How not to compete with payday lenders
I’m in the UK at the moment, where it’s quite amusing to see the amount of attention paid to national institutions for which there is no American equivalent. Obviously, there’s the way in which a woman having a baby became front-page news for days on end, generating astonishing quantities of coverage despite the fact that all the facts could be summed up in a single tweet. And then, on the financial side of things, you have the Archbishop of Canterbury, Justin Welby.
Yes, financial. The head of the Church of England gave a long interview to a magazine called Total Politics, and if you get through the first 3,000 words or so, you’ll eventually find two paragraphs on the subject of payday lending. The archbishop says he would like to compete with High Street payday lenders, helping to build up a network of “credit unions that are both engaged in their communities and are much more professional”.
This incredibly vague plan, which even Welby admits is a “decade-long process”, was treated as a major announcement by the UK press: the BBC covered it at great length, and got reactions from senior politicians of all stripes; AFP ran a story under the headline “Church of England declares war on payday loans firm”; the Economist weighed in on historical parallels; and the FT flooded the zone, providing a news story (“Church of England to take on payday lenders”), a video, and a column from John McDermott.
This is all pretty impressive given that what we’re talking about here is the ultimate in vaporware. Welby didn’t really announce anything, there is no real plan in place for anybody to compete with the payday lenders, and in fact, if you read what he says carefully, it’s good news, not bad news, for those he is criticizing. According to Welby, when he met the head of Wonga, the biggest payday lender in Britain, the bishop said to the businessman that “we’re not in the business of trying to legislate you out of existence, we’re trying to compete you out of existence”. Which must have been music to Wonga’s ears — since competition from the Church is the last thing Wonga is worried about. The big risks, for Wonga, are legislative.
The fact is that Welby’s plan “to fight capitalism with capitalism”, in McDermott’s words, is doomed to fail. I’m a big fan of credit unions and of non-evil alternatives to payday loans, but the only way to beat Wonga, and the payday lenders more generally, is to make their actions illegal. You could set up a credit union at every church in the country, offering vastly better deals than anything available from Wonga, and Wonga wouldn’t bat an eyelid — because the first thing you learn, when you study payday lenders, is that they don’t compete on price.
Payday lenders do compete with each other, quite aggressively, but they do so on convenience first, and friendliness second. If you want to be successful in payday lending, you have to be convenient above all; that means having welcoming storefronts which are open very late and at weekends, and it also means — in the case of Wonga — being incredibly easy to use from any smartphone. The way that the competition works is that they start with someone who needs cash; the company which can get that person the cash in the quickest and easiest manner will be the winner.
I can also tell you who the loser will be, in that race: a credit union which has limited hours; is based out of a church rather than the high street; which is staffed with do-gooders who want to give out Helpful Financial Advice rather than friendly young sales staff who just want you to take out as big a loan as possible; and which by its nature bundles its loans with a large dollop of paternalistic concern.
If payday lenders ever have to compete with credit unions, it will compete in much the same way as MP3s compete with vinyl. You can make the case that the latter has better sound quality, but the fact is that no one cares: convenience trumps everything.
Welby is in fact a legislator: he sits and votes in the UK parliament, where he has an important voice. If he’s decided that he doesn’t want to legislate payday lenders out of existence, then he has basically decided that he’s OK with them continuing to gouge the very Britons who can least afford such things. Because there is no way he’s ever going to be able to effectively compete with them.