In recent months, some of the UK’s biggest payday loan companies have gone to administration after it became clear that their operations are no more viable.
The growth story
Payday loan companies came into being in 2000 when the country’s economic policies were going through a phase of serious reforms. Over the next decade, the operations of payday companies flourished at an amazing rate, which saw both the number of companies and the customers going up substantially. By the end of 2013, the number of people availing payday loans in the UK reached 1.8 million from less than 250,000 before 2009.
FCA guidelines & fall of payday loan companies
However, with the Financial Conduct Authority (FCA) introducing a set of new guidelines for the payday loan companies in 2015, the unabated growth of these companies witnessed the first roadblock. The FCA started a clampdown on the payday loan industry by introducing clear rules and acting as the regulator for the market. It moved decisively to check the irrational and wild interest rates set by some lenders.
The FCA guidelines made it mandatory for the payday loan companies to fix the number of loans a person can buy at a time. It also asked the companies to check the affordability factor of the customers before disbursing the loans. The companies were also asked to put up caution and warnings on their websites.
Customers seeking compensation
The FCA’s tough stance against the unregulated and wild business practices resulted in many customers seeking compensation from the payday loan companies for giving them the loans on atrocious conditions and the companies had to pay the compensation. Wonga which is the latest one to go to administration has made over £400million in profits before going bust. Other important payday loan companies that have reported bankruptcy include Quick Quid and The Money Shop.
Introduction of best practices
It is true that since their inception in 2000, payday loan companies never had to conform to the regulation as strictly as since the introduction of FCA guidelines. The clean-up exercise taken up by FCA has finally introduced the best practices for the sector to chart out a fresh and sustainable growth trajectory. Some payday loan companies which were not prepared for the eventual cleaning up of the business practices have been on the receiving end of the regulator’s tough attitude.
Alternative products in the market
However, besides the FCA clampdown, the market has seen competition from similar new products that offer both a longer time span of 6-24 months to repay the loan and a more sensible interest rate than what some payday loan companies have been charging their borrowers. The new tech start-ups in the sector, such as BadCreditSite are redefining short term loans and how they’re found.
The business model of payday loan companies was lopsided that always put the borrowers at a disadvantage, and therefore, it was not sustainable. The bubble has begun to bust and with the FCA guidelines in place, there is little room for these entities to play foul anymore. Better app-based alternatives have started to cater to the market of short term loans, which offer the wage earners a more respectful way of availing short term loans.
The market of short term loans seems to have moved on from the payday loan to app-based better loan offerings from tech start-ups. The trend appears irreversible and can make payday loan companies completely overhaul their business practices and offerings.