The Australian Centre for Financial Studies (ACFS) has today released a report on the ‘payday lending’ market in Australia. The report, written by Dr Marcus Banks, Dr Ashton de Silva and Professor Roslyn Russell of the School of Economics, Finance and Marketing at RMIT University, and funded by an ACFS grant, finds that the Australian market for payday loans has grown significantly in recent decades, mirroring international trends. The authors argue that although such loans are relatively high-cost (reflecting the higher risks of borrower default), stronger regulation may not be the appropriate policy response. Lower caps on fees, for example, may have the unintended consequence of encouraging illegal lending activity – and so other policy initiatives should be trialled.
The report makes the following recommendations:
- That the recently-announced government review of small amount credit contract laws consider strengthening reporting obligations, either in the form of a national database or a tightening of the comprehensive credit reporting regime (CCR).
- That lender compliance be tightened in order to meet ‘presumption of unsuitability’ rules. A small proportion of the industry is not complying with its responsible lending obligations, resulting in instances where consumers receiving Centrelink payments have multiple loans.
- That policymakers recognise that any call to eliminate the industry does not remove the need for cash to meet the day-to-day living expenses of a significant proportion of the population. A broader understanding is required that growing income inequality and poverty are the crucial drivers for the growing demand for small loans.
Dr de Silva, one of the report’s co-authors, noted that: “This report is particularly timely given the recently-announced government inquiry. We find that although small loans (payday loans) in Australia are relatively high-cost, policymakers need to be realistic about what can be achieved through tighter regulation. Eliminating the industry is not a viable solution unless a cheaper option is found for the 1.1 million Australians who currently take out payday loans each year.”
Since the introduction of new regulations in 2013, loans of up to $2,000 for periods between 16 days and 12 months have been called Small Amount Credit Contracts (SACCs) – colloquially known as payday loans. In Australia, there has been a twenty-fold increase in demand for SACC loans in the last decade. The industry has consolidated from about 280 small independent operators in the mid-2000s to 30 in 2015.
The report observes that the high demand for SACC products is associated with socioeconomic changes – especially increases in income inequality and precarious employment, as well as a lack of alternative credit products that can be viably accessed by consumers. A common characteristic of SACC firms is that, because start-up costs are high and margins are low, revenue lines only tend to become profitable after the second or third loan. In general, therefore, profits appear to be derived from chronic borrowers.
“ACFS is delighted to release this report. Its timeliness and in-depth research speak to the importance of commissioning research papers that provide an evidence base for policymakers and industry to consider”, noted Amy Auster, Executive Director of ACFS.
Trends in the Australian Small Loan Market draws not just on existing data sources, but also data from an Australian Research Council (ARC) Linkage Project, responses from Victorian financial counsellors to a survey conducted in January 2014, and data from an RMIT University survey of online borrowers undertaken by Dr Banks in August 2014 (with the support of Money3 and LoanRanger). In addition, primary data was collected through interviews with a small number of key stakeholders. Dr de Silva sourced eight interviews with executives of leading payday companies and consumer finance advocacy agencies.
Trends in the Australian Small Loan Market is the latest report in the ACFS Commissioned Paper series. Each year, ACFS provides funding for academics at its consortium and associate universities to prepare Commissioned Papers that provide practitioners with an overview of the latest insights from recent academic and industry research.
Executive Director, Australian Centre for Financial Studies
Phone: (03) 9666 1018
Dr Marcus Banks
Research Fellow, RMIT University
Phone: (03) 9925 5511
Dr Ashton de Silva
Director of the Business College Doctoral Training Centre, RMIT University
Phone: (03) 9925 1313
Professor Roslyn Russell
Professor, RMIT University
Phone: (03) 9925 5187
Link to article in The Conversation: https://theconversation.com/payday-lending-vacuum-makes-regulation-difficult-48987