There’s payoff in disrupting payday loans
Community banking can work, Douglas Pawson says.
The writer James Baldwin famously said, “Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.” Nowhere is this clearer than in the fact that borrowing the smallest amounts of money comes at the highest cost.
Payday lenders have been in the news lately. Ottawa Mayor Jim Watson recently announced that the city would take advantage of new zoning powers granted by the province to limit the number of payday lenders per neighbourhood. It is a first step in tackling the issue, but only the first in what needs to be a system-wide reimagining of financial security.
Payday lenders tend to congregate in lowincome neighbourhoods, close to their target population. This seems like a good business practice. After all, higher-income neighbourhoods have what you might call “cappuccino clusters,” catering to every niche coffee desire.
But the payday lenders are not clustering in order to compete or to fill a variety of tastes. They cluster because they are symbiotic: Current provincial regulations stipulate that a person cannot access more than one payday loan at a time; and regulations that came into effect July 1 state loans cannot exceed 50 per cent of a borrower’s income. However, because there is no registry among lenders, setting up shop beside each other allows desperate borrowers — facing the deadline to pay back one loan — to easily access a second right next door. By taking out that first payday loan, borrowers risk falling into a spiralling cycle of high-cost debt.
At Causeway, we support people who have been excluded from the labour force as they find their way into jobs, including jobs at our own social businesses. We recognized that this debt cycle was a real issue for many of our clients, so we created the Causeway Community Finance Fund, which helps people with unmanageable payday loan debt access small loans and banking services at a local credit union. Since its launch, we’ve met with more than 100 individuals, most of them living in deep poverty. With an average net monthly income of $1,590, and average expenses of $1,440, there’s no margin for error for our borrowers, and very little extra for savings or investments that interest major banks.
Why do so many people take loans from payday lenders if it is so risky? The reality for a lot of borrowers is that they simply have no other choice.
During our first year of operation, we were surprised to learn that every person we met with actually had a bank account. The biggest reason for getting caught in the payday lending debt trap was not because they were frivolous with their money or that they had a large unexpected expense, but because they were underbanked: Their accounts lacked access to credit or other basic banking options.
Major banks have been closing branches in low-income areas across Canada as retail banking continues to prioritize large investors over daily customers, providing the least service and charging the highest fees to those with the lowest savings. Payday lenders moved into this under-served market, raising the fees to predatory levels. It’s astonishing to see people go to payday lenders because they are unable to correct things like billing cycles, or lack the confidence to ask for overdraft protection. Most just don’t feel comfortable even entering their bank.
Payday lenders fill this immediate need. But they only help people manage a bad situation; in fact, they thrive on bad situations. They don’t help people get out of them.
This market needs to be disrupted. The recent changes to the Payday Loans Act are a good start, but if we don’t move beyond them, we’re overlooking the central challenge. We need sustainable community banking options. Real change will require system-wide co-ordination between policymakers, financial institutions and civil society.
At Causeway, we’ve experienced this coordination at the grassroots level: Social services have extensive referral networks, municipalities have marketing abilities, and we’ve seen credit unions show moral initiative to get involved. Truly creative solutions are not only restrictive, but also constructive. Let’s get creative.