SACC – Digital Finance Analytics (DFA) Blog

DFA Highlights Payday Lending Is Driving Australians Into Debt

DFA provided data from our household surveys to inform an important report “The Debt Trap” released by more than 20 agencies helping consumers with their financial pressure. Our research, based on our rolling 52,000 households reveals that more households are using short term loans to try and manage their budgets, but many get trapped into debt. This is important given the rise in mortgage stress across the country.

The report also contains case studies which bring home the risks involved.

Worse, the recommendations from an earlier Government review are apparently in a holding pattern, and as a result more are being sucked in due to Government inaction.

Finally, the rise of apps and online lenders is making is easier for desperate households to get caught up with high cost short term debt.

Here is the official release.

Over 20 consumer advocacy bodies from around the country have released new data revealing that predatory payday lenders are profiting from vulnerable Australians and trapping them in debt, as they call for urgent law reforms.

The Debt Trap: How payday lending is costing Australians projected that the gross amount of payday loans undertaken in Australia will reach a staggering 1.7 billion by the end of 2019. It also found that:

Over 4.7 million individual payday loans were taken on by around 1.77 million households between April 2016 and July 2019, worth approximately $3.09 billion.
Victoria is the state leading the country with the highest number of new payday loans
Digital platforms are adding fuel to the fire, with payday loans that originate online expected to hit 85.8% by the end of 2019.
The number of women using payday loans has risen from 177,000 in 2016 to 287,000 in 2019, representing a rise to 23.13% of all borrowers. Close of half are single mothers.

The report was released today by over 20 members of the Stop the Debt Trap Alliance – a national coalition of consumer advocacy organisations who see the harm caused by payday loans every day through their advice and casework.

Read the full report here [PDF]

“The harm caused by payday loans is very real, and this newest data shows that more Australian households risk falling into a debt spiral,” says Consumer Action CEO and Alliance spokesperson, Gerard Brody.

“Meanwhile, predatory payday lenders are profiting from vulnerable Australians to the tune of an estimated $550 million in net profit over the past three years alone.”

Brody says that the Federal Government has been sitting on legislative proposals that would make credit safer for over three years, and that the community could not wait any longer.

“Prime Minister Scott Morrison and Treasurer Josh Frydenberg are acting all tough when it comes to big banks and financial institutions, following the Financial Services Royal Commission. Why are they letting payday lenders escape legislative reform, when there is broad consensus across the community that stronger consumer protections are needed?”

The Alliance is calling on the Federal Government to put people before profits and pass the recommendations of the Small Amount Credit Contract (SACC) review into law. This legislation will be critical to making payday loans and consumer leases fair for all Australians. There are only 10 sitting days left to get it done.

“The consultation period for this legislation has concluded. Now it’s time for the Federal Government to do their part to protect Australians from financial harm and introduce these changes to Parliament as a matter of urgency.”

The Fall Of Pay Day? [Podcast]

We look at the latest from the UK short term lending market as another big lender withdraws.

But why inaction here?

https://www.fca.org.uk/data/consumer-credit-high-cost-short-term-credit-lending-data-jan-2019
https://www.bbc.com/news/business-49878277
https://www.bbc.com/news/business-50174367
https://www.theguardian.com/money/2019/oct/25/quickquid-owner-collapses-into-administration

Digital Finance Analytics (DFA) Blog

The Fall Of Pay Day? [Podcast]

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The Fall Of Pay Day?

There have been some interesting developments in the short-term lending market in the UK recently. The Financial Conduct Authority in the UK recently published data on the so called high-cost short-term credit (HCSTC) market. HCSTC loans are unsecured loans with an annual percentage interest rate (APR) of 100% or more and where the credit is due to be repaid, or substantially repaid, within 12 months. In January 2015, The FCA introduced rules capping charges for HCSTC loans.

Just over 5.4 million loans originated in the year to 30 June 2018, and that lending volumes have been on an upward trend over the last 2 years. Despite some recovery, current lending volumes remain well down on the previous peak for this market. Lending volumes in 2013, before FCA regulation, were estimated at around 10 million per year.

