Payday comparison 'will happen', says CMA

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That's the verdict of the Competition and Markets Authority (CMA) following a 20-month investigation into the industry.

The CMA say lenders have been competing on factors other than cost, such as speed and convenience - both high priorities for would-be borrowers.

They also say most don't shop around for their payday loans because of a lack of clear information on the cost of borrowing, lack of awareness of late fees and other charges.

Price comparison - really?

Price comparison isn't the only measure being recommended to improve the industry. The CMA's interim report, published last October, included the following proposals:

• Make late fees and other additional charges clearer from the outset
• Allow people to shop around and get quotes without their credit rating being "unduly affected"
• Real-time data sharing between lenders and credit reference agencies should be improved
• Make the role and presence of lead generators much more clear to customers

But they and others remain convinced that price comparison is the real key to getting competition up and costs down in the payday loans market.

"Our actions are aimed at making the market more competitive and further driving down costs for borrowers," said Simon Polito, chair of the CMA's Payday Lending investigation group.

"We think costs can be driven lower... Only price competition will incentivise lenders to reduce the cost borrowers pay for their loans."

Mr Polito says "few customers find their lender via existing price comparison websites" - and that those services have limitations.

That's in part because many, like Choose, have made the conscious decision not to feature them.

Useful information

But the CMA say they've already spoken to several existing price comparison websites, and they think "one or more" services will emerge on existing sites regulated by the FCA.

If that fails to happen, payday lenders will be forced to set up their own comparison website, also overseen by the FCA.

The sites will have to include "all the information customers need to compare easily the total cost of different lenders' loans".

But the Association of British Credit Unions (ABCUL) said last year that they didn't believe "a lack of information or comparability is driving poor decisions and high prices."

Other efforts, such as publishing equivalent APRs, haven't been that helpful - doing little more than telling someone how much interest they'd pay if they borrowed that £150 over the course of a year rather than two weeks or 30 days.

What's more important for most people is information like this:

If there isn't enough money to cover the loan, plus the interest and charges, on the day they've said they'll pay it back, the customer will be charged an additional amount (and how much), and what happens after that.

For example, some lenders will leave the loan for a set period - often up to 60 days - before trying to recover the money again. During that time, interest will be mounting on both the loan amount and the interest and charges already incurred.

The problem with information like this is that the figures involved are difficult to get across simply.

It also doesn't touch on the problem of declined payment fees charged by banks when the borrower's account isn't good for the money.

What people actually look for

Other issues were highlighted in the CMA's research during the investigation, carried out by TNS.

They found that most people looking for a loan went straight to a lender's website, or plumped for a name they recognised or one of the top results when searching online.

TNS also used a couple of sites that already compare payday loans to see what people were looking for.

While headline cost was the most important factor for many, and people did want to know about late fees, they also wanted information on speed of access, the amount of documentation required and flexibility of repayment.

In addition, those surveyed tended to use the APR, total repayment amount, branding and position of the lender in the list to guide their choices.

The TNS report notes that users didn't "question the order the loans were listed in", or notice that the list was re-orderable according to different cost criteria.

The future

In January, the FCA's new rules came into force, meaning the amount repayable should never be more than twice that originally borrowed, and the daily interest chargeable is capped at 0.8%.

It's too early to tell what effect the new rules are having for customers, but their impact on the lenders is being felt.

The FCA have said that they think crackdowns on the sector will see the end of around 90% of lenders, leaving just a handful.

And shortly after the CMA's report was published, Wonga announced they were cutting more than 300 jobs - a third of their employees - and closing two of their offices over the next two years.

Probably the best known of the payday loan companies, Wonga had to write off the debts of 330,000 customers, worth some £220 million, last year.

This followed a fall in profits of 53%, and Wonga's chairman Andy Haste acknowledging they'd be making fewer loans to fewer people as a result of new, tighter, affordability checks.

So is this end of payday lending? Unlikely.

Simon Polito summed up the authorities' attitude towards the industry when he said:

"We expect that millions of customers will continue to rely on payday loans."

Even the Debt Advice Foundation gave the CMA's report a cautious welcome, with chief executive David Rodger saying the investigation "shone a clear light" on the industry, and that its findings would "bring it into the mainstream".

Is that really what we want?