Macleans: Payday Lenders Winning Customers

A blog post on Macleans' website today notes that payday loan companies are "winning customers who need emergency loans, as well as those frustrated by tightening credit at the big banks," stating that "as the banks clamp down, the payday lenders are filling the void."

Repost: Banks quietly finding ways to charge more

Here is another article about the banks' approach to customer service in these difficult economic times:

From the Vancouver Sun: Banks quietly finding ways to charge more

If you think the global tightening of credit hasn't impacted you in any direct way, you might want to check your credit-card statements. Mine has quietly gone from a 26-day grace period to 21 days.

The interest rate on outstanding balances and cash advances is one per cent higher than last year (despite a significantly lower prime rate); there's now a $2 fee for cash advances; and the balances from current and previous statements must be paid in full by the due date to avoid interest charges.

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TD Canada Trust, for example, advised customers it would begin charging a $35 "inactivity fee" as of April 30 on those who hadn't accessed their unsecured lines of credit in the previous year.

The interest rate on lines of credit also was going up.

In other words, you paid more whether you borrowed or not.

Ontario Advisory Board Recommends $21 per $100

The Ontario Payday Loan Advisory Board issued its recommendations today and is calling for a rate cap of $21 per $100 in that province. The basis for its decision appears to be the result of an Ernst & Young study on the cost of providing payday loans in Ontario. The study concluded that the average weighted cost to provide a payday loan in Ontario was $21.50 per $100.

The E&Y study uses data from 9 of the more than 100 companies that provide payday loans in Ontario. To put this in perspective, the most representative cost study conducted to date was done by Deloitte in 2008. Deloitte looked at the cost of providing payday loans in British Columbia and surveyed 12 of the roughly 60 payday loan companies in that province. They found that the average cost of providing a payday loan in B.C. was $25.21 per $100.

The risk of using a cost study to determine the maximum allowable rate for a product in an industry with many participants is that if you settle on the average cost then you are still putting half of the industry out of business. Some have argued that lenders need only tighten their belts and all will be fine. Unfortunately it is not that simple.

First, business owners are likely our society's most efficient at tightening their belts. Those who have owned a business do not need to be told this, but for those who have not, you need only consider that every dollar an owner can save in efficiency improvement goes straight into his/her pocket. You will not meet a more motivated group when it comes to wanting to keep expenses at a minimum. I would argue that their belts are already tight.

Second, assuming that there are few notches left to tighten, where then does a payday lender cut costs? They could move to a cheaper location, shorten their hours, hire less skilled and lower paid staff. Each step leading to fewer customers and a less viable business, unless of course customers prefer poor locations, short hours and inexperienced staff. Not likely.

Finally, payday lenders could tighten their lending criteria and attempt to reduce their bad debt costs by being more picky about who they lend to. In E&Y's first payday loan study, The Cost of Providing Payday Loans in Canada, they identified a correlation between payday loan rates and bad debt risk, illustrating that the less a lender could charge the less risk they could assume.

In practical terms, a maximum allowable rate for payday loans that is based on the average cost to provide the product means that those companies who cannot tighten their belts enough (likely because they are already tight) will be out of business and those who can tighten will do so by restricting who they lend to. If consumer protection is the goal of this legislation then you have to look at where those consumers go and how protected they will be when their already limited credit options are restricted even further.

To steal from a previous post:

As the Policis study illustrates, some newly excluded borrowers may pay up to ten times the amount that they currently pay in order to borrow $100 from an illegal source of credit. Some will temporarily relinquish their personal assets in order to obtain a pawn loan and others will do without. Of the borrowers who do without, those who knew how to weigh the difference between the cost of a payday loan and the cost of bouncing a cheque will be worse off.

The best consumer protection is education and empowerment. Require consistent rate disclosure between all lenders so that consumers can easily identify the best option for them and their circumstances. Giving consumers fewer credit options in an already tight credit market does not get them any further ahead and I doubt it is what any of them are asking for.

The Ontario government has the final say on what the maximum allowable rate for a payday loan will be. I would encourage them to set a higher rate that will leave fewer people out of business and fewer borrowers out of options.

Banks Still Learning How to Treat a Loyal Customer

We already know that the current credit crunch has lead banks to become incredibly tight with their money, refusing to lend when our recovery from this mess depends upon it. An article in today's Toronto Star shows that not only are they not lending new money, but they are also putting the screws to longtime customers. The article chronicles the experience of Marvin Zuker, a provincial judge in Ontario for the past 30 years and a BMO customer for the same length of time. Despite his history with the bank, he recently had his account frozen and started receiving calls from an outside collections agency because he chose to use his overdraft for 6 months.

