Overview of the Book
Customers of payday lenders and other providers of Fringe Financial Services (FFS)1 are people who can least afford to pay the higher cost of these alternative loans, check cashing, and payment services; those with less income are paying considerably more than the non-poor for basic banking services. A growing number of Canadians have been turning to higher-cost financial services from these non-deposit-taking firms despite the widespread availability of mainstream banking services in Canada. Recent surveys suggest that users of payday loans turn to these services because they are denied adequate credit services from traditional banks (see Box 1.1).
The growth of the FFS sector has been remarkable in terms of both its geographic scope and the variety of products and services on offer through storefronts and online. This growth is one manifestation of “financialization ”—a process that sees a marked increase in the value of financial services and financial products relative to the non-financial output of an economy. In this particular dimension, financialization is prima facie evidence of a form of financial exclusion. The existence of a large group of Canadians financially excluded by virtue of using FFS and thus being “underbanked ” raises serious social justice concerns.
In the first seven chapters of this book, we provide a wealth of evidence about how the payday loan industry functions in Canada and its effects on its customers. We tell you who the customers are and how they feel about their situation. We show the financial and operational nature of the payday loan companies, both storefront and internet lenders. We explain the options to payday lending that exist in the mainstream financial services and show what they lack. We summarize other research work, particularly from the United States. We explain how the legal and regulatory environment operates and analyze the ethics of regulation.
In Chap. 8 we summarize our findings and argue for regulators, banks, and credit unions to implement strong actions to reduce financial exclusion in general and the harm that payday loans in particular can cause. We recommend an outright ban on payday loans accompanied by the mainstream offering an expanded menu of short-term loans at more reasonable rates and other services to ensure Canadians are receiving the basic financial services they need to manage in the modern economy. If the political will to ban payday lending is lacking, we offer alternatives including a limit on fees to $15 per $100 borrowed and options for installment loans instead of payday loans that require full repayment on the due date.2
The Payday Loan Industry in Canada
There are over 1400 payday loan outlets in Canada today, and there were virtually none in the mid-1990s. Prior to the mid-1990s, there were check cashers. Once check cashers, including National Money Mart , added payday lending to their services, this became their principal product and even led them to being renamed payday lender from check casher. We estimate the national payday loan market to be $2.3 to 2.7 billion face value of loans per year. The majority of payday loan outlets are located in Ontario, with 800, and it is estimated that they issue $1.1–1.5 billion in loans each year in that province (Deloitte 2014, p. 1).
Data on the Canadian payday loan industry are, however, limited. There is little by way of official data, and private sources have dried up. Until recently the two largest payday lenders, National Money Mart through its parent company DFC Global Corporation and Cash Store Financial,3 owner of the Cash Store and Instaloans, were publicly traded so that there were some data on their size and trends. Dijkema and McKendry (2016) reinforce a common narrative that based on outlet numbers, the industry grew rapidly in the early and mid-2000s and growth slowed by the early 2010s (p. 27).
Surveying the limited data available on payday lender financial performance, Buckland (2012) concluded, “[t]he data … demonstrate the strong, if somewhat bumpy financial performance of the larger fringe banks ” (Buckland 2012, p. 139). The bankruptcy of Cash Store Financial and DFC Global Corp sale to private equity firm Lone Star Funds mean that there are very limited data available to analyze this industry in Canada. The last date for which there are data available for DFC Global Corp and hence for Money Mart is March 31, 2014. These data demonstrate growth in total revenues and payday lending , a decline in check-cashing revenue, and a small rise in revenue from other sources, from 2009 to 2014. Although many payday lenders offer other financial services like pre-loaded debit cards, money transfers, gold purchases, advances on tax refunds, currency exchange, and more recently pawnbroking, these contribute only a small portion of total revenue, more than half of which comes from payday loans and most of the rest from check cashing.
A consolidation process, or process of “corporatization ,” has been occurring among payday lenders in Canada as evidenced in the early 2000s beginning with the rapid expansion of National Money Mart Inc. and Cash Store Financial, and somewhat more recently Cash Money and Cash4You. Cash Store Financial has since gone out of business, but Money Mart has at least half the market and the top five chains have 65% of the outlets and a greater percentage of the loan volume. Chapter 4 provides a more detailed history of the industry and its present status: corporate concentration, stores by province, and financial performance.
The Payday Loan Product and Its Usage
As a very short-term (2–3 week) consumer loan, payday loans offer consumers convenient access to cash advance against their next paycheck. The costs of these loans are considerably higher than the costs of similar credit from a mainstream bank or credit union. In the past decade, regulations have imposed rate caps that have, in most sub-federal (provincial and territorial) jurisdictions, constrained the fees payday lenders can charge, but the cost of a payday loan remains more than ten times the cost of these same funds obtained from a line of credit or a credit card cash advance.