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Payday loan firms not competitive, says CMA Payday loan firms not competitive, says CMA
(about 1 hour later)
Payday lenders lack price competition, so customers may be paying too much for their loans, regulators have said.Payday lenders lack price competition, so customers may be paying too much for their loans, regulators have said.
An investigation by the Competition and Markets Authority (CMA) has found that lack of competition could be adding £30 to £60 a year to customers' bills.An investigation by the Competition and Markets Authority (CMA) has found that lack of competition could be adding £30 to £60 a year to customers' bills.
The regulator will look at ways to change the situation, including establishing an independent price comparison website.The regulator will look at ways to change the situation, including establishing an independent price comparison website.
Lenders may also have to give clearer disclosure of borrowing costs.Lenders may also have to give clearer disclosure of borrowing costs.
"If you need to take out a payday loan because money is tight, you certainly shouldn't have to pay more than is necessary," said Simon Polito, chairman of the CMA payday lending investigation group."If you need to take out a payday loan because money is tight, you certainly shouldn't have to pay more than is necessary," said Simon Polito, chairman of the CMA payday lending investigation group.
The average income of payday lending customers is similar to the overall population, but access to other credit options is often limited, he said.The average income of payday lending customers is similar to the overall population, but access to other credit options is often limited, he said.
"In some cases, those borrowers paying the extra costs are the ones who can afford it the least," said Mr Polito."In some cases, those borrowers paying the extra costs are the ones who can afford it the least," said Mr Polito.
"This can particularly apply to late payment fees, which can be difficult to predict and which many customers don't anticipate.""This can particularly apply to late payment fees, which can be difficult to predict and which many customers don't anticipate."
The role of companies that generate financial leads for payday lenders may also have to be more transparent, the CMA added. Bids for customers
"We found that 40% of new online borrowers take out their first loan with a lender via a lead generator, but the way in which these companies earn their money - by selling customer applications to the highest bidder - is often not made clear on their websites and some customers are unaware that these companies are not actually providing the loan," Mr Polito said.
For a typical loan of £260 taken out for just over three weeks, lack of price competition could be adding £5 to £10 to the average cost of the loan.For a typical loan of £260 taken out for just over three weeks, lack of price competition could be adding £5 to £10 to the average cost of the loan.
On average, customers take out about six loans per year, so a typical customer could save between £30 and £60 in a more competitive market, the regulator found.On average, customers take out about six loans per year, so a typical customer could save between £30 and £60 in a more competitive market, the regulator found.
"Some customers may be getting a worse deal still, given that the gap between the cheapest and most expensive deals for a month-long £100 loan is more than £30," it added."Some customers may be getting a worse deal still, given that the gap between the cheapest and most expensive deals for a month-long £100 loan is more than £30," it added.
The role of companies that generate financial leads for payday lenders - sometimes through texts and emails - may also have to be more transparent, the CMA added.
"We found that 40% of new online borrowers take out their first loan with a lender via a lead generator, but the way in which these companies earn their money - by selling customer applications to the highest bidder - is often not made clear on their websites and some customers are unaware that these companies are not actually providing the loan," Mr Polito said.
The CMA estimates that in 2012 there were some 1.8 million payday loan customers in the UK, taking out approximately 10.2 million loans, worth £2.8bn.
These figures represented a 35% to 50% increase on the previous financial year, but this rate of growth may have fallen since.
There were at least 90 payday lenders offering loans to UK customers as of October 2013 but the three largest lenders - CashEuroNet, Dollar and Wonga - account for about 70% of total revenue generated from payday lending in the UK.
The authority said that customers, most of whom found deals online, focused on the speed and the availability of a loan rather than its cost, so there was little incentive to compete on price.
Cap on costs
The competition authority opened its investigation into payday lenders last summer after Office of Fair Trading (OFT) concerns about "deep-rooted problems with the way competition works" in the industry.The competition authority opened its investigation into payday lenders last summer after Office of Fair Trading (OFT) concerns about "deep-rooted problems with the way competition works" in the industry.
The OFT said that customers found it difficult to identify or compare the full cost of payday loans.The OFT said that customers found it difficult to identify or compare the full cost of payday loans.
But consumer group Which? said this investigation did not get to the heart of the issue about the affordability of payday loans.
"Forcing lenders to be clear and upfront about costs would help consumers to compare the price of different loans. But this is not sufficient to clean up the payday market and stop the spiral of debt into which so many people fall," said Richard Lloyd, Which? chief executive.
It is not the only inquiry that the payday loan industry is facing.
The regulator, the Financial Conduct Authority (FCA), has proposed a series of measures to clamp down on the industry, including limiting loan roll-overs to just two, rather than the industry guide of three.
The FCA also proposed restrictions on the use of continuous payment authorities (CPAs), which allow lenders to take payments from accounts.
A crackdown on the industry by the FCA, including tighter inspection, has led a number of businesses to leave the market. They include the UK's second-biggest High Street payday lender, Cheque Centre, which withdrew after being accused by the FCA of poor practice in the way it treated customers in debt.
The government is also planning a new law to cap the cost of payday loans, with the regulator having been commissioned to work out the level of the cap.