In good times and in bad, there is never an excuse for poor customer service and for not recognizing the value of longtime customers. One way that 310-LOAN has maintained its standing as one of Canada's leading payday loan providers is by making sure its customers don't feel like they are dealing with a bank. To get an idea of how 310-LOAN customers feel about the company's level of service, here are a few of the comments from customers, provided through 310-LOAN's Facebook page:

i have had nothing but the greatest of service from 310-Loan. Thank you for making it easy to get and to pay for a payday loan
-Troy S. (Calgary)

great service , good communication, and cool payment method and speedy!!
-Roberta B. (Winnipeg)

310 is the best out their!! thank you 310 loan
-Nicole M. (Saint John)

yes its nice and kewl to have a company like 310 i'm very grateful to u guys thx so much for making everything so easy
-Ricardo D. (Vancouver)

Yes, good & fast service, without the hassle of dealing with the bank, thanks 310-loan!
-Diane G.

I am happy with your service. Your customer reps are very friendly. When I have a problem with my account, they contacted me and discuss options with me. They deal with problem professionally and with respect. Thank you 310-loan.
-Daisy L.

I am very happy with your service; 310-loan is efficient, fast and effective, and meets all my needs. Thank you for being great professionals!
-Lorraine P. (Toronto)

Manitoba Changing Direction on Payday Loan Legislation

For those of you following along with the payday loan legislation adventure that is unfolding in Manitoba, a recent Vancouver Sun article has a few quotes from Manitoba Finance Minister, Greg Selinger indicating the new direction that the province is heading in:

"When one company, The Cash Store, won the right to appeal the cap — which had been set by Manitoba Public Utilities Board after a thorough examination of the industry — Selinger refused to let the issue be stalled. He promptly made plans to plug the loophole. 'We’re going to legislate the cap,' he told me. 'We’re not going to let it be tied up in the courts for a couple of years. 'As policy-makers we can do things a quasi-judicial body like the Public Utilities Board can’t.'"

It will be interesting to see what rate the 'policy-makers' choose to go with. The Public Utilities Board is being called out by the courts for possibly overstepping its jurisdiction by setting a rate so low that it will drive the majority of lenders out of the market. The Manitoba government, presumably free to set whatever rate they want (subject of course to whatever court challenges may arise) have the opportunity to set a rate that differs from the PUB's competition stifling approach. Borrowers who enjoy the ability to choose will certainly be hoping that they take a new direction.

More on Manitoba Payday Loan Ruling

BACKGROUND: Manitoba Decision Being Contested, Payday Loan Legislation Could Be Delayed, Judge's Initial Comment on Payday Loan Appeal

Yesterday I posted the first bit of news on the Manitoba Court of Appeal's payday loan ruling. Today the media has served up a bit more information and some comments from the province. I have provided some links above to previous posts on this topic, but the long and the short of it is that The Cash Store Financial Services is challenging the Manitoba Public Utility Board's ruling on maximum allowable rates for payday loans in that province. After several months of deliberation, justice Alan MacInnis has agreed to grant an appeal and a temporary stay of the PUB ruling while the appeal is heard. Unfortunately, this will delay the implementation of payday loan regulations in Manitoba. On the positive side, it will reopen the possibility of a maximum allowable rate that will enable a viable and competitive market to exist (see: problems with the PUB payday loan decision). While the delay is unfortunate, a competitive industry is in the best interest of everyone and should have always been the desired outcome.

Judge Sides with Payday Loan Company in Manitioba

I have only found one small mention of this in the press so far, but the Manitoba Court of Appeal has sided with The Cash Store and agreed to hear an appeal of the Manitoba Public Utility Board ruling issued early last year.

Here is the brief mention on the CJOB website:

"The Manitoba Court of Appeal has declared payday lenders were unfairly treated by the Public Utilities Board, when it set lending rates. The decision means The Cash Store Financial Services could argue the PUB acted beyond its scope in setting rates.

A decision last year by the Public Utilities Board capped maximum costs of credit at various levels depending on the amount of the loan. It's capped at 17-percent for loans up to 5-hundred dollars.

Loan companies said the lower rates would drive some of them out of business. Justice Allan MacInnes agreed saying in a written decision, a full appeal of the PUB's ruling should be heard. A date has not been set."

