“There will only be four main payday lenders operating in the sector.” This was the claim made by the Financial Conduct Authority (FCA) back in 2014, as I sat in a crowded seminar hall surrounded by other payday lenders and brokers. With the FCA taking over from the Office of Fair Trading that year, many […]
“There will only be four main payday lenders operating in the sector.”
This was the claim made by the Financial Conduct Authority (FCA) back in 2014, as I sat in a crowded seminar hall surrounded by other payday lenders and brokers. With the FCA taking over from the Office of Fair Trading that year, many industry players were expecting a shake-up as directors of payday loan companies and I huddled into this room trying to get some insight into the pending regulation.
Of course, we laughed off the idea of an industry with only four players. At this point, payday lending had been a booming business with a market valuation of £2 billion, over 3 million loans funded per year, around 200 lenders, and more than 200 brokers, easily. The industry was full of playboys on yachts, international millionaires, and soft regulation – how was it going to be changed so drastically?
Fast forward five years later and the controversial industry has changed dramatically with more and more lenders going into administration. The largest casualty has been market leader Wonga, who closed its books in Q4 last year, slowly followed by The Money Shop, Cash Genie, and recently Wageday Advance. But the question begs, how did these once formidable companies fall? And why are they going into administration?
Payday loans by numbers
In 2013, the payday loan industry was crying out for more regulation. The number of complaints was rising constantly, making headlines, attracting criticism from politicians such as Stella Creasy and religious figures such as Archbishop Justin Welby, and lenders were being accused of charging usurious rates as high as 5,000% APR.
On 1st January 2015, the FCA introduced a price cap on the amount that lenders could charge to 0.8% per day, meaning that, on average, a customer will repay a maximum of £124 per £100 and never repay double the amount they have asked to borrow. Other introductions included a maximum default charge of £15 per missed repayment and a strict authorisation process required for lenders and brokers to operate.
The initial costs and timescales of being authorised were too much for many brokers and lenders to handle with dozens leaving immediately, despite many being offered ‘interim permission.’
The introduction of a price cap, higher compliancy costs, and tougher regulation resulted in lower margins for lenders and a desire to run a stricter lending criteria to ensure maximum repayment.
Whilst many lenders have continued to trade, some have simply not been able to make the business model work – finding that the margins are too tight and the running costs are too high. For them, exiting the industry has been the safest option and, in 2019, we have only 40-50 payday lenders and a similar number of brokers.
High growth is catching up on them
Whilst the payday loan industry was booming pre-regulation, many lenders were issuing loans aggressively and growing exponentially. Wonga was notoriously cited for a £1 billion valuation.
However, this exponential growth came at the expense of issuing loans to customers that could not necessarily afford them, with soft affordability checks and funding based on more behavioural underwriting and aggressive collection practices than the traditional underwriting practices of credit checking and affordability.
The result? Millions of loans were funded to customers without employment, on benefits, no income, and no means of repaying their loan. Now, this group of debtors have a strong claim to ask for compensation, and this is now a thriving sector.
With PPI claims coming to an end in August this year, the role of payday loan compensation claims is taking its place. Those who were issued a loan that they believed lacked checks are able to claim compensation of hundreds of pounds.
Wonga has been the lender most affected by this and has repaid over £200 million worth of compensation claims in the last four years – the process that has put them into administration.
Moreover, the cost of issuing a complaint demands a £500 fee from the Financial Ombudsman Service, regardless of whether it is a strong claim or not, which makes compensation claims a far greater expense.
There are a number of smaller, traditional payday lenders that have been around for over 10 years and were not lending big volumes prior to the FCA price cap – and these companies are now reaping the rewards. Companies such as Wizzcash, Uncle Buck, and MY JAR have the knowledge, resources, and financial competence to continue trading and thrive. As per the statistics below, there are 10 lenders that accounted for 85% of new loans – and as the number of lenders fall, the loan volumes are rising.
The future of payday lending
Payday lending will always have a role in the UK society. It is an important anti-poverty measure which offers a very important service to the 3 million people that apply for it every year – and its existence diminishes the risks of black market economies and loan sharking.
Whilst we initially laughed off the idea of only four payday lenders operating in the market, the rise in administration of well-known lenders is making this a real possibility.
Beyond payday loans, there is an opportunity for new alternatives to enter the market that can offer more flexible products including app-related banking, flexible overdrafts, and installment lending.
A flaw in payday lending is that all customers are subject to paying a high rate of interest, regardless of their credit rating. So those with average or good credit scores are still prone to paying the same high rates as those with bad credit ratings. If there is a lender that can find this balance, providing affordable payday loans for good credit and finding a way to accommodate bad credit customers, they will be able to crack a very complex market.
