How to give pay day loan companies real competition

A credit co-op could charge fair interest rates

Educating people to look for solutions that are not available to them is not a real solution, but it is a dandy way to blame the victim.

The recent report of the Financial Agency of Canada found that financial education is the key to addressing the exploitative nature of pay day loan practices. Only 43 per cent of respondents to their survey knew that pay day loans were more expensive than credit card cash advances.

What the surveyors may not have asked is, “Does this make a difference to the borrower?” Most pay day borrowers are taking a loan to meet a financial emergency. Many do not have credit cards or card balances that can support a cash advance.

The key observation is: “… many users lack access to more traditional types of credit, either because they are unaware of or ineligible for cheaper forms of credit.” Educating people to look for solutions that are not available to them is not a real solution, but it is a dandy way to blame the victim. It also positions the banks and credit card companies to skim those who may be eligible for their business and leave the rest.

There have been attempts to use a shortterm loan at credit card rates with limits up to $2,000 in other provinces but it has not seriously dented the activity of pay day lenders. These efforts still require conventional loan application processes and do not address the immediacy and easy access that pay day lenders offer. Also, the pay day lender may in fact be preferred by the unaware borrower because he develops a rapport and relationship with regular customers.

It is not just rates or information, it is also access that is necessary — access in not only location but also the time and feeling of being welcome in mainstream financial institutions. Most borrowers need the money immediately. Many feel uncomfortable going into a bank. A store front feels more comfortable. In other words: When I go into the pay day lender store I know I will walk out with the money and they won’t make me feel awkward nor do I risk embarrassment of being declined.

A credit co-operative could compete using modern Internet-based technology much like the new wave of FinTech companies are using to push credit. Technology is not the problem, it is the business model. An effective co-op mimic is the pay day model, which has proven effective but at marginally lower rates for a first-time loan. If the loan is successfully repaid, a next loan has a lower rate. Each successful loan reduces the rate as trust is built and risk is reduced as the borrower’s risk profile is understood. Being a co-op, any profit made (after retained capital) is returned to the borrowers in the form of a patronage rebate (refund) at the end of the year. If the co-op was affiliated to local credit unions, the coop members could also access credit unions for retail cheque cashing and other services, as well as access to payments through the ATM network.

This could be a non-exploitative, selfsustaining competitor to the pay day loan business. Legislation feels better than it works. Education without an effective alternative is not enough. It is time to put them out of business by competition. People need a better deal.

Bill Thompson has been a credit union member for 44 years and worked to build the first industrial worker co-op in Canada. He serves on the board of his housing co-op and is currently working on a project to give pay day loans some competition.