The payday loans industry is worth an estimated £220 million in the UK, down from around £2 billion quoted in 2013.
The industry valuation is based on 760,000 loans funded in 2017 according to the BBC and an average loan value of £300, equalling to £228 million.
This same calculation of valuing an industry based on the money lent out is used for other industries including guarantor loans (£400 million), equity release (£3 billion), peer to peer loans (£4 billion), bridging loans (£7 billion) and lending to family and friends (£21 billion) per year.
The industry has downsized significantly over the last 5 years, by as much as ten-fold which has been attributed to increased regulation by the Financial Conduction Authority including a price cap on the interest charged by lenders, tougher competition and de-powering of brokers.
We explain below how the payday loans industry has changed in value over the last 5 years and break down the different components that have led to this fall.
How many payday lenders are there in the UK?
There are currently around 40-50 payday lenders in the UK, which is around 20% of the 200 lenders that traded in the UK in 2013 and 2014.
This was complimented by hundreds of payday loan brokers and price comparison websites, known as PCWs. Up to January 2015, the payday loans sector was unregulated which allowed huge scope for brokers and one man bands to set up online payday loan websites, comparing payday lenders, short term loans and payday loans for bad credit. This was facilitated by the simplicity in signing up lenders as publishers, meaning that sites could be created and listing payday lenders with affiliate links within just hours.
Today, following new regulation and tougher rules for introducers, there are only a few dozen brokers currently operating and only a handful of payday loan comparison websites including All The Lenders, Lenders Compared and Choose Wisely.
How many payday lenders are there in the US?
The US market is certainly larger with more than 500 online lenders and more than 23,000 payday stores – said to be twice the number of McDonald’s restaurants. There are 12 million people in the US that use payday loans each year, compared to 3 million in the UK.
What has changed the value of the payday loan industry?
Price cap: When the Financial Conduct Authority took over as the City regulator from the Office of Fair Trading, they introduced new and much stricter rules for payday loans.
Starting on 1st January 2015, a price cap on the interest of payday loans was introduced, limiting the charges to 0.8% per day (most lenders used to charge around 1% per day), equal to £24 per £100 borrowed and that no customer would repay double the amount they had borrowed.
Default charges for customers that missed repayments would be limited to a one-off fee with a maximum of £15 – whereas previously payday lenders would charge multiple default charges and sometimes up to £30 or £45 per missed payment.
The result of this price cap has led to much tighter margins for loan providers who are lending out money. Equally it means they have to be more selective with who they lend to, which can increase underwriting costs and generally lead to less loans being funded. The default charges also restrict lending as those applicants on the verge of approval would typically be worth funding if their default charges could cover any missed payment – but a much smaller default fee limits this significantly.
Authorisation required: The FCA requires all lenders and brokers to be FCA authorised and approved in order to be providing or introduction consumer finance products. However, becoming FCA authorised is a rigorous procedure and application that aims to demonstrate companies as being ‘fit and proper’ to carry out regulated activity. The FCA application also comes with quite a cost at several thousand pounds to make an application and an annual fee of up to £25,000 – not to mention around 12 t0 18 months to be approved. Existing lenders were provided interim permission during their FCA applications so they could continue trading, although this was not provided to everyone.
The result of a more formal authorisation required has set up a barrier to entry in the payday loans industry – with several companies deemed unfit to practice and others finding it too costly to set up. The result? Far less stakeholders in the industry and far fewer loans being lent out.
Rollovers and multiple loans banned: The new regulation introduction forbids existing payday loan customers from entering into rollovers, extensions or having multiple payday loans on the go. This is designed to help customers from repaying huge sums on their loans, even if they are in arrears and avoid borrowing further amounts so they do not fall into a spiral of debt.
Less Wonga: The payday giant Wonga made up the majority of the payday loans industry and was a force to be reckoned with, always on TV, radio, print and everywhere you looked. But following a recall of their processes and a fine of £200 million administered by the FCA, the previously dominant company has lent significantly less since the FCA took over and recently showed losses of £65 million in its annual statement.
How a changed payday loans industry has increased consumer confidence
Whilst the payday loans industry is worth significantly less and has caused many companies to exit, it is very good news for the consumer. The days of heavily criticising payday loans is quickly becoming a thing of the past and this is evidenced by the fewer appearances it makes in the press.
An increase in consumer confidence in the industry is manifest, with customers now more likely to provide their details to a legitimate payday loan company and using a broker who will not share their details with multiple companies and lead to a mountain of unsolicited calls, emails and text messages.
There is always a fear that the demise of payday lending will lead to an increase in loan sharking. However, there are suitable alternatives available in the last 5 years that were not previously accessible. This includes the use of peer to peer loans, guarantor loans and other fintech financial products. Plus, individuals are able to sell goods more easily online through the likes of eBay and Shpock.
So slowly but surely, we are moving towards a better regulated and safer payday loans industry, something that has been a real success of the FCA and something that confirms their delight with the industry is that it is not set for another review until 2020.