Buggy whips. That’s what I think of as I follow the drama that surrounds payday lending.
First, allow me to discuss payday lending’s impact on workers and the future of this practice. Then, I will relate this to buggy whips, as I feel that only a percentage of the oldest two generations even have a clue how buggy whips play into all this. (Although some are looking it up right at this very moment!)
Payday lenders exist to provide small money loans at an extremely high cost to people who need access to funds before payday. This is not a new practice, and it has been a very profitable one for years.
My understanding is that payday lending came about as a sanctioned outgrowth from the days of loan sharks, when organized crime syndicates would provide loans to workers and small businesses in their “territory” and collect astronomical amounts in paybacks, leveraging threats to property and bodily harm for failing to pay up, and keeping those with loans trapped and in debt forever to the loan shark.
Unlike loan sharks, payday lenders don’t break fingers or legs when someone cannot make a payment, they just try to keep people who still owe in a pattern of always owing because it is incredibly profitable … for now.
And who are these people who are payday lender clients? Those who do not qualify for traditional loans, or who have a lot of debt already and few-to-no assets and who had, until recently, no recourse but to beg for a loan from a payday lender. That lender only requires that the worker has a job, some verification of the money they are making, and the ability to get some payback on payday.
For example, a recent payday loan for a Kansas woman of $750 turned into more than $3,000 in return for the payday lender, due to the exorbitant interest placed on the initial loan. And that’s with the loan finally paid off! So it is easy to see why payday lending is a profitable business.
Now, using technology, some of these modern-day loan sharks are turning themselves into “neo-payday lenders,” migrating to online apps to make these unsecured loans even more efficiently than the cash-are-us storefronts lining many urban streets.
But change is coming and change is here, on two levels.
First, the DailyPay app has arrived, and it is changing the game for payday lenders. DailyPay allows employees access to the money they’ve earned before payday. There is no interest, because the money is already earned, and there only is a marginal ATM-like fee for accessing the pay before payday. In some cases, the employers will pay that fee.
Employers are partnering with DailyPay in droves to ensure that their workers do not have to beg for a loan from a payday lender and can get the money they’ve earned, if they need it, before payday.
The availability of pay on a daily basis can reduce much of the need for payday loans and is a major piece of the puzzle to eliminating predatory payday lending operations. Hence, for many, no more cycle of debt.
Couple this with legal and regulatory requirements that are limiting the payday lending industry’s growth, and we can see that the payday loan era is fast coming to a crashing halt.
Yet those running payday loan operations are resisting this inevitability. Because of the inherent high loan default rate, ultra-high interest rates are necessary to stay in business, advocates for payday loan operators say.
They are lobbying the White House, trying to get measures placed on state ballots, and are claiming that their role in the economy to provide these small, short-term loans is important in areas that are economically depressed. Some payday lenders have gone so far as to influence religious leaders in these communities to support their efforts, in one case sending them on trips to lobby a state legislature.
Limiting the interest rate to 36% (it is now exponentially higher at 300-400%), as federal lawmakers are proposing, would reduce the profit margins of these businesses to the point where they will no longer be in a position to offer these loans.
Couple that with what technology is enabling, and “payday lenders, in particular, are going to find themselves very much far behind,” according to noted author Ron Shevlin, who spoke during DailyPay’s The Source podcast for December 2019.
The arguments and actions of the payday lending community remind me of similar efforts to thwart the rise of the automobile in the early 20th century. Transportation was still dominated by the horse and buggy, yet, as the demise of that industry could be foreseen, there remained those who continued to invest in the old methods.
Buggy whips were a critical implement that drivers of horse-drawn carriages used to keep horses on task. Investing in companies that made buggy whips during this period, when that mode of transportation was fast being supplanted by cars, became synonymous with not only denying that major change was underway, but also with making poor choices in an effort to maintain the status quo.
Payday lending is the 21st century’s buggy whip.