Can credit scores make payday lending ethical?

Payday lenders need to work harder to not target vulnerable borrowers.

A new report (pdf) by Damon Gibbons, published in partnership by Friends Provident and the Centre for Responsible Credit, looks at the benefits of credit data sharing and raises another possible solution to the problem of irresponsible lenders targeting the financially vulnerable.

It might be a surprise that credit scoring is not standard procedure for high-cost lenders on the high street and online. But most of us are familiar with payday lenders' adverts promising easy cash with no credit checks. The speed with which hard-up borrowers can obtain very expensive loans does have consequences, and making data sharing a priority would start to set this problem straight.

What does credit scoring and data sharing involve?

Credit scoring, simply put, is the system financial institutions have in place to check whether a person is said to be creditworthy before assessing a loan application. The system, regulated by the Financial Services Authority, works on a points system and is often shared with credit reference agencies. If a person's points score is deemed high enough then their loan application will generally be accepted; otherwise, that loan application can be denied.

How it can benefit responsible lending?

The Office for Fair Trading's guidance to lenders on responsible lending states that a creditor must consider whether a credit commitment will adversely impact upon an individual's financial situation. Ideally, credit scoring and data sharing can help lenders adhere to those guidelines. They will finally have a database to look at which will give them some indication of whether a loan of a particular amount, say, will be beneficial to them or impact negatively on their financial situation.

What bad behaviour it can stop?

At the moment there is no law stopping a payday lender from lending large sums of money, at expensive rates of interest, to low income consumers. There is only guidance to do this, and we know that this is not always adhered to. While we know payday lenders profit from repeat customers, and that only between 50 and 60 per cent of loans from payday lenders are notified with credit reference agencies, even some in the industry say that moving to a culture of data sharing would ensure that the risks attached to lending money are reduced, as well as some of the front end costs.

What are the risks?

The big risk is that credit scores could make it more difficult for a person to obtain credit.

The government, on this, have said that while they appreciate the need for credit scoring, they do take into consideration the “unintended consequences”, such as to those with no, or "thin", credit rating struggling to get loans.

However in addition to better quality lending decisions, it would be worthwhile for mainstream credit providers to be less needlessly risk averse when considering overdraft and credit applications to low income customers who may otherwise rely on a high cost payday lender, where the average loan can cost around £30 per £100 borrowed.

What policy makers should do

Two things: set criteria for what is meant by responsible lending, such as setting a minimum level of disposable income a borrower is left with after taking on a loan; and oblige lenders to refer high risk customers to credit unions, where they can receive budget management advice and borrow money at far cheaper prices.

Furthermore, payday lenders should be obliged to implement a system of five roll-over loans per customer. Credit checks will provide the data for customers who reach this point.

Credit scoring and data sharing, implemented properly, can be the lifeline borrowers need at a time when personal debt is growing and the payday lending sector is seeing its profits soar.

Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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Arsène Wenger: how can an intelligent manager preside over such a hollowed-out team?

The Arsenal manager faces a frustrating legacy.

Sport is obviously not all about winning, but it is about justified hope. That ­distinction has provided, until recently, a serious defence of Arsène Wenger’s Act II – the losing part. Arsenal haven’t won anything big for 13 years. But they have been close enough (and this is a personal view) to sustain the experience of investing emotionally in the story. Hope turning to disappointment is fine. It’s when the hope goes, that’s the problem.

Defeat takes many forms. In both 2010 and 2011, Arsenal lost over two legs to Barcelona in the Champions League. Yet these were rich and rewarding sporting experiences. In the two London fixtures of those ties, Arsenal drew 2-2 and won 2-1 against the most dazzling team in the world. Those nights reinvigorated my pride in sport. The Emirates Stadium had the best show in town. Defeat, when it arrived in Barcelona, was softened by gratitude. We’d been entertained, more than entertained.

