Presentación de resultados

Life is never easy for underprivileged people who are struggling with financial issues. Education, housing, medical and other daily expenses cost more than before, and with limited financial access, people have to borrow money from a bank at some point in their lives. Characterized by lower incomes and lower education levels than the general population, the unbanked tend to be marginalized in socio-economic terms.156

Those people who are less able to use banking services, are ‘at particular risk of being excluded from transaction banking (in the form of a current or basic bank account),’157 and they have to use cash instead of payment services, which means more inconvenience and higher costs. For example, in the UK where the use of payment accounts is more common, people without access to bank accounts means they have difficulty receiving their salary, which makes it difficult for them to be employed, which, in turn, leads to further financial hardships. 158 Bill payment is also less convenient and more expensive if banking facilities cannot be used.159

Although in China cash is still widely used, carrying cash around is insecure. There are several aspects to this problem. First, since not all rural communities have bank branches, the majority of migrant workers usually use the post office to remit their wages to their rural homes.160 However, research finds that the transfer fee at around 1 to 1.5% of the whole amount161 charged by the post office in China is burdensome for rural migrant workers.162 Since a common migrant worker usually remits roughly 3,000 yuan per year, the fee paid is 30 yuan, which is ‘equivalent to their monthly food allowance’.163

Using a payment system through a commercial bank is cheaper and faster but this choice is less readily

156 _{John P Caskey, Clemente Ruíz Durán and Tova Maria Solo, ‘The Urban Unbanked in Mexico}

and the United States’ (2006) 3835.

157

Sharon Collard and David Hayes, ‘Pa wnbroking Customers in 2010: A Survey. A Report to the National Pawnbro kers Association’ (2010). It shows that the customers of pawnshops in the UK are less likely to have a bank account.

158

Kempson and others (n 5) para 5.2.

159

Ibid paras 5.9-15.

160

Rachel Murphy, ‘Domestic Migrant Remittances in China: Distrib ution, Channels and Livelihoods’(2006) IOM Migration Research Series 4.

161

Ibid.

162

Ibid.

available,164 not only because of possible difficulties of the account-opening criteria, but also due to the relatively low education level of migrant worker who may not able to obtain useful information on banking services.165 Some of them choose the informal way of remittance by carrying the money home, which makes them vulnerable to theft.166 Second, without easy access to banking facilities due to branch closure, rural residents may also find it hard to access nearby bank branches and post offices.167 This is due to the massive closure of bank branches and even post offices in remote areas in the late twentieth century.168

Next, people who are excluded from mainstream credit, rely heavily on their informal support network (eg, family and friends), which is probably also quite limited, and on alternative lenders. From the alternative lenders the unbanked could get a loan, which is generally short term, small scale, single payment and more over-priced than a common consumer credit product.169 These features could be found in the products of payday lending, pawnbroking, auto title lending and other kinds of alternative lending services. Loans are generally used to cover daily expenses, although some of the borrowers are also small business owners.170

The high cost of subprime lending and other features makes this market notorious.171 Taking payday loans as an example, the typical product in the US is a two-week loan for around US$250 to US$300 and the typical fees range from US$15 to US$20 per US$100 borrowed, which is a very high APR.172 Higher rates can also easily be found in the market. In the UK, payday lending is included in the more general concept of ‘high-cost, short-term credit’173

in the FCA’s new regulatory regime. According to several market reviews of payday- lending practices and the Competition Commission and OFT, the typical payday credit

164 _Ibid. 165 _Ibid. 166 _Ibid. 167 _Ibid. 168 _Ibid. 169

Mark Flannery and Katherine Samolyk, ‘Payday Lending: Do the Costs Justify the Price?’ (2005) FDIC Center for Financial Research Working Paper No. 2005-09.

170

Jim Hawkins, ‘Credit on Wheels: The Law and Business of Auto Title Lending’ (2012) 69 Washington and Lee Law Review 535.

171

Ibid. Subprime lenders in the US are also blamed fo r their targeted tactics, as ‘the industry has been accused of strategically locating near populations of vulnerable borrowers, such as military bases and low income neighbours.’

172

Ibid.

173

FCA, ‘Detailed Proposals for the FCA Regime for Con sumer Credit (CP 13/10)’ para 6.12. The concept is to inc lude other products that share core features but are not confined to ne xt-payday repayment.

that most UK consumers borrow from payday lenders are: (i) amounts less than £1,000,174 at an average cost of between £265 and £270 if borrowed over 30 days,175 and the most common amount is £100;176 and (ii) loan duration of between less than one month and a few months and a maximum of a year; on average 22 days.177 Research also shows that 90% of payday loan amounts were less than £570 and over 81% loans had a duration of less than 31 days.178 Other characteristics include repayment either directly from bank account transfers or in cash paid to high street shops,179 the use of roll-over repayment, and the fast and easy loan approval process.180

Except the high cost charged for the service, there is information asymmetry in relation to some citizens. Critics claim that payday borrowers are not well informed about the true cost of their borrowing, and those lenders engaged in deceptive and unfair practices, and made profit from repeated loan rollovers.181 Lenders are also accused of encouraging customers to borrow frequently.182 Borrowers then become ‘chronic’ and are trapped in endless debt, which is where the lenders’ profit comes from. Some of them cannot repay the principle of the loan at the due time, but have to roll over their debt by just repaying the current interest. The reputation of these lenders is, at least to some extent, negative when considering their profit sources.

However, the industry claims that it runs its business fairly enough. Since borrowers are generally weak in their financial status and are not required to provide collateral, the high cost of the loan is the price paid for default risks.183 Lenders have to maintain their business and avoid these risks via higher fees. As the risks of their customers are much higher compared with those who deal with a bank, the high price of alternative financial service should be understandable,

174 _{Competition Commission, ‘Payday Lending Market Investigation: Competition between}

Payday Lenders and Other Credit Providers’ (2014). 3.

175

OFT, ‘Payday Lending: Compliance Review Final Report’ (2013) 9.

176

Competition &Markets Authority (hereinafter CMA), ‘Payday Lending Market Investigation: Provisional Findings Report’ (2014) para 2.10.

177 Ibid para 2.13. 178 Ibid paras 2.10-12. 179 Competition Commission (n 174) 8. 180

Ibid. See also CMA Investigation (n 176) para 4.190. It mentioned that 74% of interviewed respondents viewed the speed of getting the money as ‘very or extremely important’.

181

Flannery and Samolyk (n 169).

182

Ibid.

since their business is not for a charitable purpose, and their services are indeed useful to the unbanked consumers. These lenders supply valued credit services to poor people; the customers also find they are easier to access than mainstream credit, because they are both time-saving and easier to access.184

All the reasons cited seem rational and customer-oriented, but do these kinds of transactions agreed to by both parties correspond with business morals? The answer is not as simple as ‘yes’ or ‘no’. Indeed, the subprime market provides complementary services to those who are excluded by mainstream lenders, w hich are usually referred to as ‘gap-filling’ when considering their roles or functions. However, this cannot exonerate these lenders from being blamed for charging high interest. There is nothing wrong with credit- lending activities but the unfair business practices are criticized. The high costs of the loans, the inappropriate debt collection and the danger of trapping customers in unaffordable debt by encouraging them to roll over the loan185 could cause more problems to customers than other existing consumer credit products: according to the Financial Ombudsman Service (hereinafter ‘FOS’), the number of customer complaints on payday loan issues reported to FOS reached 794 by March 2014, which is up 46% from the previous year.186 If borrowing money is inevitable, then the price should also be expected to be reasonable. This is generally the ground for regulating the credit market, whether mainstream or subprime, no matter which country is involved.