I noted this advert in the Christian Science Monitor today, aimed at the UK market:
I've long hated all Provident Financial stands for in terms of exploitation of the poorest in our community. And here they are, continuing to do so, profiting from the credit squeeze and abusing those must vulnerable to its impact.
It's a sickening indictment of our financial services industry that this company survives, and a failure of a Labour government that has let it do so when options for change have been presented to it, by me amongst others.
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👿 Well, with a chief executive named – unashamedly – as Peter Crook [who looks like he has had a few hot dinners, as my mum would say…] you have got to admit they are open about it all. But if this lot are a bunch of parasites, what about the City scions on their share register [which I am attempting to obtain]? Another case of big fleas feasting off smaller fleas. And I bet they all have ‘corporate responsibility’ petticoat clauses displayed all over their web sites. And what about a ‘Government’ that allows them to continue profiteering from the poor?
I can’t comment on Provident Financial but this interesting link (http://www.creditslips.org/creditslips/2008/03/are-payday-loan.html) about “Pay Day” lenders in the US would suggest that all is not as it seems.
Despite interest rates that *seem* extortionate, the companies only make “normal” profits. This seems logical enough (if there were massive profits to be had, other providers would move into the lucrative market and returns would be pushed down… it’s hard to argue that this market isn’t competitive!)
So, we’re left with a question: how can they charge such high rates of interest and yet only make modest profits? The answer, surely, is that 1) there are likely to be fixed costs regardless of whether the loan is for £100 or £1000 or £10000, 2) the cost of collection is likely to be high (small payments, typically in cash, collected door-to-door) and 3) defaults are likely to be high.
So, if this business is only profitable at such high rates of interest, the only honest alternative to allowing them to continue is to close them down. But then what? Cut off access to credit to the poorest in society? What an unpleasant thing to do.
Richard
I somehow expected that the an apologist would comment quite quickly.
I explored the issues your raise in my report. People do not exter this market because of the blatant snobbery about doing so – see the attacks on HSBC for doing so in the US as evidence.
In the meantime with near monopoly power and no legislative constraint the Provy continues to operate in the most inefficient way possible – hence its costs.
Your argument is wrong. Provy is an example of market failure needing correction by legislation, and not an example of the market working.
Richard
I enjoyed this part of your report:
“What is clear is that this rate is extraordinary when compared to the prime
personal loan market, whatever the parameters of calculation. This is
particularly so as Provident Financial plc is, bad debt risk apart (which risk
appears highly predictable), a low risk lender by the other normal criteria of
lending risk within this market for the following reasons:
1. Rate risk. Provident Financial plc might lend at fixed rate, but its loan
terms are short. There is very limited exposure over that period to risk
with regarding to fluctuating interest rates. Cover for this risk does not
need to be built into its rates.
2. Status risk. All loans carry the risk that the borrower might see a
change in their status over the term of the loan e.g. someone with what
appears to be a secure income loses their job or what appears to be a
stable household collapses due to marriage failure. Due to the short
term of Provident Financial plc loans this risk is low in their case and as
such this factor, which is a substantial cause of risk for other
companies in the personal finance market, is largely absent in their
case.
On the basis of all this evidence there would appear to be no economic
justification for the rate of interest charged by Provident Financial plc.”
Given that a few pages before we had this:
“Has suffered increasing bad debt charges over the period, starting at
10.6% of income in 1996 and rising to 17.3% on 2002. This failure to
control debt recovery is a recurring feature of all reports on Provident
Financial plc.”
Bad debt provisions seem to be extraordinarily high: it might indeed be predictable, as you say, but given that it is predictable then it will be incorporated into the prices charged and thus lead to those high interest rates.
As a side note, I’ve seen figures from a non-profit running payday loan schemes in the US (some of the Goodwill stores now do this) and they need to charge 200% to cover their costs.
A lot of this expense is thus due to, as Richard B says, the costs of arrangement and collection of small sums for short periods.
Tim
The power of selective reading is in operation!
What you didn’t highlight are all the costs I identified that persist only because there is no pressure on Provi as a monopolist to reform its business practices.
Door to door collection is not only expensive, it’s been shown elsewhere to be fraud laden, contributing to the bad debt.
I drew attention to the debt in my report as a cost that could be curtailed. You use it as justification for monopolistic abuse. Which of us is showing greater commitment to market principles, I’d ask?
Richard
Am I the only one to find it offensive that the Christian Science Monitor should choose to sell advertising space to this lot. Not that we should be surprised at hypocrisy being closely associated with religion!