News Comments Today’s main news: Affirm raises $300M. LendingClub charged with privacy violation. Funding Circle issues 187M GBP securitization. Zopa legacy portfolio drags. Fellow Finance facilitates 18.2M euros in March loans. Today’s main analysis: March 2019 debt report from LendingTree (A MUST-READ). Today’s thought-provoking articles: Interview with SoFi CEO Anthony Noto. The slowing U.S. economy. […]
Affirm, the consumer credit startup led by PayPal co-founder Max Levchin, has raised around $300 million in Series F funding at a $2.9 billion post-money valuation, Axios has learned from multiple sources.
After a brief respite in mid-2018, the debt-to-income ratio for consumer debt rose once more, reaching 25.41% by the end of 2018. That falls just shy of the all-time high of 25.49% set one year earlier.
Household wealth saw a $5 trillion decline last quarter
Losing $5 trillion of wealth may sound disastrous, but that’s what happened to American households last quarter. According to the Federal Reserve, total net worth of U.S. households fell from $108 trillion to $104.3 trillion in the last quarter of 2018. The loss was the biggest quarterly drop since the depths of the great recession of 2008.
Announced today, PayPal has joined the extension of a Series A funding round in Cambridge Blockchain, a startup that helps financial institutions and other companies manage sensitive data using shared ledgers.
Neither PayPal nor Cambridge Blockchain disclosed the investment amount, but recent filings with the SEC indicate that Cambridge Blockchain has raised a total of $3.5 million in new equity from several investors over the past nine months. That follows the $7 million close of its Series A in May of 2018, and brings the total capital raised to $10.5 million.
As early wage access programs such as Even, PayActiv, FlexWage, ZayZoon and DailyPay gain traction, some other apps are copying their style while using a more traditional payday-loan model — sparking attention from law enforcement agencies in the process.
That’s what happened to Earnin, which is often referred to and bills itself as an early wage access provider, which give employees access to their paychecks before they are deposited. The New York Department of Financial Services launched an investigation of the firm over concerns it may be skirting state lending laws by, among other things, requiring tips from users in lieu of disclosing fees.
Leading crypto lending platform BlockFi recently announced that their Interest Account customers received their first interest payment for their Bitcoin [BTC] and Ethereum [ETH] deposits.
Since their public launch on March 5, BIA has grown by over 400% and counting. Approximately 75% of BIA clients have a balance of less than 5 BTC or 150 ETH. Their median account balance is $7,000 USD.
Former Wall Street trader Edgar Fernandez used some of his bitcoin as collateral to borrow nearly $100,000, a move that let him keep his cryptocurrency and avert a tax bill on the newly acquired cash.
Genesis Capital, a cryptocurrencies lender in Jersey City, New Jersey, an affiliate of Genesis Trading, says it handed out more than $1.1 billion in cash loans and borrowed virtual cryptocurrencies in 2018. That total volume doubled in the last quarter of 2018 from the volume of the previous two quarters. Other lenders have also said they are doing more transactions, including Nexo, a cryptocurrencies lender that says it has loaned $330 million since launching last April.
The asset tokenization company, Atomic Capital, is making a very aggressive loan offer in the crypto lending field. Back on Wednesday, the firm will be giving USD loans for 85% of the value of the Bitcoin (BTC) or Ethereum (ETH) used as collateral. In this way, the firm will be offering the most generous loan-to-value (LTV) in the space.
Just to put it into comparison, BlockFi offers a maximum LTV of 50%. Celsius Network, meanwhile, is giving customers 25%, 33% or 50% LTV.
Atomic will be charging interest rates of 11% and 13%. This is much more than the 4.5% or 8.95% that other competitors offer.
Success Member Inc.: It is the leading online loan marketplace that connects consumers with banks, credit partners and multiple lenders both nationally and internationally. They offer training with an expert to this industry of 33 years, along with a lifetime one-on-one dedicated support.
Tradeweb Markets Inc. raised $1.1 billion in the second-largest U.S. initial public offering this year, after again increasing the number of shares it was selling and then pricing them above the marketed range.
A class action lawsuit has been filed in California against Direct Lending Investments, LLC (DLI), Brendan Ross, Bryce Mason, Frank Turner, Rodney Omanoff, and Quarterspot Inc. alleging breach of contract, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, and fraudulent inducement.
Pagaya, which manages money using algorithms created with artificial intelligence, has raised $25 million in a series-C financing round led by Oak HC/FT, a health care and financial technology venture firm.
The fund raise will support the company’s move into real estate, corporate credit, mortgages, and other asset classes.
White Oak Commercial Finance (“White Oak”), an affiliate of White Oak Global Advisors, today announced the appointment of Andrew Bae to Director of ABL Originations, concentrating on Texas and the Southwestern U.S. region. Mr. Bae brings nearly 20 years of experience in commercial finance, most recently leading the establishment of the Dallas office for ExWorks Capital, a senior secured debt fund.