More Talk About Payday Loans vs. Overdraft in U.S.

An article that appeared in the Houston Chronicle over the weekend points out that many Americans don't understand the financial benefits of choosing a payday loan instead of bank overdraft for small amounts of credit:

Debt concepts a challenge for many in U.S.:

"According to a financial literacy survey by the Center for Economic and Entrepreneurial Literacy, which advocates personal finance education, just a quarter of adults knew that overdrawing their checking account (bouncing a check) for a quick $100 was more expensive than a payday loan, credit card advance or emergency wire transfer. More than half said they thought a payday loan would be pricier."

If you are considering between a payday loan, bank overdraft or a cash advance on your credit card, be sure to get the full fee schedule from both your bank and your payday loan provider in order to make an informed decision. It takes a little extra time to find all of the fees, especially at the bank, but it is the only way that you can be sure you are making the most of the credit options that are available.

Here are some other posts about the costs associated with various short-term credit options:
Bank Fees Have Ohioans "longing for a payday loan"
Mainstream Lenders Cranking Up Fees
Will Credit Unions Provide a Payday Loan Alternative?
Bank Fees Make Payday Lenders Look Like a Bargain

Good Read: "Check Cashers, Redeemed"

I just had the pleasure of reading a very interesting and thorough article on the alternative financial services sector in California published in The New York Times Magazine: Check Cashers, Redeemed by Douglas McGray. It chronicles the life of Nix Check Cashing, growing from its humble beginnings as a service offered to customers of Tom Nix's father's delivery business in the early '70s to the largest check casher and payday lender in California, sold last year to Kinecta Federal Credit Union.

There are many interesting aspects to this article and I won't go into all of them, but there are two I would like to highlight. First, the purchase of Nix by Kinecta is a rare foray into alternative financial services by a mainstream bank or credit union. They have taken the novel approach of placing Kinecta kiosks in Nix locations and have continued, with some variation, Nix's check cashing and payday loan services. They have also kept owner Tom Nix on board as an executive.

The second piece that I wanted to pass on was some of the data and commentary on why customers in California, and the broader United States, choose payday loans and the banks' relationship to this product's success:

"In the late 1980s, when a few check cashers started to accept postdated personal checks and advance cash for a fee, Nix thought it was a sleazy scheme. He thought so even after California legalized the practice in 1997. 'I didn’t want to be a loan shark,' he told me. 'But the reality is, customers wanted it.' He told (Kinecta president and CEO, Simone) Lagomarsino why. A bounced check, a fee to reconnect a utility, a late-payment fee on your credit card, or an underground loan, any of those things can cost more than a payday loan. And then there are overdraft charges. 'Banks, credit unions, we’ve been doing payday loans, we just call it something different,' Lagomarsino says."

The article also includes some staggering trends on the direction that bank and credit card fees have been heading recently:

"Bank of America took heat earlier this year for more than doubling the interest rate on some credit-card accounts, even if the cardholder pays every bill on time. Banks, meanwhile, have nearly quadrupled their fee income in the last decade, according to the F.D.I.C., while credit-card late charges and over-limit charges have nearly tripled. Fees imposed on customers for temporarily overdrawing their accounts — by accident or on purpose — have been particularly lucrative; banks made $25.3 billion in 2006 on overdraft-related fees, up 48 percent in two years, according to the Center for Responsible Lending."

While McGray draws a clear connection between the cost of bank fees and credit cards and the rise of check cashing and payday loans, he does not gloss over some of the trouble spots within the alternative financial services sector. He talks about the high cost of over use of check cashing and payday loans and speaks to customers who are well aware that their choice is not a cheap one. In the end, he demonstrates how the banks have failed to serve an entire segment of the population and how companies like Nix have stepped in to fill the void, with unparalleled service, openness and transperency, and a mission to do whatever it takes to say yes to their customers.

With their acquisition of Nix, it seems like Kinecta is making it pretty clear that they get it. They realize that mainstream financial services companies have missed the boat on a segment of the population and they are counting on people like Tom Nix to help them figure out how to win them back.

Bank Fees Have Ohioans "longing for a payday loan"

Ohio banks and their ever rising fees have this Cleveland resident longing for the days when payday loans were available in that state: Bank fees will have you longing for a payday loan

Study: Oregon Households Hurt by Payday Ban

A new study from Prof. Jonathan Zinman of Dartmouth College was released last week that looked at the effect of a payday loan ban on Oregon households. Like the 2007 New York Federal Reserve report, Payday Holiday, this study found that households fair worse in a state that has banned payday lending.

