PayDay Salvation

Apparently Justin Welby has had a meeting with Errol Damelin, the head honcho of Wonga the payday loan company. He’s reported to have told him that he isn’t planning to legislate these companies out of business, rather he wants to create an economic environment where healthy competition makes them redundant.

Wonga - Interesting Advertising...The Archbishop of Canterbury  has vowed to put payday lenders out of business by using the Church to build up Britain’s network of credit unions.

The Most Rev Justin Welby has told Errol Damelin, the founder and chief executive of Wonga, about his ambition to make the controversial lenders redundant – by helping the 500  financial co-operatives, which already provide small loans to their members, play a much bigger role in helping  people with money problems.

The Church of England has already set up a credit union for its own staff,  which will advise the other co-ops on how to expand their reach. Officials believe the problem is not the number of unions but ensuring greater access to them. The Church will allow them to use its buildings and schools and encourage Church members with the right expertise to volunteer with them.

The idea is to pull the rug out under the internet lenders by creating a network of local short-term lenders operating on a not-for-profit basis.

The Archbishop added: “We’ve got to have credit unions that are both engaged in their communities and much more professional, and the third thing is people have got to know about them. It’s a decade-long process. “We’re putting our money where our mouth is, we’re starting a Church of England staff credit union. You’ve got to have a corporate interest body to identify who’s members of the credit union. We’re starting one of those so we’re actually getting involved ourselves. We’re working steadily with the main trade bodies for the credit unions.”

It’s an interesting idea. I’ve seen first-hand for myself out in the developing world how credit and savings unions help to transform communities and provide a framework for aspirational thinking in individuals. People in poverty are encouraged to save money together and then to draw on those funds to support economic activity (buying sewing machines to set up a business for example) which creates financial independence. If the Church of England can help support this kind of local lending then that can only be a positive thing.

Of course, there are issues involved in lending. Not all loans are repaid and despite anybody’s good will, it costs money to lend in the first place so there are costs associated with lending, however small the amounts actually are. Of course, the fact that these credit unions are not trying to make as much money as possible will help, but as I mentioned on LBC 97.3 this lunchtime, these fixed costs can’t be reduced below a certain level. The worst payday lenders may charge in the region of £40 to borrow £100 but a credit union would be hard-pressed to charge anything less than half of that. And on top of that, what do you do if you are a Church lending money and the borrower refuses to pay? Send round the Canterbury Inquisition?

Perhaps the solution to pay-day lending is to apply the same identification rules to it that affect mainstream lenders. At the moment there are too many instances of fraud around payday loans – criminals using other people’s bank account details for repayments for example – and this area needs to be tightened up. If payday companies insist on fast turnarounds they should be obliged to use the mainstream Credit Reference Agencies to ensure that the bank account details given match up to the addresses offered. If drawing this data from the likes of Experian and Equifax makes the process of lending too expensive for payday companies then so be it – the mainstream banks have to do formal identity checks so these companies should also. It could also be insisted that payments have to made from the account the money is paid into.

This is probably a better solution then trying to limit roll-overs (next to impossible to stop someone simply taking out a loan somewhere else to roll-over by proxy) or have lending caps (just split the loan into multiple small amounts to avoid that). It helps tie the sub-prime lenders into the same stringent criteria that mainstream banks have to hold to. I’ve also heard the idea that payday lending should be subject to a 24 hour “cooling off” period where the loan is only paid out 24 hours after it is approved, and the borrower can pull out at any point before then. That would allow for bad decisions made in the heat of the moment to be reflected on and other sources of lending or liquidity to be explored.

Ultimately though the problem is not the payday lenders but a society that has people in it who need or want these loans. People end up in financial straits for a number of reasons – bad money management is one reason but the high cost of living is another. See the explosion of food banks across the country as evidence of increasing numbers of people in increasingly desperate situations. At the same time, other people use pay day loans to make luxury purchases (a new phone for example) and we have to ask ourselves what kind of culture we live in where people are prepared to run up debts for items that are not necessities. What happened to the virtue of patience?

The Church of England getting involved in dealing with the problems of poverty is nothing new. We have a tradition of getting stuck into the mess of real people’s lives and helping to provide real solutions. Perhaps in a society where the doctrine of the church seems so out of place with the way society is going, becoming the financial point of help in local communities might be a way that we demonstrate that the call to holiness we find in Scripture plays itself out in many different forms.

You can read my earlier post on the ethics of payday lending here.

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  • mattwardman

    I’d say that the appropriate model for this is a “ready to go” project for churches that want to do something locally.

    As used by the Trussell Trust and Street Pastors, for two.

    Support and expertise – where wet behind the ears people fall over – provided centrally; enthusiasm, premises and necesary funds provided locally.

    The difficult link will be local governance.

    • http://www.peter-ould.net Peter Ould

      I think you’re right. I noticed yesterday that East Kent doesn’t have a Credit Union. Hmmmm….

  • sheppied007

    This may help to repair the CofE’s political reputation, by sidestepping the media disasters of Women Bishops and same-sex marriage. However, merely casting the Archbishop of Canterbury as a latter-day Robin Hood of banking fails to nail the underlying problem of coping with the risk of higher default rates for credit unions.

    The high interest rates of pay day lending covers profit AND the possible absence of credit checks and the relative likelihood of default. As you’ve indicated, the charges mount up when borrowers fail to make timely repayment. Wonga have mentioned that, similar to high street banks, their default rate currently stands at 7 per cent.

    Typically, credit unions have comparatively low default rates, so how will they handle this added risk. For one, they would have to establish hgher interest rates for this kind of lending. It still remains that credit unions are not financially geared to absorb such losses, whereas Pay Day lenders are.

    Considering these factors, it would appear that the Archbishop is mapping out a vicariously generous path for the financially desperate to approach the kind of lenders who are just not financially capable of handling a comparatively higher default rate of short-term high-risk lending.

    • mattwardman

      @sheppied007:disqus

      I’d say that ABC is being more strategic than that, and looking over a generation or more.

      A key role in CUs (see the legisation) is education for financial literacy, and the real goal for the ABC needs to be to create an environment where people are not dependent on that type of loan.

      Perhaps we need to bring children into CUs at the age of 16.

      • sheppied007

        I’d be happy if that is the long-range objective and the credit union approach may also inculcate a complementary savings ethos that would render obsolete these short-term tide-over loans.

        I should note that Policis research shows that fewer than 3% within the lowest 50% of household incomes use payday loans.

        Finally, a Sunday ‘spot the difference:

        Excerpt from Wonga’s code of practice:

        ‘We will only ever extend the length of your loan term when requested to do so by you – and if will believe it to be in your best interests. We will clearly explain the additional cost of extending your loan, require you to significantly reduce the outstanding balance to do so and limit the number of times you can move your repayment date.

        • We will never extend the term of you loan without your request, i.e. by ‘default rollover’’

        Excerpt from the Consumer Finance Association Code of Good Practice:

        Maximum of three loan extensions

        Affordability assessment before any loan extension.

        A fixed repayment plan to repay over a longer period with no additional interest or charges.

        • mattwardman

          Love it.

          Two of the interesting things about the anti-Wonga campaign are:

          a – The ABC niterview wasn’t actually a direct attack on Wonga.
          b – The stats used by the campaigning lefty politicos are (naturally) bogus. La Creasy has been lecturing through her shriekaphone about 4000%+ interest rates, based on annualisation over 12 months of interest that Wonga stop in its tracks at 60 days.

          Not that anything as straightforward as reality will stop them shouting of course.

          Thanks for the chat.

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