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 (FCA), the regulator for consumer credit (see Notes to Editors). 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.
The CMA, which took over from the Competition Commission (CC) at the start of April (see Notes to Editors) has analysed data relating to 15 million payday loans taken out between 2012 and 2013, carried out a survey of 1,500 customers and also looked at Credit Reference Agency records for over 3,000 payday loan customers.
The CMA estimates that in 2012 there were around 1.8 million payday loan customers in the UK, taking out approximately 10.2 million loans, worth £2.8 billion. These figures represented a 35 to 50% increase on the preceding financial year – depending on the way in which the size of the market is measured – though more recent data indicates that this rate of growth has reduced substantially in 2013.
There were at least 90 payday lenders offering loans to UK customers as of October 2013 but the three largest lenders (CashEuroNet, Dollar and Wonga) account for around 70% of total revenue generated from payday lending in the UK.
Two-thirds of customers pay their loans in full on or before the originally agreed date. Once they have taken out a loan, 80% of customers take out further loans in the same year, either with the same lender or others in the market. Around 4 in 10 customers borrowed from at least two different lenders during the year.
Most payday loan customers borrow online – 83% of payday lending customers have taken out a loan online compared with 29% of customers who have taken out a payday loan on the high street. The median income of online payday customers is close to that of the wider UK population but is notably lower in the case of high-street borrowers.
Within the past 5 years, 38% of payday loan customers had experienced a bad credit rating, 35% had made arrangements with creditors to pay off arrears; 11% had experienced a county court judgment and 10% had been visited by a bailiff or debt collector. In total, 52% of customers had experienced one or more of these debt problems in the last 5 years.
Customers typically focus more on the speed and the availability of a loan rather than its cost. Over half of customers do not shop around prior to taking out a loan, and those who do often struggle to carry out effective comparisons. As a result, lenders have little incentive to compete on price. This tendency is particularly marked with late payment fees and charges – nearly 1 in 5 customers find paying the loan back more difficult than expected – and information about these charges is generally harder to find than the headline rates.
For those customers who do shop around, it is difficult to compare prices given the differences between product characteristics and the limited usefulness of the APR in helping make comparisons between these short-term loans. Only a small proportion of customers find their lender via existing comparison websites, which suffer from a number of limitations.
Customers do not see other credit products as a close substitute for payday loans – only 6% surveyed said they would have used another type of credit had they been unable to obtain a payday loan.
In a notice of possible remedies, the CMA has proposed a number of measures to increase price competition in the market:
The creation of a comprehensive and independent price comparison website to allow customers to make comparisons on the cost of a loan specific to their own requirements.
A requirement on lenders to provide clear upfront disclosure to customers of the costs and charges payable if they fail to repay their loan on time.
Changes to help customers assess their own creditworthiness and likelihood of being accepted by a lender. These could include allowing customers to search for credit without it affecting their credit rating and requiring lenders to provide real-time updates to credit reference agencies, so that lenders have better visibility of actual loans taken out by customers.
Periodic statements showing customers the long-term cost of their borrowing.
Requirement for lead generators (and other credit brokers active in the sector) to explicitly state the nature of their business and the commercial relationship they have with lenders.
The provisional findings summary, notice of possible remedies and all other information relating to the investigation can be found on the investigation home page. The full provisional findings report will be published shortly. The CMA is now inviting comments in writing on both the provisional findings report and the notice of possible remedies by Friday 4 July 2014 either by emailing firstname.lastname@example.org or writing to:
Payday Lending Investigation
Competition and Markets Authority
London WC1B 4AD
Notes for editors
- The CMA is the UK’s primary competition and consumer authority. It is an independent non-ministerial government department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law. From 1 April 2014 it took over the functions of the CC and the competition and certain consumer functions of the Office of Fair Trading (OFT), as amended by the Enterprise and Regulatory Reform Act 2013.
- The members of the Payday Lending investigation group are: Simon Polito (Chairman of the group), Katherine Holmes, Ray King and Tim Tutton. More details on how market investigations are conducted are available. The OFT referred the payday lending market to the CC on 27 June 2013.
- The FCA assumed responsibility for consumer credit regulation from 1 April 2014. In October 2013, it published its detailed proposals for regulating consumer credit, including payday lending, which formed the basis of its new conduct of business for consumer credit rules now in force. Also, following an announcement in November 2013, Parliament passed legislation which places a duty on the FCA to impose a price cap on the cost of payday loans by 2 January 2015.
- The CMA is consulting on a possible modification to the investigation’s terms of references to include lead generators. A decision about this will be made by the CMA board later in the summer.
- Enquiries should be directed to Rory Taylor or Siobhan Allen or by ringing 020 3738 8798 or 020 3738 6460.