In the lead up to the 2016 federal election, Good Shepherd Microfinance asked team members what financial inclusion issues they’d like to see addressed during the election campaign and by the incoming government. Good Shepherd Microfinance CEO, Adam Mooney, outlines changes he’d like to see made to payday loans.
There’s been a lot of commentary in recent years about the growth of sports gambling. Once contained to shopfronts in the suburbs, bets can now be placed anywhere, anytime using a smartphone. Betting adverts are now on TV, radio, player’s uniforms and newspapers, as highlighted by Tuesday’s Sydney Morning Herald which carried a full front page advert for betting giant Ladbrokes.
The impact of this advertising can be heard in the way sports fans talk about the game – betting terms like ‘the line’, ‘multies’ and ‘the spread’, once obscure, are now broadly used and understood by the sports fans, and kids judge a team’s chances by the odds rather than their line-ups.
This popularisation of sports gambling culture has been mirrored in the financial sector, where the ease in online lending, anywhere, anytime, combined with an advertising blitz, has seen a boom in payday loans – short term, high cost loans which typically make a borrower’s financial situation worse.
Like sports betting, these companies are trying to change the way we speak in an effort to make their products, once hidden in dingy shopfronts, seem like a normal part of life. Online payday lender Nimble tells us that when we have a financial hurdle we should “just Nimble it and move on” – a clever attempt to make its name synonymous with a simple, carefree lifestyle.
The outcome has been stark. The payday loans written in Australia has grown by 80 per cent over the past decade. The number of women using these loans has grown by 110 per cent.
But such rapid growth is unlikely to be the result of advertising alone – these numbers show there’s a demand for their product. Our major banks have become increasingly risk averse, and people who would have previously been able to borrow at affordable rates from a mainstream lender are now finding themselves shut out.
These are the working poor. They earn too much to be eligible for programs like our No Interest Loan Scheme (NILS), yet their overheads and relatively low income makes them too risky for banks. They need credit, but they need fair and affordable credit. Payday lenders charge around 240 per cent, more if you accrue a late payment or default fee, and a loan that expensive will only ever compound a borrower’s financial problems.
As long as annualised interest rates sit at around 240 per cent and with high fees for defaults or dishonours, taking out just one loan will leave a borrower on a low income without enough money to pay for day-to-day living expenses such as food and utility bills. Many borrowers will end up taking out further loans just to get by.
The solution, which is easy to identify but harder to bring about, is to create a market that offers credit that is priced on the purpose of the loan and a person’s capacity to repay. We need to move beyond the binary thinking of products as charity and therefore free, or of products as ‘for-profit’, where financial return for the shareholder is the only goal.
In the case of credit, this would involve a cost structure which sets prices by balancing a person’s need for the product, that is how essential is the item to their wellbeing, with their capacity to afford the cost of finance and repay the loan. For example a NILS client on a Centrelink benefit needs a loan for an essential household item like a fridge and they have the capacity to repay the cost of that fridge (and not a cent more) over a reasonable period of time. A bank personal loan customer, on a slightly higher income, may also have an essential need, but has the capacity to repay a little more over a reasonable timeframe. The problem is that currently payday loans are not priced at affordable rates that are aligned with a person’s capacity to repay.
We also need lenders to refer clients to other services where appropriate, such as NILS, financial counselling or hardship programs especially if they’re borrowing to cover other debts.
We can’t rely on market forces to drive down prices and promote good practice because research shows there is little competition in the sector. Despite the proliferation of lenders, customers aren’t shopping around for the best rate. They’re desperate and will borrow from the first lender they come into contact with, so there’s no incentive to drop rates and, consequently, the vast majority of lenders charge the maximum allowed under Australian law.
That’s why we need the Government to play a role. In the absence of competition, we need consumer protections to be regulated and strong oversight to ensure responsible lending. With a government-commissioned independent review into payday loans recently completed, the incoming government will be well placed to take immediate action.
The independent review made a number of regulatory recommendations that would go some way to improving payday loans and goods rental – another booming industry harming people on low incomes. For payday loans the review recommends:
There will be those who say this is only tinkering around the edges of the problem, and others who see this as unnecessary market intervention, however our view is that implementing the review’s recommendations would immediately improve the sector.
The main problem remains – people need short term credit, but the current fees and charges are simply too much for many people and families. It means these loans are neither affordable nor fair. There is a gap in the market for affordable, short term loans that needs to be filled by a responsible lender but, in the short term the government shouldn’t miss the opportunity the recent review presents – a chance to make meaningful change to an industry that has made itself an expensive crutch for people struggling to pay the bills.
By Adam Mooney
Chief Executive Officer, Good Shepherd Microfinance
Adam Mooney has considerable experience in community development, social inclusion and financial services, working in Australia, Cambodia, England and New Zealand. He joined Good Shepherd Microfinance in April 2012 from Reconciliation Australia, where he performed several roles, including Acting CEO, Director of Business Development and, for over three years, Director of Reconciliation Action Plans, the organisation’s primary program.
Prior to that, Adam was Head of Community Development Finance with ANZ from 2005 to 2008. Before that, he worked with development agency Concern Worldwide in Cambodia from 2003 to 2005 on community-led livelihood programs, where he helped establish what is now Cambodia’s largest financially sustainable microfinance institution. Adam brings strong corporate, financial management and governance experience after senior roles with ANZ and Merrill Lynch including CFO and Head of Finance.
Tags: #AUSVOTES, Financial Inclusion, microfinance, payday loan, SACC, Small amount credit contract