The Australian government is examining two consumer credit markets that have a huge impact on the lives of many low-income Australians: payday loans and consumer leases for appliances and furniture.
Among other questions, the review, triggered by a requirement in the Credit Act, examines whether the current regulatory regime strikes a “fair balance” between the need for these industries to remain viable and the need to protect consumers from exacerbation of their risk of financial hardship. .
It is an important – and welcome – step in the right direction that the terms of reference of the review recognize the link between payday loans (also known as low-value credit contracts) and the household goods rental markets. .
However, more is needed to adequately understand how low-income Australians actually manage their money, the scope and scale of their credit market commitments, and why this is of critical importance to regulators.
A complex juggling of debts
In our article published this week analyzing trends in the Australian small loan markets, we argue that two basic frameworks underlie the relationship between the lending practices of low-income households and the companies that provide various forms of consumer credit. .
The first framework was referred to by University of Queensland researchers Greg Marston and Lynda Shevellar as mixed credit economics – the complex routines and resources used by many low-income citizens to exercise their constrained credit choices. .
They describe the very different costs and calculations involved in making decisions about borrowing money from the private sector, the state, family members and friends, or through non-financial microfinance programs. government. There are pragmatic considerations such as the location of different credit providers, cost, eligibility, speed, and knowledge of the options available.
Emotional costs also need to be weighed, such as the potential risk of shame or stigma in seeking credit from a parent or from a welfare agency.
The mixed credit economy also has a very strong time dimension, as low-income consumers tend to rate credit affordability by periods consistent with their bi-monthly receipt of Centrelink payments.
Market responses – alternative financial services
Second, various credit products and services have been developed – especially over the past three decades – as market responses to the economic, geographic, and emotional computation involved in mixed economy credit that occurs in the credit landscape. debt of every citizen.
An Alternative Financial Services Market (AFS) has emerged – an economic framework comprising businesses offering multiple lines of services and products to meet the needs of low-income, precarious employed households.
These companies provide payday loans, pawnbroking services, option-to-buy household products and other forms of consumer leases, credit “repair” services, deposit arrangements, etc. debt collection services, in-house used car loans, “check cashing” services (especially in the US), and insurance products for low-income people.
Each AFS submarket is very complex. Companies in the small loan sector, for example, have specialized, multi-industry business models designed to offer specific products, such as pawn shops and payday services, brokerage services, or a suite of lending options. Vertically integrated that range from low margins, large volumes and smaller higher risk loans to higher margin, lower risk secured and unsecured credits valued in thousands of dollars.
Each model takes a different approach to minimize default risk, encourage repeat customizations, find new customer groups, leverage the value of consumer interactions, and institute administrative and compliance efficiencies.
About 90% of online requests are rejected by SACC providers who nonetheless monetize these requests by reselling the data as “lead generators” to other lenders willing to accept higher risk clients and others. markets such as consumer product retailers. A major player in the online industry believes the lead generation market is now larger in Australia than the small loan market.
An understanding of the AFS industry is very low. We do not know how many Australians use these services, nor how these financial products are integrated into the mixed credit economy of a low-income household.
Only partial information is available due to the lack of industry-wide data on consumption patterns (or whatever). We know that the costs of consumer leases are highly polarized. Based on the total cost, consumer leases are the most expensive way to access a household appliance. However, on a fortnightly basis, they are one of the cheapest.
We know that over a million Australians take out, on average, three payday loans each year. On the flip side, we know that around 25,000 Australians took out an Interest Free Loan (NILS) from a nonprofit agency last year.
The table below shows some stylized facts from what we have collected so far on the relationship between the AFS market and consumers who are unemployed, casual / precarious, and those with regular income.
What are the implications of these ideas for the current review? Should there be a national database where all credit providers are required to upload transactions in real time? Should the industry be more strictly regulated? Although these are important questions, we believe they do not answer the fundamental problem: it is not clear why consumers access these forms of credit or the extent, scale or patterns of their use.
We don’t know what specific (and global) interactions with the AFS market may contribute to the growing indebtedness of low-income Australians.
While basic ideas have been established such that taking out multiple payday loans at the same time increases financial hardship, we do not know the welfare effects of more complex borrowing practices in the AFS market. at large. Additionally, we do not know how environmental factors have contributed to the growth of the industry.
For example, to what extent have government policy, changing labor market conditions, increasing levels of income inequality and poverty, and changes in the banking sector lead to the growth rates we have observed? We firmly believe that unless these issues are explored, any intervention in the market is likely to be ineffective and unnecessary.
Any new regulatory regime developed from a review examining only one elephant’s foot (in this case, some aspect of the Australian AFS market) risks exposing low-income households to financial hardship and hardship. potentially greater emotional distress, especially when viable alternatives to credit and social protection are not seriously considered by the government.