Op-Ed: Payday Lending Addresses a Credit Market Failure

June 7, 2016

By Jim McDonell

 

The Ontario Government has called a vote for the Second Reading of Bill 156, the Alternative Financial Services Statute Law Amendment Act. The Bill changes the framework within which collections agencies, payday lenders, cheque cashing services and lease-to-own providers operate.

 

Few could argue that the fees and costs incurred by users of these services are high. A payday loan in Ontario can cost up to $21 for every $100 borrowed – the fees add up quickly. Many opponents of the payday lenders’ and cheque cashers’ business model, however, miss an important point: Why is there demand for their services?

 

There is a reason the Ministry deems these financial services “alternative”. The conventional finance many of us have grown accustomed to involves a credit history, a bank account, an income and other factors that some Ontarians don’t have access to. Unexpected expenses, such as a dental bill, can bring financial hardship upon a family on low or unstable income.

 

With conventional finance tools such as lines of credit and credit cards, Ontarians can address such events through quick access to cash at a comparably low interest rate. New Canadians, Ontarians with poor credit histories, Ontarians on social assistance, single parents, the self-employed and those on low incomes often don’t have immediate access to convenient, low-rate credit, but they do have access to payday lending.

 

The situation has been compounded by increasing under-employment in the Ontario economy. Almost one in ten Ontarians (8.9%) work for the minimum wage, double the proportion in 2003 when the current Government took power. For the economic engine of the Confederation, this is a travesty. The destruction of the stable, skilled, well-paid jobs our Province used to have is a contributing factor in preventing many Ontarians from establishing a solid financial footing that would open them the doors of conventional finance.

 

Payday lenders operate in the market left behind by conventional finance institutions. This market carries a higher risk of loan default that must be factored into the cost and the length of the loan. As far back as 2004, payday lending institutions experienced, over the two-week lifetime of the average loan, a loan default rate several times higher than larger bank’s benchmarks.

 

The Government’s proposals in Bill 156 add to the existing regulatory framework with a view to micro-manage the industry and throttle the supply of payday loans. Limiting a person’s access to repeat payday loans may sound positive on paper, yet it doesn’t offer the customer a way out of their financial predicament.

 

We must tackle the source of the problem. We must help the poorest Ontarians obtain bank or credit union accounts while minimizing the impact of fees on their monthly budget. All Ontarians should be afforded the opportunity to build a solid credit history that would enable them to access conventional finance products. Last but not least, the Government should focus on beefing up Ontarians’ disposable incomes by allowing them to keep a greater portion of the fruits of their labour.

 

These aims are harder to achieve, but they are worth striving for. We can all agree that in an ideal situation there would be no need for payday lending and the industry would evaporate for lack of demand. Bill 156, instead, tinkers at the edges of the problem without offering Ontarians a viable alternative. Its principle is micromanagement and kicking the can down the road. Ontarians, including the most financially vulnerable ones, should not let themselves be convinced that their financial troubles are over.