Stopping the game of loans will take more than regulation

Many people see a payday loan as less risky than a credit card. Image sourced from Shutterstock.com

ABC Four Corners’ recent exposé of payday lending provided some disturbing glimpses into a world many people know little about. Unfortunately, framing the story as one of sharks preying on the hapless does not treat the financial problems being faced by those on low or precarious incomes seriously enough, nor how they can be resolved.

Why are more than a million Australians taking out, on average, three to four small loans (typically A$100-$400) each year? Why have they only been doing this since the early 1990s?

Low income Australians are in good company with their counterparts in the USA, the United Kingdom, Canada and New Zealand. All these countries have a thriving payday industry with remarkably similar proportions of people borrowing comparable amounts of cash.

In 2012 research we found that overwhelmingly, the reasons people were typically borrowing $50 to $300 for a fortnight was to buy food or necessities for their kids and pay mobile phone, utility bills and the rent. Nearly eight in ten of those interviewed were receiving a Centrelink payment. Very few thought the industry should be closed down as they had no alternative way of securing a small loan. Credit cards were not a viable option, as one woman with three young boys commented:

“If you’ve got a credit card you’re always going to use it, you know. Like if we’re low on money and we need to do shopping, if we’ve got $100 in my purse, that’s what we’re going to spend. But if we’ve got a credit card that’s sort of like an infinity bucket.”

For many people, credit cards are seen as far too dangerous a product. Borrowing cash from a payday lender makes more sense as it has a set price (borrowing $100 for less than a month will cost you $24) and a set repayment time frame. Rather than seeing consumers of payday loans as gullible, brain damaged or drug affected (though a minority are), our research found low income people to be sharp budgeters and savvy in finding ways to make ends meet.

Poverty industry

The report’s finding that most people get caught up in an expensive cycle of repeat borrowing has led to calls by the media and consumer advocates to further regulate the sector and even close it down. A financial counsellor interviewed for the study summed up what is wrong with this argument:

“It’s very easy for a bunch of middle class advocates, financial counsellors, whatever, to say this shouldn’t be happening – but walk a mile in the shoes of the people who have no other access. I think our entire premise should sit around that Centrelink payments are inadequate for people to live with dignity in this community.”

Below-average income earners need to rely on small loans for a number of reasons. Firstly, accompanying the deregulation of financial markets in the 1980s, there has been a general transfer of risks and costs that accompany disadvantage from the state to both individual households and businesses. As a result, there has been a decline in the social wage – the public provision of health, education and welfare. Secondly, there has been an increase in inequality and precarious work. Thirdly, there are no other viable options. The No Interest Loans Scheme shown on the Four Corners program does not provide cash for day to living - the main reason people go to payday lenders.

This is the reason why commercial payday lending has only existed for 25 years. Today there are more payday shopfronts in the USA than Starbucks and McDonalds combined. This new sector is just one part of what Gary Rivlin has termed the poverty industry - which includes appliance rental stores and other consumer leasing arrangements, low-doc second hand car finance, pawnbroking services and dollar shops.

Susan Soederberg’s recent book “Debtfare States and the Poverty Industry” describes how the poverty industry in the United States has thrived as social provisioning has ebbed, student loans have become established as part of daily life, inequality intensifies and work precarity becomes the new norm.

Beyond regulation

It is a knee jerk reaction by media and consumer advocates to frame small loans simply as a market problem that can be addressed by greater regulation and smaller fees. The short answer is no it won’t. It is expensive to be poor, and the higher risks associated with lending to those on a low income means that any tighter regulation will abolish this now-established market and send it underground. Secondly, ignoring the wider societal issues that drive casual and low-waged workers to online lenders and welfare recipients to street front lenders leaves the status quo unchallenged.

People turning to payday loans are portrayed in the media as passive, easy prey and financially illiterate. However, as our Caught Short report and other studies suggest, a person taking out a small loan is often making a highly rational choice to manage their credit and debt in small amounts over short periods of time rather than putting themselves at greater risk of being overwhelmed by a ballooning credit card debt.

Narrowly framing one financial symptom of current society – payday lending – to be a problem resolvable through tighter regulation lets the Australian government off the hook, airbrushes away the real financial struggles of low income earners, and offers no viable strategy to resolve their financial crises.

Those wanting to make a difference should place their energies into supporting campaigns to increase the social wage and access to steady, well-paid jobs. Defending the minimum wage and social services fit this bill, as do grassroots initiatives to stop Work for the Dole, which has been shown as ineffective at moving people off welfare. Both offer more viable ways to undercut the enormous and growing demand for poverty industry financial products such as payday loans.

Note: The disclosure statement on this article has been updated to include disclosures that were not originally made by the author.