Payday Lending – fixing a broken market

Sponsored by the ACCA, the objectives of the report were to: develop a detailed understanding of the business models underpinning UK payday lending; inform the debate about the level and structure of the new charge cap; and examine which other regulatory interventions may be necessary to create a small-sum lending market which allows lenders to innovate and also delivers good outcomes for borrowers.


Payday lending is currently causing enormous consumer detriment and harm, often to people who are among the most beleaguered and vulnerable in our society. In 2012 borrowers spent over £900m on payday loans, with £450m spent on loans which were subsequently ‘rolled over’.

The evidence presented in this report suggests that existing online payday lending business models are reliant on repeat borrowing for their profitability. Consumer detriment, in the forms of default, repeat borrowing and the taking of multiple loans from different lenders, appears to play a highly profitable role in existing business models.

It seems that many payday loans serve only to increase the likelihood of future indebtedness. Many payday borrowers would have been better off without these loans.

Allowing capital to flow into the development of products which cause consumer detriment also carries a high opportunity cost. True innovation is stifled and products capable of answering consumers’ needs cannot be developed. This issue is of increasing importance and relevance to all of us; unless an economic miracle occurs, a growing proportion of our population will need to seek recourse to the high-cost credit sector.

Appropriate regulation has the potential to fix the payday lending market, which is currently failing due to asymmetric information, detrimental practices and behaviours, and poor product design. The new cap on the total cost of credit, in particular, could transform this industry. Not only will this protect vulnerable consumers, the constraints it will place on the business models of payday lenders should clear space to allow community lenders to grow and offer fair, affordable loans to more households.

The FCA now has a unique opportunity to enable the high-cost credit sector to evolve into a sector which is genuinely ‘fit for purpose’.

The full report can be found here: Payday lending full report