Comparisons call for payday loans
A typical payday loan customer is paying up to £60 a year over the odds because of a lack of price competition in the industry, a watchdog has claimed.
The Competition and Markets Authority (CMA) is proposing that an independent price comparison website should be set up, giving consumers a clearer choice of lenders and the overall cost which is specifically tailored to their needs.
The proposals were broadly welcomed by a trade body for payday lenders as well as consumer groups, although there were also calls for high street banks to do more to give people looking for short-term credit "real choice" by offering "responsible micro loans".
The CMA will not publish its full report into the payday lending sector until later this year, but giving its provisional findings, it said that the size of the "rapidly" growing £2.8 billion sector means that injecting more competition could have a "substantial" impact.
It calculates that the absence of competition adds up to £10 to the average cost of a typical £260 payday loan. As customers tend to take out six loans a year, this means they could save up to £60 annually with better competition.
Across the market, the total savings for customers from greater competition could add up to more than £45 million a year.
The CMA also proposes lenders should be forced to clearly tell a customer up front what the total cost will be if they fail to pay back their loan on time and give out periodic statements showing the long-term cost of their debt.
Simon Polito, chairman of the payday lending investigation group and CMA deputy panel chairman, said: "There is a substantial gap between the cheapest and most expensive loans, so borrowers could benefit if we can help them compare prices more effectively, which in turn would stimulate greater price competition and lower costs."
He continued: "Short-term loans like these meet a very clear need for around 1.8 million customers a year. This level of demand isn't going to go away so it's important to ensure that this market works better for consumers."
The watchdog also found that often, payday loan customers are confused about the role of lead generators, which act as middlemen by selling customer applications to the highest bidder. Some customers mistakenly believe they are actually the loan provider. It is proposing that lead generators should be required to explicitly state their commercial relationship with lenders.
The industry is already undergoing a clampdown after coming under the control of City regulator the Financial Conduct Authority (FCA) in April. The FCA will consult this summer on capping the overall cost of a payday loan.
At present, it is hard for consumers to shop around for the best price because there is often more focus placed on the speed of the loan, and the generally poor reputation of the sector puts other firms which could boost competition off entering the market, the CMA found.
Lenders which have tried to offer substantially lower rates have not been particularly successful in attracting new business, because of consumers' lack of focus on price, it said.
The CMA said the three largest payday lenders in the sector - Wonga, Dollar and CashEuroNet - account for around 70% of revenue generated from payday lending in the UK.
Dollar's subsidiaries include The Money Shop, while CashEuroNet's online lending products include QuickQuid and Pounds to Pocket.
Gillian Guy, chief executive for Citizens Advice, called for banks to do more to help people looking for a short-term loan.
Ms Guy said: "For consumers to have real choice in the payday loans market, they need more responsible short-term credit options, not just the ability to choose between existing providers.
"The time for high street banks to enter into the market and offer a responsible micro loan is long overdue."
Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents short-term lenders, described the CMA's findings as " the most authoritative and accurate analysis of the market we have seen" for an industry which has been "scrutinised and demonised".
He said: "The CMA's proposed remedies combine well with the regulatory measures that lenders are putting in place as they protect choice, promote competition and make it tougher for rogue lenders and lead generators to exploit."
But he warned that the looming price cap could make payday loans commercially unviable and drive borrowers into the hands of illegal lenders - "either those operating with baseball bats or more likely those that operate offshore, out of the regulator's reach".
Under the FCA's new rules for payday lenders from July 1, they will have to include risk warnings on print and television advertising. Payday firms will also be banned from rolling over a loan more than twice and they will only be able to make two unsuccessful attempts to claw money back out of a borrower's account by using a recurring payment.
The industry was referred for a full-scale competition investigation after the Office of Fair Trading (OFT) found evidence last year of "deep-rooted" problems, including some lenders appearing to base their business models around people whose costs are ramped up because they cannot afford to pay their loans back on time.
Charity StepChange received nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.
Mike O'Connor, chief executive of StepChange, said: "With customers taking out an average of six per year, it is clear that this is a market that traps people in unsustainable cycles of unaffordable repeat borrowing.
"The failure of the payday loans companies to compete for customers adds insult to the injury of people paying extortionate prices."
Richard Lloyd, executive director of consumer group Which?, said: "We also need to see tougher action by the regulators to clamp down on the excessive charges that borrowers get hit with when they're in financial difficulty."