UK payday loan, or High-Cost, Short-Term Credit (HCSTC), regulation was introduced to prevent consumer harm. However, in our new paper we argue that whilst regulation has restricted the cost of a payday loan it has effectively normalized this form of credit, making payday lending shift further towards the mainstream financial sector. Our research exploring the lived experience of HCSTC regulation identified that it is now more difficult for people at the financial fringe to access credit, putting them at greater risk of financial vulnerability.
Research on the financialization of everyday life has explored the increasingly significant role of finance within people’s lives. Financialization has shifted greater financial responsibilities and risks to individuals alongside reform to the welfare state. Individuals are encouraged to be financially secure through active engagement with financial services. Yet financialization research to date has tended to focus on wealthier financial subjects but even this shows there has been an uneven impact on an individual’s ability to engage with financial services and secure their financial wellbeing.
The financially marginalized and/or excluded by mainstream financial institutions have been largely ignored by the financialization literature. Financial exclusion is where mainstream financial institutions are unwilling to risk lending to individuals with a thin or poor credit history. This means that many people are excluded from accessing affordable and fair sources of credit. This group of people at the financial fringes of the mainstream are pushed towards the subprime credit market.
The research emerged in response to the astonishing growth of the UK payday lending industry which filled a gap for people considered to be financially precarious. The payday loan market grew from an estimated £100 million worth of loans made in 2004 to over £2.5 billion in 2013. The number of loans taken out more than doubled from 2009 to 2013 to reach 10 million loans, taken out by 1.6 million customers across 400 companies. This growth has been combined with exceptionally high profits for many payday lenders.
Before HCSTC regulation was introduced in 2015, the average value of a payday loan taken out was £270 for 30 days. The cost of a payday loan could be between £15-£35 per £100 borrowed for 30 days, equating to between 448 per cent and 3,752 per cent annual percentage rate (APR). In 2014, the FCA introduced the first in a series of new rules for payday lenders. Lending responsibly through checking borrower information and affordability became central to these initial regulatory changes. The key regulatory reform to payday loans was introduced in 2015: a cap on the initial cost of credit at 0.8 per cent per day; default fees were limited to a maximum of £15 and a 100 per cent repayment cap. This meant that borrowers would never have to repay more than double the amount borrowed.
The decision to regulate HCSTC impacted on flows of credit to individuals as the consumer credit markets shifted to this new regime and it was predicted that 160,000 people or 11 per cent of payday borrowers would no longer be able to access this form of credit. Whilst these measures were designed to protect consumers from financial harm, it excluded a significant number of consumers from accessing payday loans. Our research explored the lived experience of those declined from payday lending post-regulation.
We explored the range of socioeconomic practices at the financial fringe to diversify the types of people and households we researched under the remit of work on the financialization of everyday life. Identifying the socioeconomic practices helped us create a typology of strategies ranging from credit to non-credit use to meet their financial needs having been unable to access a payday loan.
Whilst our research showed that the new regulations had restricted payday loan availability and consumer detriment had decreased, there had also been other consequences too. UK HCSTC regulation has shifted the financial fringe further away from those at the financial margins making it harder to access regulated mainstream and subprime credit, particularly for those who are financially marginalized.
Yet, as we have witnessed over the course of the covid-19 pandemic, the need for credit remains. Through examining the lived experience of declined payday loan applicants, we have shown that individuals employ a range of socioeconomic strategies to manage their finances in the absence of payday loans. In so doing, we argue that the financially marginalized are active, calculative and responsible financial subjects making difficult decisions in the context of a financially constrained environment. Understanding the role of credit at the financial fringe is an important area of research as it demonstrates that people can be excluded from both mainstream and subprime financial institutions but also the role of policy and practice in providing viable solutions.
About the authors
Lindsey Appleyard is Assistant Professor at Coventry University.
Carl Packman is Head of Corporate Engagement at Fair by Design.
Jordon Lazell is Research Assistant at Coventry University.
Hussan Aslam is Research Assistant at Coventry University.