Every business has to start somewhere. Banks, global corporations and even McDonald’s began as a small business just trying to make it work. This also holds true with payday lenders. Before they started generating any sort of profit, many lenders went cap in hand in search of financial sources to get their businesses off the ground. This article reveals where much of this funding has come from and why this might lead to a potential conflict of interest.
Where does the money really come from?
While you might consider payday lenders to be a likely source of competition for the banking sector, the UK’s high street banks have actually invested millions of pounds in the industry. The banks never baulk at an opportunity to make money, and it seems they considered the payday lenders to be a sound investment.
Some of the biggest UK payday lenders are actually backed by US companies that are banned by law from issuing payday loans in American states. While Wonga is currently the UK’s largest payday lender, two of the other major players, Pounds to Pocket and QuickQuid, are both owned by CashEuroNet UK, which is an American firm registered in Delaware, a state where US firms can take advantage of low taxes and laws protecting shareholders.
The changing payday loan climate
In recent months, the Financial Conduct Authority (FCA) has taken over regulation of the industry from the Office of Fair Trading (OFT) and began its reign by introducing tough new rules. These rules will stop lenders from accessing borrowers’ bank accounts to collect payment on more than two occasions and prevent loans from being rolled over more than twice.
Furthermore, proposals to cap the cost of a payday loan have been announced by the FCA to make payday loans more affordable and to limit the potential for borrowers’ debts to spiral out of control. The proposals, which are currently in the consultation period, limit the cost of a payday loan on three fronts.
- Limiting the total interest charged per day to 0.8 percent
- Reducing default charges to a maximum of £15
- Ensuring that total fees and charges never exceed 100 percent of the original loan amount
Criticism of the banks
Despite widespread criticism of the high street banks’ current reluctance to lend to small and medium-sized enterprises, many of the UK’s short-term lenders have received loans from banks for their funding and set up costs. So much so in fact, that the US based payday lender, Lending Stream, described Barclays Bank as a major ‘strategic partner.’
And that’s not all. Lloyds TSB, which relied on a £5.5bn taxpayer bailout to save it from collapse, has provided funds for Instant Cash Loans Limited who are owners of the Money Shop. The Royal Bank of Scotland, another tax-payer owned bank, has also invested heavily in the short-term loans industry.
Irrespective of the strict new regulations and cost cap proposals, international investors are still keen to invest in short-term lenders. One of those investors to buy into the industry is Don Valentine, the venture capitalist who has made his fortune backing companies like YouTube, Google and Apple. He clearly knows a good opportunity when he sees one and for him the short-term lenders have a bright future in the industry.
So what does all this mean?
Have you ever considered that the widespread condemnation of the payday loans sector might be unfair? The banking sector has been responsible for the PPI misselling saga which still prompts over 1,000 complaints to the Financial Ombudsman every single day. Then there’s the Libor rigging scandal, the recent business loan misselling case, and of course the catastrophic mismanagement that brought the country to its needs in the first place.
Could it be that the banks are busy funding their very own scapegoat to divert the attention from their chronic shortcomings? Well, stranger things have happened.
What do you think? Is it right for banks to invest in payday lenders? We’d love to hear from you on this issue, so please leave your thoughts in the comments section below.
***Photos thanks to geralt of Pixabay and Jason Comely of Flickr.***