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On January 2nd 2015, FCA regulations on payday industry came into effect. The payday industry was populated with firms charging high interest rate exceeding 5,000% APR like Wonga and Uncle Buck. These firms had a huge impact on the general society, much bigger than the size of the industry would suggest. According to FCA the payday industry gave loans worth £2.1 Billion in 2013. However when looking at the actual number of loans dispensed and the number of households affected one can gauge the reasons why this industry got such a huge attention from media and the civil society. According to FCA a staggering number of 10 million loans were given by payday lenders to 1.6 million customers in 2013.

2014 was a watershed year for the payday industry in which not only the overall voices increased against their workings and charges but there were robust actions taken by regulatory bodies against the industry as a whole and against major erring lenders individually. In any industry there is always a competitive pressure which keeps the prices in check and over a longer period puts a downward pressure on the price. However payday industry in UK was a special case where individual firms did not compete on interest charges and other prices but only tried to grab a greater market share through heavier advertisement. There were firms who would have an army of agents employed on the payday to make sure the borrowers paid back the loans taken at whatever the cost, some at detriment to the borrower.

All these actions along with the massive advertisement campaigns undertaken by payday lenders required huge margins on the loans disbursed. Wonga at one time was known to have inked a deal with Newcastle United for as much as £8 Million per year. They also made heavy investments in online and TV adverts. This also included advertisements during prominent children viewing channels and timings. This can only be viewed as mala fide intention to make the children use ‘pesky power’ to get their parents these loans to get gifts, vacations and other non-essential items.

Wonga puppets were a major marketing masterstroke where they made a subtle suggestion that getting money through them was extremely easy, prudent and even fun. This cloaked the pitfalls which were present in taking a payday loan which included eye-watering interest rates exceeding 5,000%, heavy processing fees, high default fees and the possibility of seeing the amount payable expand to astronomical size within a couple of months. There were numerous examples highlighted in the media where a couple of hundred pounds of payday loan from Wonga ended up increasing to thousands of pounds of repayable amount due to default charges and high interest rates.

It was through these heavy charges and interest rates that Wonga was able to stay afloat and expand at a breakneck speed. Now that FCA has imposed the new rules we would see a new face of these payday lenders. The first impact would be at the huge margins they had while giving these loans. This in turn will impact the available budget they have for taking grandiose advertisement campaigns or to pay their agents high wages to get more loans. The first signs of change within the entire industry are already visible. Many payday lenders have already closed their shop as they could not work under the lower interest rates. Wonga made the requisite changes in their lending by mid-December.

Payday lending is past its heyday as can be seen from the stagnant growth within this industry. In 2012 the industry clocked total sales of £2,151m and in 2013 it was £2,145m. One of the reasons for the stabilization have been the modest increase in GDP as the economy gets back on its feet after the devastating financial crisis of 2008. After the strict penalties and action by FCA in 2014 the payday industry has been reined in to a great extent. Under the new regulatory guidelines few payday lenders will survive and fewer will be able to continue doing the business in the manner they did before. We will see a huge realignment in the business processes of all the firms and they will try to reduce both the default rates of their customers as well as reduce their marketing and administration costs

Any credit must be given only after a thorough assessment of its affordability. The ease of processing should never be a reason to throw caution to the wind when undertaking a loan. The Wonga puppets were a prime example where a company tried to persuade the customers to take a loan due to the ease of processing even though it wasn’t prudent for them. The new FCA regulations will force the payday lenders to scrutinize each application more carefully because the default charges are limited and hence they cannot afford massive late payments or defaults. This in turn will force the payday lenders to reject customers who cannot afford the loans. By doing this the overall level of indebtedness will come down significantly and should lead to a better society.

The era of 5,000% interest rate is definitely over. However the next step must be educating the borrowers. Payday loans have never been an ideal option for borrowers who are hard-pressed for money. There are several other viable options for borrowers, even those with bad credit, than payday loans. The borrowers would need to manage their finances efficiently and make sure they use better alternatives to payday loans when in need for some cash.



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