Last week saw the launch of four major new research projects that will advance understanding of effective strategies for tackling poverty. This important new research is part of the What Works in Tackling Poverty programme which is being led by the Public Policy Institute for Wales. Victoria Boelman and Alice Sachrajda, from the Young Foundation, are leading a project on ‘What would work as a viable alternative to payday loans?. Below they blog about the project.
“Before if I had saved for three months I would have been able to buy a new fridge. Now this is not possible … All the time I am in the minus.”
Time and again over the last few years we have heard stories like this – of households trapped by the rising cost of living and falling incomes. The recession and subsequent ‘austerity’ measures have exacerbated previous economic inequalities and pushed thousands of households into debt and situations of financial precariousness. Payday lending and other forms of high-cost credit rose sharply in the wake of the financial crash.
This proliferation of payday loan companies provoked a strong backlash – from the Archbishop of Canterbury’s ‘War on Wonga’ to the Advertising Standards Authority banning ‘socially irresponsible’ payday loan advertisements. But, despite efforts to offer up alternative forms of credit, the payday lending industry continued to grow and now supplies over 8 million loans annually, expanding from an estimated £100 million worth of loans in 2004 to over £2.2 billion in 2012/13.
Some research suggests that the majority of payday loans are taken out by people who are financially vulnerable and are using loans to pay for basic necessities like food, fuel or housing. For some people, payday loans appear to be the only viable option if there are no savings or family and friends to fall back on. Despite offering worse economic terms than some alternative products, including loans offered by credit unions, payday loan companies have been the decisive winner of the UK’s recent squeeze on household incomes. The staggering rise of extremely high-interest-rate debt threatens to shape the way many in poverty experience the economic recovery, reducing household spending power, increasing insecurity, and derailing anti-poverty strategies.
The Welsh government has taken concerted action to respond to the rise in use of payday loans warning of the damage to communities across Wales. It increased its support for the credit union movement in Wales and announced a £1.9 million funding package in 2013 to increase membership. But, despite this uptake has been generally much lower than hoped.
New regulations on affordability checks and controls on Continuous Payment Authorities are already forcing lenders to act more responsibly. The Financial Conduct Authority is also proposing a cap of 0.8% interest per day from January 2015, and that no borrower should pay back more than twice the value of the original loan. These measures are expected to make the business model of most payday lenders unsustainable, potentially putting large numbers out of business. Yet the likely significant reduction in access to short-term credit may have unintended consequences for those who currently use them – for example, defaulting on bill payments or missing rent payments can have other serious consequences for individuals.
The objective of our new research is to explore practical ways to offer viable, competitive alternatives to high-cost credit and to understand how the people of Wales can access more beneficial options. We start by aiming to produce the first robust picture of the extent to which Welsh citizens are using different credit products and a broad understanding of the triggers to taking out a loan and the reasons behind the choices made.
Getting product and service design right requires a rich and detailed understanding of the user-experience of using different forms of credit. Our study will adopt a participative methodology that will give us a ‘borrowers-eye-view’, to understand the customer journey and the role that individual, social and cultural factors play in the decisions made by low-income borrowers. Using those insights we will attempt to co-design a viable alternative offer to payday loan-style products through a series of participative workshops.
This is an intentionally practical project which seeks to have an impact on both policy and practice. There is no quick fix to issues of financial exclusion but by starting with a richer understanding of the experience of individuals, their needs, the challenges they face and the context in which decisions are made important steps can be made to help generate attractive and viable credit options which are accessible to those who need them most.