Pay day lenders’ business model analysed and slated by UK accountancy body

13th May 2014


The current payday lending business model makes huge profits from defaulting borrowers, repeat borrowing and multiple loans from different lenders a report from one of the UK’s leading accountancy bodies says.

The Association of Chartered Certified Accountants (ACCA) has launched a report on payday lending looking specifically at its business model, called Payday lending: fixing a broken market.  The report was written by Sarah Beddows, an independent consultant and Mick McAteer from the Financial Inclusion Centre. The report demonstrates through economic modelling and analysis of publicly available data, that the business model of payday lenders relies on repeat lending for profitability.

The report says that consumer detriment, in the forms of default, repeat borrowing and the taking of multiple loans from different lenders, appears to play a highly profitable role in existing business models.

Ewan Willars, director of Policy at ACCA says: “When considering in 2012 borrowers spent over £900m on payday loans, with £450m spent on loans which were subsequently ‘rolled over’ you begin to understand the magnitude of the market.

“While ACCA does not necessarily think short-term lending is innately harmful, the current payday lending format exhibits clear signs of market failure. As part of our Royal Charter ACCA is committed to acting in the interest of the public to highlight where improvements can be made and enter into meaningful discussions with all parties to make improvements.We need to find a more responsible way to meet the needs of short term borrowers.  This will take better regulation and innovation amongst providers of credit.”

ACCA have also commissioned a video called Debt Shadows to coincide with the announcement of the report.

The report also found that online loans carry higher charges than store-based loans, so prolonged use carries a greater risk of consumer detriment. It adds that default rates among online borrowers are significantly higher than among store based loans.

It also suggests that lenders may be using the first loan to a borrower as a credit check rather than assessing ability to pay in other ways. It says: “If running out of money at the end of the month (ie applying for the loan in the first place) is the most salient feature of borrowers’ financial situation, what kind of Affordability Assessment would have any predictive power? It appears that lenders may be using the borrower’s first loan itself as a substitute credit check.”

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