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Seven years ago my bank decided to close the local High Street branch in our run down area of South London. A few weeks later, a colorful new business with balloons outside moved into the empty site.
Called Speedy Cash, it was one of the many American lenders to flock to the UK at this time. They were fleeing an increasingly hostile regulatory environment at home and saw Britain as an exciting new frontier. Regulation was light and existing banks were withdrawing from serving poorer customers.
At the time, Errol Damelin, the founder of UK payday lender Wonga, praised the UK government for having the “soundest” legislation. His company then charged clients a representative annual rate of 4,214% for its short-term loans.
“Wonga’s business model is said to be illegal in some countries,” he told a government minister in a private meeting, according to minutes I obtained as part of an investigation into the sector.
Last week, karma finally caught up with payday lenders. Wonga entered administration, overthrown by customer claims and increasingly stringent regulations. Last year Speedy Cash closed my local branch and all other UK stores.
It’s tempting to see this as the end of the story. But that would be missing the point. The payday loan industry was not so much a problem as a symptom: a flashing warning signal indicating difficult labor market conditions on both sides of the Atlantic.
Who takes payday loans and why? “We call [our customers] Alice. It’s an acronym for Limited Assets, Limited Income, Employees, ”the then managing director of payday lender DFC Global told investors in 2011. They hold“ non-offshorable service jobs ”and “Struggle to meet their family”. financial needs. And because they are underqualified and undereducated, the opportunity for them to advance above that income bracket is very limited. So what we’re seeing is very, very little migration out of that income bracket and very little churn in our customer base. ”
Payday lenders did not extend credit to the unemployed, but to employees in industries such as hotels, retail, warehousing and social services. It was fertile ground because the work was poorly paid and increasingly volatile. Zero-hour contracts, temporary contracts and “just-in-time schedules” all became more common after the 2008 recession.
Employers in low-margin companies have tried to control costs by changing their employees’ schedules to accommodate the ebb and flow of demand. For payday lenders, that meant a lot of potential clients who suddenly found they had fewer hours a month, but the same number of bills to pay. Basically, as payday lenders could see, for the unskilled, these jobs looked more like traps than stepping stones. Although politicians bragged about the strong post-crisis job growth, the booming payday lending industry should have given them pause.
One of the defining economic challenges for policymakers today is how to make service sector jobs more decent, with better wages, safety training and opportunities for advancement. These positions are important because they are multiplying. Over the past two years there has been an increase in low paid work in UK bars, care homes and warehouses. In the United States, official projections suggest that many of the new jobs in the next decade will be for orderlies, fast food workers, janitors and laborers.
So far, the signs are not good. US President Donald Trump is on a pipe dream to recreate the blue-collar jobs of the past, rather than fixing the jobs of the future. In the UK, Prime Minister Theresa May has neither the political capital nor the courage to suggest anything other than well-intentioned progressive reforms. As politicians wrestle, payday lenders have new reasons to feel gleeful, despite the UK crackdown. Curo Group, the company that owns Speedy Cash, was listed on the U.S. stock market in December amid signs of a regulatory thaw under Mr. Trump. Since then, its share price has doubled.
The lesson here is that exploitative business models will surface again and again until policymakers tackle their root causes: a labor market that has made too many people vulnerable. Employment should be the answer to financial distress, not the cause of it.
sarah.oconnor@ft.com
