The more I look at my life, the more I realise how fortunate I am. This feeling of comfort could foster complacency or smugness, but in reality it’s acting as a catalyst for change, so I can keep the lights (and on a morning like this) the central heating on, well into the future.
What this blog isn’t about however is global warming, alternative energy sources and utility bills, but it is about a much bigger and a shorter term spectre – Money on tap.
I was brought up in a family where Dad was an accountant and Mom was a housewife who’s budget was controlled with military precision. Whilst there was a stable income and we wished for nothing, treats were something we saw at birthdays and Christmas!
Not very far away from where we lived was abject poverty. Coal mines and Heavy Industry struggled to survive against cheap imports and with a (much hyped) backdrop of ostensibly lazy british workers, investment into the British Midlands dried up. The Government could do little but watch the physical decline, but chose not fully understand what ‘industries’ were feeding on the collapse of communities.
Entrepreneurs (I’m being polite) sprung up in many a coal village and small town. These affable entrepreneurs loaned money, cashed in bonds, sold gold and collected their debts, often with an iron fist. Families were struggling, towns were becoming Ghost Towns (Thanks to The Specials in 1981, British youth became aware of the poverty and empty grime in the Midlands) and a new economy was born.
Readers may note that William the Conqueror introduced the concept on pawnbroking in England in about 1060, so what was happening in the 1970’s was nothing new, except that the money being raised now was for food, heat, light and transport. Yes of course, booze, fags and nags also needed funding, but in the late 70’s, without Sky TV, Playstation and the internet, these were pretty staple diversions.
Thirty years forward, the massive growth of money lending has taken on a new, less entrepreneurial nature. Yes, there’s still the ‘tally man’, the ‘collector’ and the ‘back street lender’, but now there’s a new face on (almost every) high street. These facias have replaced the bank, the building society, the solicitor and are, for planning reasons, of course (sic), right next to the bookmaker, the pub and the cash for goods stores. Has no-one thought of combining all these into a department store?
Sorry, I’m now off track!
So, we have a new high street emerging around us, but for today I’m focusing on the pay day loan shopfronts.
These guys have limited regulation (compared with the focused regulation of the financial services sector), they have relatively minor employee costs and have a limited product portfolio that makes managing their retail offer relatively simple.
They maintain respectable businesses by doing their ‘bad debt’ collection electronically and offer support to those struggling to repay, by rolling over debt across the short to mid term.
In short, they offer a service that’s needed and on the surface, they do it well.
So why regulate? Can we regulate? Are we too far in moral debt?
Let’s look at the vicious circle we’re now in. We have an industry where lenders are highly competitive, well funded and lowly regulated in a growing market. We’re in an environment where state welfare is declining, bills are increasing and jobs are becoming more centred – meaning travel costs outside of major cities is becoming more costly.
We’re also in a market in a state of post consumerism hangover. In the run up to the credit crunch, we individually borrowed on credit cards, loans and overdrafts (to the sum of £1TN) to fund lifestyle attributes. The Plasma TV, the new car, the laptop, the tablet, the fortnight in Florida were all within our reach and we enjoyed ourselves.
Five years on, the holiday is a distant memory, the plasma is knackered and we’ve sold everything else down the pawn shop or on ebay. There’s no more juggling to be done, but the kids need new shoes for school and there’s no money for the electric meter.
Let’s look at the synergies between the pre-credit crunch scenario where big lenders provided the wonga, and the situation now, where Wonga (other pay day lenders are available!) provide the wonga. I’ll give you a scenario.
It’s the 11th March. Family A have a monthly income of £700, their outgoings are £675. Unfortunately, this month, the washing machine needed a new pump which cost £100. Family A has an immediate deficit of £75 which is borrowed from a high street lender.
With fees and charges of almost £22, borrowing just enough to replace the pump has cost Family A £97 (APR 4214%). This amount needs to be repaid at the end of the March.
On April 1st, Family A’s income arrives as usual, but £97 extra is deducted. The family are now £72 under where they should be. With the kids needing new trainers and a birthday coming up later in the month, their temporary lender has offered a helping hand.
We know the rest.
Whilst this is a simplistic scenario (and one which the industry says doesn’t happen), it’s one that my research reveals is all too prevalent. Real people, in real difficulty. (Source – Citizens Advice Bureau)
What I’m not saying is that the problem is all like the Family A scenario, it’s not. Some still can’t wait for the new trainers, iPad, TV and these loan companies can put that new gadget in your hand today. Some gamble and lose their income, some drink it away…..
…and this is where the big difference is with todays problem. William the Conqueror bought armaments with the money from his pawned goods. Before 2007, we bought property and stuff with our apparently regulated mortgages and personal loans but now, new loan companies are lending for lifestyle without limits – with no questions asked.
This is a tricky one for all involved.
When I sold loans in a high street bank, I had to understand my customer ‘inside out’. What the loan was for, how they’d repay etc, whereas now the speed of transaction is the main prerequisite and the relationship between the provider and customer is at best, transient.
If the Government wants to regulate, it will mean greater bureaucracy, slower transactions, greater costs to both parties and ultimately money lending will once again, be more ‘entrepreneurial’. Many of these ‘new’ lenders wouldn’t survive anything other than light touch regulation, so the market would decline and would be driven underground. At least the current situation is ‘manageable’ and those in power can at least estimate the scale of the problem.
So, why not look at the commercial opportunity? We have at least two banks who are Government backed. We have the Funding For Lending scheme which has promoted banks to lend to their customers to drive forward business and boost the housing market. Doesn’t the commercial opportunity exist to offer short term loans to customers of these great financial services institutions at more moderated rates in a more regulated environment?
What I’m not encouraging is a wholesale increase in risk for the banks or a return to ‘pre crunch’ lending, but I am suggesting there’s a new customer base and a new long term opportunity. Once these customers are treated as individuals and they fiscally recover (as the economy recovers), do our FS providers not see these customers as their future advocates?
What you don’t know is that once, I was there. Stuck. Underpaid and overly flamboyant with a credit card and rapidly wad becoming ‘unbanked’. A little known subsidiary of a High Street bank helped me out by consolidating debt, but also by controlling my monthly expenditure, ensuring priorities were paid and my social life curtailed. I had to report in weekly to a branch, had to call the bank if I received an unexpected bill and had to pay off the consolidation as a key priority (Second only to rent and utilities). I paid a rate in excess of 50% APR for this consolidation and yes, I could have still found another money lender to fund my youthful excess, but I didn’t, I repaid the trust they had in me by paying off the debt quickly and soon realised how close I’d come to my own credit crisis.
Unfortunately, this subsidiary and their counsel no longer exists. It was annihilated by the ‘big bank’ during the good times, when consolidation and re-lending was just part of normal day to day lending. Arguably, many banks offer this type of programme to customers who have admitted to being in financial trouble on their secured borrowing even today.
But that’s the point, it’s the population whose heads are firmly in the sand who need help. Now may be the time to bring the principle behind this consolidation / recovery programme back to life? I’m no accountant, but I do understand people, economics and human behaviour and I’m all too aware that the current situation is untenable.
Commercially, whoever takes the first step into a more regulated short term loan marketplace will face as many detractors as it will receive plaudits, the pro’s / con’s list is longer than this blog! But, can we morally afford not to do something about this conundrum, or do we just wait for the next crunch that for some will be too much to handle?