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The Borrowers

Ian Maleney

Loan Sharks: The Rise and Rise of Payday Lending, by Carl Packman, Searching Finance Ltd, 146 pp, £9.99, ISBN: 978-1907720543

It’s a common theory that the financial and social gains made by the working classes before and after World War II have been eroded since about the end of the 1970s. In works as varied as Adam Curtis’s Century of the Self and Thomas Piketty’s Capital, a story is told of Thatcherite and Reaganite policies which have expressly focused on undermining communal relations between workers (and, increasingly, non-workers) in favour of a rampantly individualistic understanding of success, desire and society. Piketty tracks the increasing financial divide between upper and lower classes, with his theory predicated on the idea that the rate of return on capital inexorably outstrips the rate of growth in modern economies, causing wealth to flow ever more towards pre-existing wealth. The acceleration of this process since the 1970s is driving first world countries towards a neo-Victorian situation, a return to a gilded age of hoarded wealth and masses of working poor, with all the impoverishment and instability that implies.

Curtis’s work contains a similar message. The Century of the Self explores the ways in which neoliberal theories and policies developed throughout the twentieth century from a psychoanalytic perspective and examines some of the ways in which people have dealt with them during that time. One particular point of interest is how, in the late 1980s, as wages began to stagnate and many traditional working class jobs disappeared altogether, consumer credit grew swiftly on the back of the financial deregulation brought in throughout Europe and the US at that time. The rise was obvious first among the middle classes, those who had credit readily available from banks through credit cards and mortgage loans. However, as long as there have been banks there has been a percentage of the population who exist below their notice; people who can’t get credit from them because they don’t earn enough, because they have a chequered credit history or even because they aren’t the type of person a bank wants to be seen lending to, people who never have savings accounts or pensions, people who never look for a mortgage or a car loan, people who might function entirely in a cash economy. This sub-banking category is growing ‑ at least in part for the reasons outlined by Piketty and Curtis - and it is the bedrock upon which the high-cost credit industry is built.

Carl Packman’s book attempts to provide a historical background to today’s payday lending industry and to tracking in detail the spread of this most virulent disease. He follows this dangerous, but mostly legal, outgrowth of the loan shark, pawnbroker and check-casher as it develops in the US before spreading to the UK, Europe and Australia. What started as one shop in 1993 is now a global industry worth several billion dollars, sucking money heartlessly out of low-income communities.

Payday lending works like this: Mark finds himself in need of a short term loan to cover an immediate expense ‑ rent, say, or an electricity bill. He can walk into a payday lender (or use its website) and leave fifteen minutes later with cash in hand. The typical loan, in the UK, is about £270. The average repayment period is thirty days. If Mark pays back his £270 loan within thirty days, he’ll pay, on average, £67.50 in interest on top of the principal. If he finds he can’t pay the money back in time, the loan rolls over and he now owes £337.50 plus £84.38, or a total of £421.88. Within two months, Mark owes 156 per cent more than the original amount he borrowed. Should he not be able to pay, the debt spirals. These high-cost compounding loans are the lender’s ticket to huge profits, and what leads to incredible representative APRs like those charged by UK market leader Wonga – 5,853 per cent.

Though Packman’s focus is mostly on how payday lending has travelled and grown, there are hints at what might be considered the more useful question: why? One of the causes suggested is the retreat of traditional banking services away from low-margin, small sum lending to the working classes and small enterprise, toward long-term, high-profit mortgage and commercial investment loans. Put simply, the return banks get on lending to the poor increasingly isn’t worth the paperwork, not when there’s so much more money to be made elsewhere. Banks are closing their branches in poorer areas, physically and ideologically distancing themselves from an unprofitable market. Lloyds in the UK, for instance, is planning to close two hundred branches next year, and cut nine thousand jobs, despite a 35 per cent rise in profits in the first nine months of 2014. The money saved will be channelled into more lending for mortgages.

