Reproduced by kind permission of the CISI
Alex hates this time of year. It's when the
bills from Christmas, which have lain unattended for many weeks, now need
paying. This year they are a little higher than expected, by more than £200, and
Alex hasn't been sleeping well, thinking and worrying about how they are going
to be paid. His partner, Sam, tells him to go down to the money shop on the
High Street and borrow the £200 on a short term basis. Alex does as he is told.
Next month, the money is repaid, but Alex is astounded to find that he has been
charged £84 in interest and fees with a combined APR of over 2,200%.
Surely this is why the Government undertook in late December, as part of
the Financial Markets Act, to introduce a cap on the amount of interest that can
be charged on a loan? This legislation was aimed at payday lenders whose lending
rate, in APR terms, is in the thousands of per cent per year.
But Alex didn't go to a payday lender. He
went to a bank.
Alex obtained his £200 by taking an
unauthorised overdraft from one of the big four high street banks - one 40%
owned by the public. This was a bargain rate; had he gone to the other state
owned bank it would have charged an APR in excess of 4,000%.
On the other hand, if Alex gone to a typical
payday lender for his £200, the charge would have been £66, whereas at the sign
of the Black Horse it would have been £84 and over £110 at RBS.
So why is there such an outcry over payday
loans, but complete silence on the fees being charged by banks for unauthorised
We are warned that payday loans might be
fine for short term borrowing, but for anything longer than a month, use a
bank. True, but a bank overdraft is a short term loan; so how does it differ
from a short term payday overdraft?
In both cases the borrower pays the money
back, usually when their salary arrives. Probably also in both cases, some
further borrowing takes place the following month, ideally at a lower level than
before. So whether an individual borrows via an overdraft or a payday lender,
the principle is exactly the same but, rather unexpectedly for some borrowers,
it may be as cheap or cheaper to borrow via a payday lender than a bank.
The scandal isn't the rates charged by
payday lenders, but the rates charged by banks whether or not the borrowing is
Suppose that Alex has visited another high
street bank such as the Halifax, and been allowed to have an overdraft facility
of £200. Here the interest rate is advertised as 0%. However the apparently
innocuous daily fee of a £1 per day - including weekends - makes Alex pay an
effective APR of over 350%.
The payday lenders, and the banks, will live
or die by their own actions. In an age where the reputation of bankers,
regulators and (probably) politicians has sunk to new lows, public trust is
running on radically different lines than it was just a few years ago - along a
horizontal axis, based on the views of "people like me", family, friends,
Facebook, rather than the old vertical axis from leaders to junior apprentices.
Those who gain and keep a reputation for playing fairly will win in this
Simon Culhane, FCSI, Chief Executive, Chartered Institute for Securities &