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Unintended Consequences

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Payday lenders are in the press and on the TV a lot at the moment, be that in their own adverts or the news and it is a business that seems to have come from nothing in just a few years. Journalists and politicians are quick to blame the current economic climate for the meteoric rise in the use of these high cost lenders but is this the real reason? We've been through recessions before without the existence of these companies so what is different this time? There are two seemingly positive but innocuous changes that have happened since the last period of economic turmoil that have allowed them to prosper and they're not the ones you may think. They both sound fairly dull and are not as headline grabbing as charging the government with causing unemployment and cutting benefits or blaming individuals for their "must have it now" attitudes but without them the payday loan industry would not exist.

Firstly, following public and government pressure the cost of unauthorised overdrafts and meeting bill payments where the customer doesn't have enough money in their account have fallen substantially. Whilst at face value this is a good thing, if something isn't profitable for a bank to do they won't do it. If they can't make money from customers use of an unauthorised overdraft why let a customer have one? It's far easier to bounce the payment and not have to worry about the customer paying you back. This in turn means the customer needs to find the money from elsewhere and this is where the payday lenders step in.

Secondly the one which is most important but sounds the most boring is changes to BACS clearing times. This might sound like a tiny technical point but these loans sell themselves not on how much it costs to repay but how quickly you can have the money. Prior to the introduction of the Faster Payments Service it took three days for money to be transferred between accounts or between a lender and a borrower. Now it takes 10 minutes. So people may have been in just as much desperate need to access money to buy food or pay the bills prior to the recession but they had no way of getting money quickly enough.

None of the above is meant to defend payday lenders and the astronomical APRs they charge nor am I claiming that the reduction in bank charges and clearing times are bad things. However, it does show the potential butterfly effect of actions. My concern is that if they are banned or regulated out of existence what will the unintended consequences be?

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