Packman pinpoints the birth of contemporary payday lending ‑ distinct from loan sharks in that lenders operate mostly in the open, exploiting loopholes in credit regulation ‑ to 1993, the beginning of the Clinton administration and a troubled time for the global economy. By this point, credit cards and bank loans were necessary additions to wages for many of the working and middles classes, who were no doubt feeling the stagnation of their take-home wages. In 1983, 37 per cent of American families had a credit card; by 1992, it was 62 per cent. The average wage in the US was lower, in real terms, in the mid-90s than it was ten years previous. Even now it has barely grown. If the median household income had kept pace with the rise in productivity of the US economy since 1970, it would be almost double what it is. Instead, it has grown just four per cent in the last 20 years. While the minimum wage in the US has increased twenty-one per cent in real value since 1990, the cost of living has increased by 67 per cent, and a year on the full-time minimum wage will net you around half of the amount widely accepted as necessary for economic security.

In Ireland, the average income is down over €1,000 a year from where it stood in 2009, and twenty per cent of workers earn less than a living wage. By the EU Commission’s measurements, 24.9 per cent of Irish people live in “material deprivation”, unable to afford the basic necessities of daily life. British workers are, on average, £2,000 worse off than they were in 2008 and, if you’re under twenty-five, real wages are at 1998 levels. If you can get a job that is – twenty-two per cent of Ireland’s remaining youth are unemployed, a figure that is less shocking than it might be thanks to emigration, education and the statistical manipulation of exploitative employment schemes. These trends, to one extent or another, are mirrored across the Western world, and it is in this eminently suitable environment that pay-day lending flourishes.

Packman asks a pertinent question: which type of borrower does the payday lending industry seek? “Is it the impatient, relatively better-off customer who doesn’t want to visit the bank manager to justify an expense, who wants few questions asked, and perhaps wants to keep the bank manager at bay so they can be relied on at a later date (perhaps for a conversation about a mortgage loan)? Or is it the working poor consumer who has seen the cost of living increase far faster than their wage packet?” The question almost answers itself. While the former might use a payday loan service, they don’t make the lenders much money. It’s the latter group who find they can’t pay back their loans as quickly as they thought, who roll over or default, landing themselves with repayment agreements that see their bank accounts raided by direct-debit. It’s the latter group who are pretty much always short a hundred quid, and sometimes just can’t do without. It is this group that payday lending targets so successfully.

Just as it is more difficult for the poor to eat healthily, so it is with personal finance ‑ getting quick, expensive loans when one is in a pinch is easier than securing long-term financial stability and reasonable repayment packages. Though the industry is only twenty years old, payday loan operators have more shopfronts in the US and UK than McDonalds or Starbucks. They’re on the high street, unlike the banks and they’re lending, unlike the banks. Their advertising is often childish and animated, presenting a friendly face to a desperate customer base ‑ people who find the cost of the bus or train to work is eating more and more of their pay cheque, parents who find that the cost of childcare is more than they can handle, those who find their rent is twenty-five per cent more than it was a year or two ago. Packman calls this group ALICE; asset-limited, income-constrained employed. These are the working poor, the precariat, locked out from steady employment and stable housing, locked out from any kind of stability at all.

The unemployed too are a beneficial source of income for payday lenders, who until recently have not even been required to inspect a borrower’s ability to pay back their loan. In the UK, people are increasingly forced to work to keep their benefits, with fear and intimidation at the heart of the strategy. Ireland seems to be following suit, looking set to privatise key social services and back-to-work programmes. People are paying for their benefits through full-time employment at sub-minimum wage levels: the €50 extra someone on the dole gets for working – that is interning – thirty-five or forty hours a week might barely cover the increased expense of transport, lunch, or work clothes. It mightn’t cover it at all, and it certainly wouldn’t cover any childcare costs that might be incurred. Payday lending provides a temporary crutch in the daily struggle. It is this unbalanced and underpaid labour market, scarred by low pay, long hours and decreasing job security, that drives people, both employed and unemployed, into the arms of payday lenders.

So what, if anything, is happening to curb the growing influence of the high-cost credit industry? Should it be curbed? For now, it appears that slightly tighter regulation is the official approach. Ireland’s Central Bank has actively “discouraged” payday lenders from setting up shop here, and their presence is certainly far less pronounced than it is in the UK. The US is far more awkward to regulate, with differences in legislation between states, as well as the backing of national banks and Wall Street funds, making high-cost lenders difficult to pin down. The UK’s Financial Conduct Authority this year brought in a cap on interest rates of 0.8 per cent a day and limiting all fees and charges to no more than 100 per cent of the principal loan amount. Greater scrutiny will also be required on the ability of borrowers to pay back loans. Those trapped in exponential debt crises will be safer, and market leader Wonga has had to write off £220 million in loans because of the new affordability measures. However, these changes will not greatly affect the ability of the biggest players in the UK to do business, nor their profits in the long term. The regulations will affect smaller lenders, forcing them to leave the market to the bigger fish. The FCA also estimates that seventy thousand current borrowers will be denied finance under the new rules, and many will receive less than they need. So is this really solving the problem? People obviously need the money; where are they to get it?

