The tangled relationship between Aussie banks and payday lenders
How are banks and payday lenders connected? We untangle the strings.
On 4 August 2015, Westpac pulled its funding from payday lenders. If you were unaware of the association you may have been surprised – one of the Big Four banks letting payday lenders dip into its pockets? But in fact Westpac had been doing so since October 2013, when it signed a two-year deal to provide Cash Converters with $60 million in backing for payday loans.
That move proved controversial. "Banks are generally wary of the payday lending market given the reputation risks involved in writing short-term loans at high rates to low-income earners," the Sydney Morning Herald noted when the deal was announced.
So what happened? Westpac cited "commercial reasons" for pulling the funding, but when multi-million dollar commercial deals break down, there are usually multiple factors at play. When it comes to the funding of payday lenders, it always seems to come back to public opinion, compliance and ASIC regulations.
Which banks are associated with payday lenders?
At the time of writing (November 2015), none of the Big Four banks are providing any funding to lenders who offer payday loans. Westpac's decision to pull its funding came amid increasing pressure from government and corporate watchdogs over the behaviour of some short-term lenders.
The "commercial reasons" that Westpac cited might relate more to its desire to be a socially conscious bank than to a lack of return from the loans.Payday lenders are a necessary source of funding to many borrowers in need, but the loans are high cost and there are some dodgy practices being carried out by certain lenders. Having said that, Australia has one of the most heavily regulated and affordable payday loans markets in the world.
Westpac has moved away from paydays, which many commentators will view as a positive move. We're yet to see if Westpac will try and further embellish its social responsibility credentials by emulating NAB, which works with Good Shepherd Microfinance to provide low and no interest loans to low-income borrowers.
So where do payday lenders get their money?
This really depends on the lender. Some lenders, including Money3 and Cash Converters, are public companies that are listed on the ASX. Each company has a board of directors and stock that can be purchased. Other lenders such as Nimble were started by individuals and are run as a private business. The business earns its money from the fees and interest paid by borrowers.
The negative perception of payday loans can cause lenders to move on
It is not only banks such as Westpac that bow to public pressure when it comes to payday loans. Small amount loan lender Credit Corp, also listed on the ASX, announced in October 2013 a shift away from offering payday loans, instead focusing on longer-term loans for higher amounts. Interestingly enough, since its move away from payday lending, the company's share price has fallen 31% to $9.28. That doesn't mean demand is reducing. In a recent Sydney Morning Herald article, Cash Converters said its performance was likely to improve because it would soon have no competition.
Summary: What have we learned?
- Australian payday lenders are not backed by banks
- Banks such as Westpac and lenders such as Credit Corp have withdrawn from the payday industry, partly due to public criticism of payday loans
- Payday lenders continue to operate under the same regulations as before, getting their funding from wherever they need to – as public companies on the ASX or as private companies
It's important to understand the loans you're applying for before you submit your application. If you're thinking of applying for a payday loan, make sure you compare before you apply.