Digital challenger bank Monzo crowned a bumper year in 2018 by coming first for customer service in an independent survey, stealing the title from regular winner First Direct. But will its growing legion of coral card-carriers ever pay for its expanding array of services?
The bank, which is now testing a new paid-for premium offering, thinks they might just do so. ‘Monzo Plus’ – as it is being called – even allows users paying a monthly fee to have Monzo cards in colours other than its famous ‘hot coral’ colour.
There are now just over 48 hours left to make the most of the annual tax breaks on offer in an individual savings account (Isa). This year’s £20,000 allowance expires at midnight on April 5 and you can’t carry it over so it’s a case of use it or lose it.
Through Monevo, you’ll be matched with loans of up to $100,000 with interest rates ranging from 3.99% to 35.99% APR; finding this many competitive options could take you hours to do individually. With Monevo, you can do it in about 60 seconds.
The administrators of WageDay Advance, which went under in February, have started contacting thousands of former customers owed compensation through being mis-sold loans by the company to urge them to join a growing list of creditors.
Compared with Wonga, WageDay was more of a piranha fish than a shark – but the problems it has created aren’t all that different.
THIS WEEK is the busiest of the year for ISA providers and ISA savers alike. As the end of the tax year approaches, investors and savers are rushing to make the most of their annual ISA allowance, while ISA managers scramble to convince them that theirs is the right product.
People are still making money from property and always will, sometimes lowering their exposure by jointly investing with friends and family, or looking at peer-to-peer lending. Investing locally can give first time investors more confidence as they know their own postcodes, and can keep an eye on what’s going on.
Finastra today announced the appointment of Sharon Doherty, as Chief People Officer. Doherty joins from Vodafone, where she held the position of Global Organization and People Development Director. In her new role at Finastra she will have global responsibility for making Finastra the most loved and inclusive employer in the Fintech industry.
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In March Fellow Finance investors funded business and peer-to-peer loans worth around 18,2 million euros. Cumulative loan volume grew over 415 million euros and the total number of investors grew to 12 031. You can always check the real-time peer-to-peer lending statistics on our website: www.fellowfinance.com/for-investor/statistics.
In a Nutshell: In the wake of the 2008 financial crisis, peer-to-peer (P2P) lending arose as an alternative to credit offered by traditional banks. At the same time, blockchain-based cryptocurrencies like Bitcoin also emerged. Now, CoinLoan is bringing the two together through its P2P lending platform that lets borrowers use cryptoassets as collateral for obtaining fiat (or traditional) currency. Lenders provide capital with a guarantee from CoinLoan that they will be repaid in full. Borrowers gain access to funds without needing to dispose of their cryptoassets or prove their creditworthiness.
Valerie Kay, Chief Capital Officer at LendingClub, is responsible for overseeing LendingClub’s Investor Group. She addresses the need for diversity, inclusion, mutual respect and collaboration. She emphasizes the vital importance of diversity to drive better workplaces, happier customers and more profits.
Andrea Gellert, Chief Revenue Officer and Chief Marketing Officer of online small business lender OnDeck, says she sees good progress being made by Fintechs in finding female candidates at all levels including C-Suite and board positions. She points out, “There are more female founders than there used to be. We are moving at a much more accelerated pace than previous industries did in terms of female management.”
Sydney-based digital bank Volt promises to offer a faster more personalised service than the country’s big four incumbents – National Australia Bank, Commonwealth Bank, Australia and New Zealand Banking Group and Westpac.
Melbourne-based small business bank Judo launched last June lends between A$250,000 to A$5,000,000, and is process of applying for a banking license from the Australian Prudential Regulation Authority.
According to research from small business lender OnDeck Australia, which involved a survey of 331 business with an annual turnover of less than $5 million, 25 per cent of SMEs plan to seek additional finance over the next 12 months.
India currently has about 30 online P2P lending platforms. Some of these are Faircent, i2ifunding, Lendbox etc. In 2018, as many as 11 P2P players received the RBI licence to operate as an NBFC – P2P company. RBI in its master directions has defined NBFC – P2P as a non – banking institution which carries on the business of a peer – to – peer lending platform. The estimated P2P lending to be generated in India over the next 5 years is pegged at around $ 4 bn. Whereas in China, the P2P lending book currently is around $ 100 bn.
SINGAPORE-based leading SME lending platform Validus Capital (Validus) and Lighthouse Canton, an independent asset management and family office advisory services firm, jointly announce the reopening of the LCV Trade Finance Fund (the Fund) with additional capacity of US$14.8 million (S$20 million; RM60 million).
OnDeck (NYSE: ONDK), the leader in online lending to small business, today announced it has completed the transaction combining its Canadian operations with Evolocity Financial Group (Evolocity), a Montréal-based online small business lender. The combined companies are majority owned by OnDeck.