Packman concludes that more support for credit unions and cooperative, non-profit banks is necessary. These kinds of institutions invest in the communities that use them rather than siphoning off the cash for shareholders and CEOs. They can provide affordable finance for communities underserved by traditional banking, communities that have been hardest hit by the rise of payday lenders. Packman suggests that “greater leniency” be shown to these types of lenders in terms of their capital requirements, allowing them more freedom to lend. More than three million people in Ireland are credit union members, and they currently provide over €4 billion in loans, but membership in the US and UK is far lower. Providing people with a safe and reliable means of community-based finance is the only viable market solution to the social and financial costs of payday lending. Unfortunately, Irish regulators are taking the opposite approach and subjecting credit unions to far stricter operating rules, requiring increased professionalism from a largely volunteer workforce.

Alternative measures like credit unions are certainly positive steps, but they don’t address the underlying question of why are people borrowing so much, and so often. Why are people living so close to the edge of their means, or beyond them? Why are shareholders reaping the benefits of record corporate profits while workers are taking home less and less? (“Corporate profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years,” said The New York Times earlier this year.) The more this situation is allowed to grow, the more we will see payday lending taking over the high street, at the expense of more productive, useful enterprises that generate employment, community and taxable income. To go back to Piketty, or better again all the way back to Marx, this could have disastrous consequences for the workings of capital, because a healthy capitalist economy requires a large amount of discretionary spending by working and middle class people ‑ someone has to generate the profit.

For years now, we have been hearing that consumer confidence is dangerously sluggish, having failed to bounce back from the economic crash, and this is a significant problem amid all the talk of recovery. If people don’t feel confident that they can meet unexpected expenses as well as their usual monthly bills they cannot be expected to dispose of their disposable income in a way that benefits the economy. They will save and scrimp, rather than buy cinema tickets, go out for a meal or buy a new car. Trips to the pub, clothes shopping, going on holiday – these are all important economic activities that in current circumstances seem harder to justify. A recent Deloitte Consumer Tracker survey suggested that thirty-nine per cent of Irish people surveyed were less optimistic about their disposable income increasing than six months previously. Only seventeen per cent had become more optimistic. The impact of a real wage decrease of 11.5 per cent in the last five years, and a twenty per cent drop in average household disposable income over the same time, is obvious: domestic demand is down almost twenty per cent on where it stood in 2007. Non-discretionary spending (healthcare, education, utilities) continues to increase, so how can people possibly have confidence in their ability to engage in a consumer economy?

As Packman illustrates, payday lending outfits are perfectly placed to exploit this gap, where people borrow “not so much on the promise of relative future prosperity, but to supplement wages and live throughout the month”, and little except pay increases can change this. Until people are paid more, they can’t spend more and until they spend more, the real economy will continue to flounder. Tax cuts, such as those brought in through the last budget and the suggested removal of the USC, will do nothing to help in the long term; they contribute nothing to the welfare of those most in need and those who actually keep the economy motoring. Recent movements, such as the increase in the minimum wage to $15 in Seattle and strikes by traditionally non-unionised workers at companies like McDonalds, Walmart and Amazon are pointing the way forward and must be matched here by a greater focus from trade unions and community organisations on raising the minimum wage, enforcing a living wage and securing improved work and social welfare conditions.

A greater transfer of wealth from high earners, rentiers and corporate bodies to the workers and tenants is the only immediate way to create a stable social and economic environment. Increases in individual wages ought to be matched by an increase in the social wage, whereby public goods and services are improved and provided for the benefit of all, paid for out of increased taxation on corporate profits. Otherwise, we will continue to see the numbers in deprivation increase, consumer confidence will remain flat and local economies will not emerge from the doldrums. Our low-pay, high-cost economy is driving people into the arms of loan sharks, legal and otherwise, and holding the country back. As Unite economist Michael Taft puts it, “poverty is a cost on a productive economy – and in Ireland, it is a very high cost”.

Ian Maleney is a writer and musician living in Dublin.