suffer from a number of limitations and are only used by a small proportion of borrowers.
"We found that 40% of new online borrowers take out their first loan with a lender via a lead generator, but the way in which these companies earn their money – by selling customer applications to the highest bidder – is often not made clear on their websites and some customers are unaware that these companies are not actually providing the loan. We want customers to know who they are really dealing with, and the basis on which their applications are being matched with lenders, so that they can make informed choices.
"Short-term loans like these meet a very clear need for around 1.8 million customers a year. This level of demand isn’t going to go away so it’s important to ensure that this market works better for customers. Our focus is now on taking practical steps that will make a real difference to borrowers so we now want to hear from all those involved on how best we can achieve this."
