Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
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Author: Internal Compliance Department
Price Comparison Websites
The Competition & Marketing Authority (CMA) has recently deemed, following some in depth research, that there is insufficient price completion in the High Cost, Short Term Credit (HCSTC) market. They have therefore passed legislation in August 2015 that, from a yet to be defined date in the future that all HCSTC lenders MUST appear on at least one Price Comparison Website (PCW).
In this short article I am going to discuss firstly the problems with many of the PCW that exist to date, and then how the new regulations will help overcome this and increase price completion. Before we start, what do we mean by a PCW?
We are all familiar with sites like Money Supermarket, Compare the Market, and Go Compare. These all examples of PCW that operate in many different industries including insurance, travel, loans, energy, credit cards to name but a few. In essence they allow you to see the cost of many products side by side so you can compare deals and find the cheapest. Some of these, for example credit cards, will just list all of the available deals, whereas for products like insurance where every deal is tailored to the customers circumstances, they will take your details and electronically ask all of the insurers to submit a personalised quote. You can then see all of these quotes side by side and make your choice if which one, if any, to proceed with.
Many of these PCW will allow a certain amount of filtering, such as only show insurance quotes with protected no claims. However one of the common features is to default the sort by ‘cheapest’ first.
Over recent years the HCSTC industry has a number of PCW entering the market. This is good you might say. Well it is and it isn’t. While, what I am about to say is not true of all HCSTC PCW, it is certainly quite a common occurrence. The key question is ‘what defines the order that lenders are listed?’ As with any business the company running the site wants to maximise their profits. On some sites therefore the ranking is not determined by the cost of the product to the customer, but the amount that the lender will pay the PCW for directing that customer to them. A firm willing to pay £5.00 Cost Per Click (CPC) will be listed above a firm paying £1.00 CPC, even though their deal may be more expensive. While this does compare products by allowing them to be shown together, many customers will not have the knowledge or time to do the comparison themselves and may simply choose the top one.
I am pleased to say that some of the bigger HCSTC PCW are already adopting a model of charging everyone the same PCP rate and are then ordering on cost of the loan. I am also delighted that the new regulations, when bought into effect, will force this to be the case.
The FCA (as at December 2015) are consulting on the final rules for these sites and also determining what the exact basis for the cost of the loan will be. On one hand it is good that they agree that the APR is probably not a good indicator, whereas I personally feel that their current thought it should be the ‘total cost’ of the loan also has its downsides. A 3 month loan will normally cost more than a 1 month loan, which is obvious really, however if the customer needs a loan for 3 months because 1 month is not affordable, they may be driven towards the 1 month deal (being top of the list) rather than the more affordable 3 month product. While I do not have the answers to this, maybe something like an ‘average cost per day’ would be worth considering. Very simply this would be the total cost of the loan (interest, fees etc) divided by the number of days. This would mean £100 borrowed as a 30 days loan and costing £24.00 would rank alongside a £100 loan for 60 days costing £48.00. I am sure that after the consultation is over all such options will be reviewed and a formula set.
So how will this increase price competition? Well, historically in the HCSTC market place, unlike many other industries, price has not been seen by the consumers as the deciding factor when choosing the lender. Because of the circumstances of many borrowers, factors such as ‘who is most likely to lend to me’, ‘who can get the loan to me these quickest’, ‘who lends to those with poor credit’ and ‘who has the easiest application with no need for document’ have all taken priority over ‘who is offering the best deal’. In many cases customers will simply do a Google Search for something like ‘Payday Loans for Bad Credit’ and simply start applying with the lender at the top of the list. They then continue down until someone agrees to the loan. In many cases they do not have the time or desire to search for a number of lenders and compare prices. Because of this there has been no incentive for lenders to reduce their rates in order to get more customers. This in turn has led to poor price competition.
Take an airline company for example. Customers know the names of the ‘low cost’ carriers on the UK. Ryanair and EasyJet are 2 examples. If you are shopping for a cheap flight you would probably have a look at both of these, and maybe a few others too. You are not interested in how long it takes to get there (as they will be similar in duration) and many depart from similar airports at similar times. What draws you to one or the other is often who is cheapest. This forces a constant battle to occur between the two to drive their price below that of the competition. The net result being the better deals for the customer.
The CMA hope that when these rules are in force that HCSTC lenders too will have to compete fiercely on price in order to stay at the top of the PCW. This will then introduce the same price competition to this market as exists in many others and in doing so benefit the consumer.