The study claims that, in the absence of payday loans, borrowers are forced to choose "inferior substitutes," and "restricting access (to payday loan credit) caused deterioration in the overall financial condition of the Oregon households."

Mainstream Lenders Cranking Up Fees

It looks like the big lenders are trying to pass the pain of the credit crunch on to consumers any way they can. There have been several articles lately about Visa's move to increase their rates and the rising cost of bank fees. Here are two:

CityNews: Visa Rates Skyrocket - Just In Time For The Holidays
"Starting next month, Visa is boosting its interest rate for customers who miss two consecutive minimum payments - ensuring those most in debt will be the hardest hit."

Wall Street Journal: Banks Boost Customer Fees to Record Highs
"Banks are responding to the troubled economy by jacking up fees on their checking accounts to record amounts."

PEI Comes on Board

Over the past 18 months, most Canadian provinces have been engaged in the process of launching payday loan legislation and determining maximum allowable rates. Manitoba, Nova Scotia, Ontario, Alberta, British Columbia, Saskatchewan and New Brunswick have all engaged industry and consumers to determine how best to develop effective regulations. Yesterday, PEI came on board by launching its own consultation initiative. Attorney General Gerard Greenan is seeking input by December 31st. Here is what you need to know:

Article: Province Seeks Opinions on Payday Loans
Consultation Document: here
Draft Legislation: here

ACORN Member Calls Payday Loan Customers "the wrong element"

People who use payday loans and the companies who provide them understand that they fill a need for hard working Canadians who are tight on credit and often facing an unexpected financial crunch. The latest study of who uses payday loans and why is a study of Alberta payday loan users by Pollara on behalf of the Canadian Payday Loan Association and is available here.

While people who use the product rate it favourably, what continues to resonate in the media is that people who don't use it take a different view. One example of this is a recent quote from ACORN member and candidate for city council in New Westminster, BC, David Tate, who complained that payday loan locations "bring the wrong element to the city."

ACORN is a community organization that has most recently made the news in the United States for their role in a voter registration scandal. In Canada, they describe themselves as "the nations largest community organization of low- and moderate-income families." They list among their priorities, advocating for regulation of payday lenders, a priority they share with the Canadian Payday Loan Association, the British Columbia Payday Loan Association and a host of other industry and consumer representatives.

While I may be stating the obvious here, I find it somewhat concerning that a member of an organization that claims to be advocating for the people who use payday loans would describe them as "the wrong element."

What is also concerning is that Mr. Tate is pushing for a limit to how many payday loan locations can be in the downtown core, relying on his claim that these locations are attracting the wrong people to the neighbourhood. If there are enough people who live and/or work in the downtown core to support several payday loan locations then whose role is it to say that people should not have access to a variety of providers? And how is that advocacy? I find it hard to believe that there are any payday loan users asking for a reduction in locations.

Businesses open locations where there are enough people to support those locations, if there weren't, they would close. It is pretty basic supply and demand. And in case you are wondering, it is not a 'chicken vs. egg' argument. Think of other industries. Banks don't open a location where there are few bank users. They find locations where their customers work and/or live. They don't put a branch in the middle of nowhere and then hope that customers will make extra time in their day to visit that branch.

The other piece of this topic that is equally troubling is the notion that the public would be served by limiting competition for a product. By restricting the number of locations for any type of business, you are making the businesses who do get a license incredibly more wealthy and far less interested in enhancing their services or efficiency. Why would they? If there is no threat from 'the guy down the street' offering a cheaper product or better service or longer hours?

Consumers love competition and businesses hate it. Ask any business owner and they will tell you that they would much rather have a monopoly than a highly competitive market. Advocates like ACORN need to make better use of this fact if they are to be truly effective in their quest to improve products and services on behalf of the people they represent.

Advisory Board Gets Down to Work in Ontario

Originally, the word was that Ontario would select an advisory board of three members to provide a recommendation to the Minister on the maximum allowable charges for payday loans in that province and they would finish their work by September 30th (original post). According to this Government of Ontario website, the board is now comprised of two members and they will be receiving submissions from the public until October 31st. There is no clear indication of when their work will be completed.

Payday loan users and industry members who are interested in providing the board with their two cents on maximum allowable payday loan rates in Ontario, should do so according to the guidelines laid out here.