An increasingly important part of today’s banking landscape are payday lenders. These are businesses that offer short-term loans at extremely high rates of interest for small amounts to borrowers who usually earn less than the national average. For instance, one of the leading UK lenders has a top rate of over 5,000% APR. Pay-day lenders have typically located themselves in retail premises in the midst of impoverished communities which have been neglected by banks. More recently, they have taken to the web. Leading online lenders use an impressive range of indicators to calculate the riskiness of potential borrowers. These range from traditional credit scores to more unexpected measures such as the computer you are using, the locale you are logging on from, and even your likes on Facebook. One site takes into account over 8,000 data points when deciding on your rate. To big data nerds, this might sound impressive. To the social critic, it sounds like big brother meets the mob.
Pay-day lenders have grown rapidly in the last few years. In the UK, the industry has expanded from £900 million in 2008/9 to £2.2 billion in 2011/12. In the USA, payday lending has grown from an almost non-existent industry at the beginning of the 1990s to a wide-spread feature of impoverished communities. One would expect that such an impressive rate of growth would be something to celebrate. But there is mounting evidence that pay-day lending generates significant negative externalities. Critics have long pointed out that payday lenders operate a business model which is based on exploiting the economic, political and informational asymmetries between poor borrowers (who lack access to alternatives, political voice and basic financial literacy) and financial entrepreneurs (who have ample access to cheap finance, political influence and financial knowledge). A recent survey by the UK Citizens Advice Bureau found evidence of pay-day lenders offering loans to underage people, making inadequate checks on borrowers, taking more than is owed, harassing borrowers, draining bank accounts and refusing to agree repayment plans. In addition, a charity advising indebted people has found a 300% rise in people approaching them with problems with payday loans. A study suggests that many pay-day loans are taken out to repay a previous loan – resulting in the transformation of occasional borrowers to people who are chronically indebted. Overtime, this can make it difficult for borrowers to pay basic household bills. It does not take too much mathematical prowess to understand that a loan taken at 5,000% APR can rapidly become unpayable. This becomes all the more worrying when one realizes that payday lenders are focused on a new growth market, small businesses that are struggling to make ends meet.
The problems with pay-day lending have attracted the attention of the media as well as regulators. For instance, in the recent UK parliamentary committee report on banking standards, a few overlooked pages outline the problems with payday lending and the lack of alternatives for individuals and businesses who are already on the edge. However, there has not seemed to be sufficient appetite to regulate this very questionable sector of the financial industry out of existence. In the US, some local restrictions have been imposed on the industry through zoning laws. Twelve states in the US have either banned payday lending or imposed regulations which makes payday lending very difficult.
Given the current lack of a legislative response in the UK, a range of civil society actors have waded into the debate. Perhaps the most striking example of this was a recent announcement by the newly appointed Archbishop of Canterbury, the worldwide head of the Church of England (the Episcopalian Church in the US). Archbishop Welby stated in an interview with a magazine that he hoped to compete pay-day lenders out of business. Reading the interview more carefully, we find that the Archbishop does not want to start up a new bank. Instead, he hopes to provide church resources (such as space, access to expertise, and a client base) to help existing co-operative lenders. Co-ops offer a far lower rate of interest (a maximum of 42.6% APR) to similarly marginal clients. The hope is that with the Church’s help, they can attract clients away from the pay-day lenders.
This announcement was met with a number of immediate questions. Some asked whether the Church should have any business in finance. Anyone with knowledge of history will know that faith groups have often played an important role in supporting more ‘ethical’ financial initiatives. Others have pointed out that the Church of England has been quite hypocritical about all this as its own pension fund had an investment in one of the pay-day lenders they had targeted. Further investigation showed that this investment was via a venture capitalist and only amounted to about £75,000 out of total portfolio of £5.2 billion. The complexities of contemporary financial markets mean that few of us actually know what our money is invested in.
The public debate about the Archbishop’s new mission missed what the real issue is here. Whether out of political calculation or a belief that free competition eventually selects the best solution, the Archbishop seems to have shied away from the legislative route. Instead, his focus is on supporting an alternative organizational form (the Co-Op) which might challenge the incumbent (the pay-day). But is some help from the church enough to unseat pay-day lenders? There is actually a large literature that gives us some clues about when alternative organizational forms might win out. We know that resources are an important part of the picture, but they are not enough on their own. So the Archbishop’s offer of space in Churches or access to expertise is important, but insufficient. Building up an alternative organizational form within an industry also requires an opportune moment. This typically happens when there is mounting evidence that existing organizational forms clearly are not working. Sometimes this comes in the form of shocking cases. Other times it appears in a slow drip feed of evidence. But when a part of the elite become convinced that things cannot go on the way they have, and that alternatives are needed, then part of the work is done. In the case of credit co-ops, there appears to be increasing recognition among Whitehall policy-makers that pay-day lending is not an acceptable financial model. In addition, co-ops seem to have gained some currency as an alternative organizational form among policy makers. Finally, and perhaps most importantly, an alternative organizational form gains currency in an industry when it is connected with deeply imbued social values. Clearly the credit co-op movement trades on a deep tradition of social justice and community spirit. Perhaps a connection with the Church will provide it with an additional touch of holiness and ethicality.
Although all the conditions do indeed appear to be ripe for Church-backed challengers to pay-day lenders, there are two more tricky issues which need to be considered. First, although the Church has done well at establishing opportunities and connecting with the values that resonate with policy makers and some members of the middle classes, it is not clear to what extent this has been achieved among the main target of this new venture – i.e. the working class. To what extent do the Church-backed co-ops resonate with the values and concerns of the contemporary working classes and their travails? One of the reasons that the credit union movement was so successful in industrial Britain during the 19th and early 20th century was that it tapped into closely knit working class communities and their beliefs and values, which were codified often in religious movements like Methodism. If this revived form of financial co-operative movement is to become more than a policy exercise, it is vital that it taps into the new version of these values and institutions. This will be difficult given the fragmentation of values and destruction of many traditional working class institutions – not just in the UK, but throughout the developing economies.
The second open question is whether creating and promoting alternatives is enough. A commonly accepted disposition across the political spectrum today seems to be a fetishism of ‘alternatives’ and an abhorrence of ‘regulation’. In many ways this is supported by the widespread anti-statism, political romanticism and addiction to change. This means change and alternatives are always thought to be good while stasis and regulation are bad. This attitude seems to be embodied in the Archbishop’s move to back alternatives and back down over legislative change. But surely, coming up with alternatives is not the only solution. As any activist knows, the work of building alternatives is difficult, arduous, lengthy and often ends in dashed hopes. This is not to say it is futile. Often mobilization creates social change – but frequently in unexpected ways.
What I am trying to do is add a note of realism to much of the over-enthusiastic celebration of a hopeful future which often passes for progressive initiatives. Perhaps in some situations, all this effort and passion which goes into alternatives might be better channeled into slightly less sexy directions such as reforming existing institutions or legislation. Indeed, if there was ever a case to be made for legislative change, it would be the usurious interest rates charged by payday lenders. Although it is difficult to excite the TED-talk romantic about the hard slog of changing legislation around pay-day loans, it may prove to be a worthy path to follow. Clearly this road is more difficult in the US with its increasingly corrupted legislative process owned by special interests and lobbyists. But is still an option worth considering – all the more because, where the pay-day lenders have been, the next generation of online banks are likely to follow.