These data reflect the aggregate number of loans made in a period but not the number of borrowers, as a borrower may take out more than one loan. They estimate that for the year to 30 June 2018 there were around 1.7 million borrowers (taking out 5.4 million loans).

The market is concentrated with 10 firms accounting for around 85% of new loans. Many of the remaining firms carry out a small amount of business – two thirds of the firms reported making fewer than 1,000 loans each in Q2 2018.

For the year to 30 June 2018, the total value of loans originated was just under £1.3 billion and the total amount payable was £2.1 billion. Figure 2 shows that the Q2 2018 loan value and amount payable mirrored the jump in the volume of loans with loan value up by 12% and amount payable 13% on Q1 2018.

The average loan value in the year to 30 June 2018 was £250. The average amount payable was £413 which is 1.65 times the average amount borrowed. This ratio has been fairly stable over the past 2 years. A price cap introduced in 2015 stipulates that the amount repaid by the borrower (including all charges) should not exceed twice the amount borrowed.

Over the past 2 years the average Annual Percentage Rate (APR) charged for HCSTC has been consistent, hovering around 1,250% (mean value). The median APR value is slightly higher at around 1,300%. Within this there will be variations of APR depending on the features of the loan. For example, the loans repayable by installments over a longer period may typically have lower APRs than single installment payday loans.

In the UK, the North West has the largest number of loans originated per 1,000 adult population (125 loans), followed by the North East (118 loans). In contrast, Northern Ireland has the lowest (74 loans).

Borrowers between 25 to 34 years old holding HCSTC loans (33.4%) were particularly over-represented compared to the UK adults within that age range (17.5%). Similarly, borrowers over 55 years old were significantly less likely to have HCSTC loans (12.2%) compared to the UK population within that age group (34.8%). The survey also found that 60% of payday loan borrowers and 45% for short-term installment loans were female, compared with 51% of the UK population being female.

61% of consumers with a payday loan and 41% of borrowers with a short-term installment loan have low confidence in managing their money, compared with 24% of all UK adults. In addition, 56% of consumers with a payday loan and 48% of borrowers with a short-term installment loan rated themselves as having low levels of knowledge about financial matters. These compare with 46% of all UK adults reporting similar levels of knowledge about financial matters.

But now the top PayDay lenders are out of business. In August 2018, Wonga, once the biggest payday lender in the UK collapsed and now administrators for the lender have revealed that 389,621 eligible claims have been made since Wonga’s demise. Despite being vilified for its high-cost, short-term loans, seen as targeting the vulnerable, it became a household name and was enormously successful until stricter regulation curtailed its, and other payday loan companies’, lending.

It collapsed in the UK following a surge in compensation claims from claims management companies acting on behalf of people who felt they should never have been given these loans. So far, the compensation bill is £460m, with the average claim £1,181.

Another lender, The Money shop closed earlier this year.

Now QuickQuid, UK’s largest payday lending firm is to close with thousands of complaints about its lending still unresolved. QuickQuid’s owner, US-based Enova, says it will leave the UK market “due to regulatory uncertainty”.

QuickQuid is one of the brand names of CashEuroNet UK, which also runs On Stride – a provider of longer-term, larger loans and previously known as Pounds to Pocket. The UK’s Financial Ombudsman Service said that it had received 3,165 cases against CashEuroNet in the first half of the year. It was the second most-complained about company in the banking and credit sector during that six months.

Back in 2015, CashEuroNet UK LLC, trading as QuickQuid and Pounds to Pocket, agreed to redress almost 4,000 customers to the tune of £1.7m after the regulator raised concerns about the firm’s lending criteria.

More than 2,500 customers had their existing loan balance written off and more almost 460 also received a cash refund. (The regulator had said at the time that the firm had also made changes to its lending criteria.)

“Over the past several months, we worked with our UK regulator to agree upon a sustainable solution to the elevated complaints to the UK Financial Ombudsman, which would enable us to continue providing access to credit,” said Enova boss David Fisher.

“While we are disappointed that we could not ultimately find a path forward, the decision to exit the UK market is the right one for Enova and our shareholders.”

So this could be the twilight of the PayDay industry in the UK, as better education, and other lending options, plus tighter regulation bite.

