We wanted to write this piece in response to Martin's response to our own statement naming him as one of the reasons we have surrendered our Payday Loan License. I'm glad he took the time to respond, it wasn't expected but he did. Although he did mention that I aimed my "Venom" at him which was a bit headline grabbing but it's not a big issue.
Martin states that we didn't check our facts, or rather I didn't. I want to address each of those points that he highlights.
Martin's first rebuttal is that my figures are overstated, I believe he is talking about the figure I named as the price he sold his website for. OK hands up I accept that, the £300m was a very flippant comment on my part. I accept that it is probably way out. The point I wanted to raise was that Martin has the capital to start a decent sized Payday Loans Company if he wanted, I stand by that part.
His second point is a rebuttal to my claim that he won't put his money where his mouth is when it comes to lending. He correctly states that he does in fact loan money via Peer to Peer and Credit Unions. We stand by our points about his hypocritical views on Payday Loans and here is why.
Peer to Peer Lending: The standard model for Peer to Peer lending and the sites he links to (Zopa, Lending Circle), is extremely focused on prime borrowers. Comparing those applicants accepted by Peer to Peer lending services to those borrowers in the Payday Loan market is like comparing Apples to Oranges. Martin's comments against the Payday Loan market are what I'm addressing; Martin cannot use his prime lending history as a justification of his views on Payday Loans.
Credit Unions, Martin correctly points out that this money helps those who are struggling. This then answers our criticism of what he says about his Peer to Peer lending not involving the subprime borrowers. However, Martin knows that his money is safe in a Credit Union. Assuming that he has less than £85,000 in any one union, his money is guaranteed by the Financial Services Compensation Scheme. Again, this is not a like for like comparison with what we did or what others Payday Lenders currently do, his capital is safe, ours is not. If a customer fails to repay us money, we don't get repaid by the taxpayer, we lose the money full stop.
The point we wanted to make is, Martin, it isn't easy to run a payday business. Several have already gone out of business, Welcome Finance and London Scottish to name two. Those were big companies, not small independents like us.
Our ideal outcome is that Martin names the rate he thinks is fair for Payday Loans and lends his own money at that rate. If he makes a success of it, then I'll be happy to hold my hands up again and say I'm wrong.
Martin raises the point that he doesn't want to kill the market, he just wants to regulate it. Of course this depends on what is in the regulations. Merely regulating something does not kill or promote it on its own, it's the rules in the regulations that do that.
Let's argue the price cap point he raises, Martin wants a price cap rather than closure of the sector. The feedback from politicians and the FCA is that the rate of £24 per hundred per month is a likely figure to come into force in January 2015. We know we can't operate at that figure and decided to surrender our license.
I want people to have a look at what that £24 has to pay for:
£3 per credit check, For Payday Loan applications we approve just fewer than 1 in 5 applications. That means that we pay £15 in credit checks for every 1 we lend to. That £15 has to be paid for by the person who gets approved. So we have £9 out of that £24 to cover bad debt, rents, utility bills in the office, staff, running costs of the website, banking costs and many other outgoings. It just doesn't add up for us as a business.
The only way we could make it work is to then lend more money, someone only wants £100 but now to make it cost effective, we would have to lend a minimum of £500 loans (5*£24 = £120), then it starts to become worthwhile to us as a business. The price capping that Martin wants now means we would have to have a minimum loan amount of £500, even though the applicant only wants £100.
Giving struggling people more than they actually need is not good for anyone, but that is what price caps will lead to.
The hint is that regulations will limit the amount of times a loan can be rolled over, it's already limited to two. We have to smile at people like Martin on this one, he's been well and truly done up like a kipper by the big American lenders.
One thing we know is that these lenders are too smart for politicians, too smart for people like Martin. They have already got round this and the fact that people haven't seen it happening is quite funny. I'm not going to name these big lenders for obvious reasons, you can find them advertising on tv daily though.
The big Payday lenders have separate brands that do 6-12 month loans, usually around 400% APR. Once the Payday lenders have reached two rollovers on Payday Loans and added their maximum penalty fees. The borrower gets handed off from the Payday Lender, over to their big brother, the separate brand (but same company) that then lends them money to cover the penalty fees of the previous Payday Loan, not to clear the whole debt.
It's very clever; the customer now has two loans. The original Payday Loan Debt (without fees) and now a 6 month loan debt at an interest rate of 400% and it's all legal under the very regulations Martin called for.
This is what happens when things get complicated, every time you bring out a new regulation, these big boys have already bypassed it. What you have also done is to scare off sites like ours who would compete in clarity and price, but no longer doing that.
We don't doubt that Martin means well, we are not accusing him of telling lies or trying to spread misinformation. We just want him to accept that lending is not easy, we would like him to try to look at things from a lenders point of view, especially small independents like us trying to compete with the big boys. We were not rogue lenders, we may not have even been affected by the regulations, we don't know what they are after all. What we can't do is be under threat of constant inteference in our planned business model, we need stability and we don't see that coming in the near future. I'm sure Martin would have issues if regulators were changing the rules on his website every 6 months.
If he wants to try lending in the Payday Loan market, we wish him well. He has the brand name to do it and genuinely hope he gives it a try.