There are approximately 20 to 30 payday lenders currently in the UK and around a similar number of online brokers who generate leads and applications on behalf of lenders.
Payday lending grew rapidly in the UK around the year 2008, with the demand for short term cash during the economic recession and fuelled by advances in the Internet that enabled online applications and funding.
At its peak, they may have been more than 100 payday lenders in the UK and the industry was valued at £2 billion per year.
However, at the beginning of 2015, strict regulation was introduced by the Financial Conduct Authority (FCA) which has seen the number of lenders unable to withstand the regulatory requirements and subsequently exit the market.
What are the common product features of payday lenders?
- Operating purely online (not storefronts)
- Customers can borrow £50 to £2,500
- Repaid over 3 to 12 months
- APR is typically over 1,000% APR
- Approval is subject to status
- Late fees if you cannot repay on time
How do you become a payday lender?
To become a payday lender in the UK, you will need to have:
- Full authorisation from the FCA
- Consumer credit license
- Registered with the ICO
To start off, you must apply for FCA authorisation which is a process lasting 6 to 24 months and checks that you and other key members of your organisation are fit and proper to offer consumer credit in the UK. This will evaluate your ability to provide funds, carry out sufficient checks on applications and have processes in place to protect customers.
In addition, you must have a consumer credit license to ensure that you can legally offer money to other people in the UK.
Things to consider when becoming a payday lender in the UK
- Your application for FCA authorisation
- Loans software – how you process applications
- The rates that you charge – will you offer higher or lower rates?
- How you are different? Will you offer lower rates or monthly repayments?
- Underwriting – what checks will you carry out and how will you determine who is approved?
- Reserves – how will you be funding your loans? Do you have money available?
How did the payday loans industry change in 2015?
In 2015, the Financial Conduct Authority (FCA) took over from the Office of Fair Trading as the main regulator of consumer finance and this included payday loans.
Whilst the regulation for the payday loans industry was quite soft beforehand, this weak stance was being abused by a number of high cost lenders and brokers.
The FCA quickly addressed this by proposing a price cap on the daily interest rate charged at 0.8% per day, equal to £24 per £100 borrowed and default fees capped at £15. This had a dramatic impact on the margins that lenders could make and immediately, a number of existing lenders exited the market unable to make it commercially viable.
Every lender and broker was now required to apply for FCA authorisation and given interim permission whilst their application was being processed. This long and lengthy process provided another barrier to entry and also caused less compliant companies to exit the market.
Further restrictions were added such as strict affordability and credit checks required for every approved customer and tougher guidelines on how companies used customer data.
Slowly but surely, more and more lenders and brokers exited the industry. For any new entries, the FCA had peace of mind knowing that they were more transparent and compliant than any predecessors.
How did the payday loans industry change in 2018?
Around 2018, the FCA allowed anyone who had previously taken out a payday loan the option to request a refund from their lender. A refund was based on the individual struggling to repay any loan, had paid late fees, give subsequent loans or been granted a loan without sufficient affordability checks.
Whilst not every refund was approved, the overall volume of complaints, refunds and paid claims was overwhelming. In fact, the market leader at the time, Wonga, paid over £500 million in refund claims and subsequently went into administration in October 2018. This was followed by other market leaders falling into administration on the back of large reclaims, including The Money Shop, QuickQuid and WageDayAdvance.
What is the future of payday lending?
With only a select number of lenders in the industry, the payday loans sector is made up of highly transparent and responsible payday lenders
The demand for payday loans will continue to exist, with over 3 million Britons using them every year.
In terms of the future, we will see a number of new entrants to the market offering a variety of more transparent and low cost products, including apps, overdraft facilities and more flexible terms.
For instance, Fund Ourselves offers short term loans at lower rates
and for those with payment difficulties, there are no late fees and the option to extend the loan up to 12 months, for free.
For more information about our products and to apply, simply click here