ALICE in lender land

Payday loan stores are not hard to find. The brightly lit outlets dot the streets of big cities and small towns all over the country. And their advertisements hawking “quick and easy” cash are everywhere.

In Ontario, the paydayloan industry offers sums of cash of less than $1,500 for short terms — less than 62 days — at very high interest rates: currently 657 per cent on an annualized basis on the average 10-day term, down from 766 per cent before the regulations took effect.

These lenders fill a unique niche in Ontario’s lending market for customers known as ALICE — an acronym for Asset-Limited, Income-Constrained, and Employed. More than twothirds of ALICEs earn less than $50,000 per year. And while payday lenders’ reputation for being the somewhat shifty cousins of banks is not entirely undeserved, they nonetheless provide a real and needed service to people who, for a variety of reasons, can’t or don’t have the cash to meet their needs. The majority of people who take out a payday loan are doing so to avoid late charges, NSF fees, or just to keep the lights on.

In short, they take out these loans because of a lack of cheaper alternatives.

And that has consequences. Payday loans can lead customers to develop a habit — an addiction even — of using high-cost loans to meet their needs. Cardus research has shown that many payday lenders even take a significant loss on a new customer’s first loan, suggesting a business model that would seem to resemble the “first hit for free” strategy practised by your local drug pusher. The repayment structure requires borrowers to pay back both principal and interest in one lump sum, which exacerbates the very cash-flow crunch that led the borrower to take out the loan in the first place. And that can easily lead to a cycle of borrowing and runaway debt.

We’ve known about the challenge for a while, and the typical response has been to tighten already strict regulations. The problem with this approach, however, is that it simply raises the cost of providing what customers really need — better small-dollar alternatives — while driving solutions underground.

Financial institutions like credit unions have long indicated a desire to provide alternatives to the ubiquitous payday storefronts, but the existing regulations constrain their ability to try new products. The Ontario government’s recent proposal to exempt these community banks from all payday loan regulations allows credit unions to experiment with cost structures, interest rates, loan terms and other factors that the rules otherwise prevented. For instance, a credit union might make space for a borrower to take more than 62 days to repay a loan.

While technically this opens up the possibility for higher rates, the government correctly notes that it doesn’t make sense for credit unions to take advantage of their own members. As the government itself puts it, “consumer protection would be unaffected by this exemption as credit unions are required by law to operate on a co-operative basis for the primary purpose of benefiting the credit union’s members.” Some credit unions are already beginning to experiment. Windsor Family Credit Union’s “Smarter Cash” program offers substantially lower rates than traditional payday loans. Other credit unions, including First Ontario, DUCA, and Libro are exploring ways that they can offer new products to those who need cash, and need it quickly.

In a way, this sort of deregulation for credit unions is an example of history repeating itself. Alphonse Desjardins founded Canada’s first credit union in 1900 to offer a lending alternative for white-collar workers who were forced to borrow at high rates to buy their weekly groceries. Over time, credit unions developed and, in many cases, acted as leading innovators in Canada’s heavily regulated, moribund banking industry. The Ontario government’s moves to exempt these institutions from regulations might not just be clearing a path to address a lack of payday-loan alternatives; they may also open a road to alternate solutions for other, bigger social problems.