Arsenal’s 5-1 surrender to Bayern Munich on 15 February was very different. In this capitulation by instalments, the fascination was macabre rather than dramatic. Having long given up on discerning signs of life, we began the post-mortem mid-match. As we pored over the entrails, the curiosity lay in the extent of the malady that had brought down the body. The same question, over and over: how could such an intelligent, deep-thinking manager preside over a hollowed-out team? How could failings so obvious to outsiders, the absence of steel and resilience, evade the judgement of the boss?

There is a saying in rugby union that forwards (the hard men) determine who wins, and the backs (the glamour boys) decide by how much. Here is a footballing equivalent: midfielders define matches, attacking players adorn them and defenders get the blame. Yet Arsenal’s players as good as vacated the midfield. It is hard to judge how well Bayern’s playmakers performed because they were operating in a vacuum; it looked like a morale-boosting training-ground drill, free from the annoying presence of opponents.

I have always been suspicious of the ­default English critique which posits that mentally fragile teams can be turned around by licensed on-field violence – a good kicking, basically. Sporting “character” takes many forms; physical assertiveness is only one dimension.

Still, it remains baffling, Wenger’s blind spot. He indulges artistry, especially the mercurial Mesut Özil, beyond the point where it serves the player. Yet he won’t protect the magicians by surrounding them with effective but down-to-earth talents. It has become a diet of collapsing soufflés.

What held back Wenger from buying the linchpin midfielder he has lacked for many years? Money is only part of the explanation. All added up, Arsenal do spend: their collective wage bill is the fourth-highest in the League. But Wenger has always been reluctant to lavish cash on a single star player, let alone a steely one. Rather two nice players than one great one.

The power of habit has become debilitating. Like a wealthy but conservative shopper who keeps going back to the same clothes shop, Wenger habituates the same strata of the transfer market. When he can’t get what he needs, he’s happy to come back home with something he’s already got, ­usually an elegant midfielder, tidy passer, gets bounced in big games, prone to going missing. Another button-down blue shirt for a drawer that is well stuffed.

It is almost universally accepted that, as a business, Arsenal are England’s leading club. Where their rivals rely on bailouts from oligarchs or highly leveraged debt, Arsenal took tough choices early and now appear financially secure – helped by their manager’s ability to engineer qualification for the Champions League every season while avoiding excessive transfer costs. Does that count for anything?

After the financial crisis, I had a revealing conversation with the owner of a private bank that had sailed through the turmoil. Being cautious and Swiss, he explained, he had always kept more capital reserves than the norm. As a result, the bank had made less money in boom years. “If I’d been a normal chief executive, I’d have been fired by the board,” he said. Instead, when the economic winds turned, he was much better placed than more bullish rivals. As a competitive strategy, his winning hand was only laid bare by the arrival of harder times.

In football, however, the crash never came. We all wrote that football’s insane spending couldn’t go on but the pace has only quickened. Even the Premier League’s bosses confessed to being surprised by the last extravagant round of television deals – the cash that eventually flows into the hands of managers and then the pockets of players and their agents.

By refusing to splash out on the players he needed, whatever the cost, Wenger was hedged for a downturn that never arrived.

What an irony it would be if football’s bust comes after he has departed. Imagine the scenario. The oligarchs move on, finding fresh ways of achieving fame, respectability and the protection achieved by entering the English establishment. The clubs loaded with debt are forced to cut their spending. Arsenal, benefiting from their solid business model, sail into an outright lead, mopping up star talent and trophies all round.

It’s often said that Wenger – early to invest in data analytics and worldwide scouts; a pioneer of player fitness and lifestyle – was overtaken by imitators. There is a second dimension to the question of time and circumstance. He helped to create and build Arsenal’s off-field robustness, even though football’s crazy economics haven’t yet proved its underlying value.

If the wind turns, Arsène Wenger may face a frustrating legacy: yesterday’s man and yet twice ahead of his time. 

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 24 February 2017 issue of the New Statesman, The world after Brexit