There is a central moral conundrum at the heart of the payday loan phenomenon, as our report Can You Imagine an Ethical Wonga? sets out.
It is that payday loan companies are designed to help people through what are intended to be unusual and temporary periods of financial difficulty. Long-term and repeated use of payday loans is seriously expensive.
Yet the business plans of most payday loan companies envisage growth. Their business purpose, and the purpose of their investors, is to maximise their profits – and this is bound to be at the expense of some of the poorest families and the most vulnerable places.
So it is time we looked at the issue of what growing payday loan companies means for the local economies in the poorest neighbourhoods.
The profits of the top ten payday loan companies in the UK were about £194 million, according to the Bureau of Investigative Journalism. It is not clear how much the profits of the other 230 or so payday loan companies are, but the same report suggests that the turnover of the top ten is about 55 per cent of the total, which suggests that about £400 million a year is being extracted from the some of the poorest areas of the nation.
This will be an under-estimate because it excludes the money extracted to cover basic costs. It is also a suggestion of what the figure might be, which is a reason for more research to pinpoint the amount being extracted more precisely.
If that is so, it is a serious problem, given that the way that money stays circulating in the most impoverished areas, from local business to local business, is a vital element in their economic resilience. If there is an economic vacuum cleaner on the high street, it means that what enterprises survive locally will be that much less viable, and the neighbourhood that much more dependent on benefits and grants.
The loan companies point to the amount of money they are funnelling into the poorest economies. But more research is needed about the long-term impact on the poorest local economies when the borrowers are expected to pay back the loan, but find the equivalent of 5,000 per cent annual interest as well.
This matters because the money flowing through a local economy is one of the few assets poorer neighbourhoods possess. Increasing the length of time that money stays circulating locally can increase people’s wealth. Finding more ways that it can leak out will make them more dependent.
At the heart of this idea is the theory that maximising the use of the money already flowing through the economy, so that it is passed from local business to local business before it flows away, and can increase the economic impact without necessarily requiring new money.
The Campaign to Protect Rural England (CPRE), for example, suggests that spending £10 in a local food outlet is actually worth another £25 to the local economy, as it gets re-spent locally several times (a local multiplier of 2.5); and they also report that local food shops can employ three times as many people for the same amount of turnover as a large supermarket.
If this is the case, it matters that money is leaking out to payday loan companies. Unsuccessful places leak out income very quickly. That is what makes them unsuccessful, because it is not the total amount of money that is important here. It is the diverse ecosystem of businesses, and maybe even the diversity of people that matters – because they can keep money circulating:
- The original research by the New Economics Foundation on the local multiplier effect showed that every £10 spent with the organic vegetable box scheme was worth £25 for the local area, compared with just £14 when the same amount was spent in a supermarket.
- A study in a Chicago neighbourhood showed that a dollar spent at a local restaurant yielded a 25 per cent greater economic multiplier effect than at a chain restaurant.
- Another study in Maine showed how, for every $100 spent with 28 locally-owned businesses, $58 returned to the Portland economy.
- Closer to home, a study of the Lincolnshire Co-operative Society found that every pound spent in a co-operative store changes hands five times, at diminishing levels, until the final penny leaves the local economy.
The implications of this for the local economy are profound. It means that sustainable economic success requires a diverse range of locally-owned businesses which trade with each other. It also means that, if a financial institution sets up which drains the economy of the money circulating, then the economy will suffer.
It won’t just be the person paying back the loan. Payday loan companies may be depressing the poorest places.