The Watcher Cat

The Watcher Cat

Friday, July 26, 2013

"I Have a Cunning Plan..."

Let's be charitable and hope that this falls into the "swing and a miss" category.

The Archbishop of Canterbury announced to the press that it is targeting payday lenders:
he archbishop of Canterbury has told Wonga that the Church of England wants to "compete" it out of existence as part of its plans to expand credit unions as an alternative to payday lenders.

The Most Rev Justin Welby said he had delivered the message to Errol Damelin, the chief executive of Britain's best-known payday lender, during a "very good conversation".

"I said to him quite bluntly 'we're not in the business of trying to legislate you out of existence, we're trying to compete you out of existence'," he told Total Politics magazine.


In June, Wonga raised the standard interest rate it quotes on its website to 5,853% APR, leading to renewed calls from poverty campaigners for a cap on the cost of short-term credit.

Someone borrowing £200 for a month from Wonga will typically pay back £270.

Welby, who has served on the parliamentary Banking Standards Commission, said he wanted to create "credit unions that are both engaged in their communities and are much more professional – and people have got to know about them."
Huh. Sounds like a plan, right? I mean, non-coercive, just opening a campaign on the social justice front, and making a better way available--it's a conservative response, but one which (unlike anything the American GOP has suggested in opposing the President's agenda, for example) has the virtues of (1) acknowledging the problem; and (2) proposing a solution.

Or perhaps not. As Felix Salmon notes:
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.
Moreover, as the Guardian has reported, the Archbishop's free market competition idea could take the wind out of the sails of a real effort at regulation:
The Office of Fair Trading has referred the payday loans market to the Competition Commission, saying there are deep-rooted problems with the way competition works and that lenders are too focused on offering quick loans.

The regulator said variable levels of compliance with credit laws and guidance meant firms that invest time and effort to comply were at a competitive disadvantage.

The referral follows a year-long review of the sector which exposed widespread evidence of irresponsible lending and breaches of the law, which the OFT said were causing "misery and hardship for many borrowers".

Although lenders say their high-cost loans are designed to be taken out over short periods and that annual interest rates of often more than 4,000% are not a fair indication of the cost, the regulator found companies were making up to 50% of their money from customers who extended or rolled over loans or incurred late payment charges.


The OFT's chief executive, Clive Maxwell, said: "Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time. We have seen evidence of financial loss and personal distress to many people.

"The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market."
The fact that the Church of England "holds a more than £1m investment in one of the main financial backers of Wonga" might encourage a cynic to conclude that the Archbishop's plan is more cunning than it seems--that it is designed to protect the Church's stake for the "decade long" period Welby said the credit union option would take to set up and really compete with Wonga, but I don't want to presume bad faith here; the Archbishop has disclaimed knowledge, and he has been in place so short a time that he quite reasonably could not know. That said, as I pointed out over three years ago, the Church of England has previously invested in "predatory equity," and really should get to work on formulating and following an ethical investment policy.

And, as Salmon points out:
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.
Let's hope that the Archbishop rethinks this cunning plan, and comes up with something more pragmatic.

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