Meantime in Australia its worth reflecting that proposed changes to SACC loans here (Small Amount Credit Contracts) have not progressed despite an earlier investigation, and we will be talking about the impact of this inaction in a later post.

Given the pressures on households here, we are concerned that more will reach for short term loans to tide them over, despite the high costs and risks from repeat borrowing, all made easier still via the proliferation of online portals. The debt burden on households is high and rising.

Alternative Lenders Are Driving The Personal Credit Market

Household debt in Australia continues to rise. But the strongest growth at 15%, is found in the sub prime Alternative Lending Personal Credit sector.

So it is worth considering the personal credit market holistically.

Drawing data from our cure market models we estimate total personal credit to the ~9.2 million Australian households currently amounts to $164 billion. This is separate from the $1.7 trillion secured debt for owner occupied and investment housing.

Within that banks and mutuals (ADI’s) hold $42 billion in credit cards, and $66 billion in personal loans of all types. But this leaves Alternative Lenders, (non-banks) with around $56 billion, or 34% of all personal credit. The chart below shows the relative shares since 2006. The Alternative Lending sector is growing faster than credit from ADI’s.

Relatively, overall personal credit has grown at around 2.6% in the past 3 years. Within that, credit card debt has been static, ADI personal credit rose 2% but Alternative Lending credit rose 5%.

In fact ADI’s have stepped up their personal lending as mortgage lending has eased, with an 8% rise in the past 12 months. We expect this momentum to continue, with a strong focus on vehicle credit, another risk area!

Alternative Lenders include many large well established companies, as well as a rising tide of new online lenders, including P2P loan providers. In fact online has become the predominate origination channel. As they are not banks, ASIC is the primary regulatory body.

But looking in more detail, the sub prime segment of Alternative Lending has growing significantly faster at around 15% per annum over the past three years, compared with 5% for all Alternative Lending. We define sub prime as households with VedaScore/Equifax Score below 622, or a poor credit history, or adverse personal circumstances.

There are a range of products taken by households in the sub prime segment, including unsecured personal loans, Medium Amount Credit Contracts (MACC), Small Amount Credit Contracts (SACC), secured and unsecured car loans or loans on other capital goods, and loans secured by assets, such as cars post purchase.

Our surveys show that a considerable number of highly in debt households with mortgages also hold loans with Alternative Lenders. Such loans might be difficult spot during an assessment of a mortgage loan application, thanks to the negative credit records which are only now morphing into comprehensive credit.

This is a concerning trend and is further evidence of the debt laden state of many households. It also helps to explain the gap between stated finances on a mortgage loan application and the real state of household finances.

Note SME’s are excluded from this analysis.

Pay Day Lending Still Running Hot

We monitor Pay Day lending – or Small Amount Credit Contracts (SACC) – as they should be called, via our surveys. We have just run our 2017 updates, and we find that SACC lending is still growing, and well above inflation and wage growth. A symptom of financial stress in the community .

Watch the video, or read the post.

But SACC lenders are targeting different borrowers now, and mainly via online channels.

This first chart shows the relative lending flows split by distressed households and stressed households. Stressed households, we define as those with cash flow problems (often thanks to poor budgeting or over commitment) but many will have other financial assets, and even may own property. Most will be in employment. Lenders are targeting this group (especially using TV, radio and online channels) and there has been substantial growth.

Distressed households are those under financial pressure, often with limited employment, and are very likely to be on Government assistance. Recent tightening of the lending rules has reduced the share of lending to these distressed groups – which is a good thing.

The overall net effect is the total lending from Pay Day providers, including the many online players – has risen to around $842m flow and $994m stock. Growth in 2015 -2016 was 10.7% and 2016-17 was 14.5%. We expect growth at least 10% in 2018, perhaps higher.

The share of loans originated online continues to rise, from 48% in 2015, to more than 75% now, and it will continue to rise further. These online services are easy to access, and borrowers, once they sign up can get “special” deals.

The online environment is of course hard to police, but the interest rates offered by many players are right at the top end of the allowable range.

The latest changes to the SACC legislation are still in the works. But we think there should be a further review looking at the online lending environment. This is clearly where the action (and risks) are. By plugging the lending to our most vulnerable households, the industry has regrouped around more affluent but needy connected households. There are more to target, and the prospect of substantial growth.

For an outline and critique of the proposed payday lending* reforms, see the following articles by Gill North (Professor of Law at Deakin University and Joint Principal of Digital Finance Analytics)

‘Small Amount Credit Contract Reforms in Australia: Household Survey Evidence & Analysis’ (2016) 27 Journal of Banking and Finance Law and Practice 203
‘Small Amount Credit Contract Reforms: Will the Affordability Cap Achieve Its Intended Objectives Without Unintended Adverse Consequences?’ (2017) 32 Australian Journal of Corporate Law 1
‘Small Amount Credit Contract Reforms: Have Transparency and Competition Concerns Been Forgotten?’ (2017) 25 Competition & Consumer Law Journal 101

Draft versions of these papers are available at https://ssrn.com/author=905894

Defined as “small amount credit contracts” in the National Consumer Credit Protection Act 2009 (Cth)

Watch Your Nuts – Anti Pay Day Loan Campaign Launched

The Consumer Action Centre and Financial Rights Legal Centre have launched a social media campaign to warn prospective Pay Day borrowers of the risks involved. Entitled Watch Your Nuts, it involves a memorable squirrel!

Fitting, as lenders themselves have been pushing into digital, and are using social media and apps to extend their reach to cash stretched households.

The digital war just stepped up a notch!

ABC’s The Checkout Does Pay Day

ABC Checkout looks at Pay Day Loans, using data from our consumer research and the Stressed Financial Landscape Report.

DFA has completed detailed analysis of households and their use of small amount credit contracts, a.k.a. payday lending.

New Small Amount Credit Contract and Consumer Lease Reforms

The Treasury has released exposure drafts for further reform for the Pay Day (SACC) and consumer lease sector (FINALLY)!

The exposure draft of the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2017 (the Bill) introduces a range of amendments to the Credit Act to enhance the consumer protection framework for SACCs and consumer leases. The amendments contained in the Bill are to be complemented by amendments to the Credit Regulations, which will be consulted on separately at a later date.

The new SACC and consumer leasing provisions will promote financial inclusion and reduce the risk that consumers may be unable to meet their basic needs or may default on other necessary commitments. The Bill implements the Government’s response to the Review of the Small Amount Credit Contract Laws (the Review) that was conducted by an independent panel chaired by Ms Danielle Press. The Review was publicly released in March 2016. The Government’s response to the Review was released by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, on 28 November 2016.

The Draft Bill implements the Government’s response to the Review. This includes:

imposing a cap on the total payments that can be made under a consumer lease;

requiring small amount credit contracts (SACCs) to have equal repayments and equal payment intervals;

removing the ability for SACC providers to charge monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;

preventing lessors and credit assistance providers from undertaking door-to-door selling of leases at residential homes;

introducing broad anti-avoidance protections to prevent SACC loan and consumer lease providers from circumventing the rules and protections contained in the Credit Act and the Code; and

strengthening penalties to increase incentives for SACC providers and lessors to comply with the law.

Deadline for submissions is 3rd November 2017.

ASIC Stops More Pay Day Lenders

ASIC annouced today enforcable undertaking with Payday lenders Web Moneyline and Good to Go Loans, to cease using a loan product, called OACC2, following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

Both lenders are required to

write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
not enter into the OACC2 loan product with any new consumers.

Here are the ASIC releases:

Payday lender Web Moneyline has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Web Moneyline may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking , Web Moneyline is required to:

write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;

notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and

not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘Financially vulnerable consumers can be at particular risk from this sort of activity, and in many cases will have little real understanding of the greater risks of default they are being exposed to. ASIC will take action to protect those consumers from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 21 August 2014 and 26 May 2015 are not required to make any more payments and will shortly receive communication from Web Moneyline confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Web Moneyline (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au. If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options.

Payday lender Good to Go Loans has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Good to Go Loans may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking, Good to Go Loans is required to:

write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;

notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and

not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘ASIC will continue to take action to protect financially vulnerable consumers, many of whom are recipients of welfare payments, from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 18 May 2014 and 20 May 2015 are not required to make any more payments and will shortly receive communication from Good to Go Loans confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Good to Go Loans (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au. If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on 1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options