Who is regulating the payday loan industry?
The payday loan industry is carefully regulated. It has been for some time.
Many people are aware of controversies that have surrounded payday loan providers in the past. Some lenders have needed to pay compensation for irresponsible lending behaviour.
Despite significant changes to the industry, there are still some negative perceptions.
With input from the Financial Conduct Authority (FCA), who ensure enders are fair, the payday loan industry has altered. Stricter regulations now protect borrowers from excessive repayment figures.
But the FCA is not the only organisation wanting to play a part in industry regulation. Now, Google has thrown its hat into the ring.
Google’s new payday loan policy.
In early May 2016, Google announced a ban on payday loan advertising.
This is a first for Google. An entire advertising ban on products that are already strictly regulated.
Certain advertisements for payday loans and short term loans are no longer allowed on Google websites, from July 13th 2016.
Advocacy groups have campaigned and listened to.
Before, there were concerns adverts for short term, high interest loans could take advantage of consumers. Adverts would be shown to people struggling, encouraging them to borrow and take on debt they couldn’t afford. Google’s new ruling, which applies internationally, could reduce those worries.
- Around the world: Any loans that have 60 day terms, or shorter, are covered within Google’s new policy.
- In the US: An extra clause covers loans with an APR of 36% or higher.
These are adverts that Google makes a lot of money from. In making these changes, they are cutting off a significant source of revenue.
It is clear that this is a big move for the leading online search engine. Not covered by this ban yet, are other forms of credit including credit cards, traditional loans and car finance.
What does the new Google ban affect?
Loans with terms of 61 days or more will not be directly affected by Google’s ban.
This means many payday lenders will still have product offerings they can advertise on Google. As well as short term loans, many of the most well-known payday lenders offer loan terms of up to 12 months. New payday lenders will have to adapt or create a product that adheres to the new rules.
Is Google regulating the payday lending industry?
The Financial Conduct Authority regulates short term lending in the UK.
They have regulations in place to limit consumer risk, including:
- Fixed default fees, capped at £15.
- A cap on interest and fees, at 0.8% per day.
- A cap of 100%, ensuring borrowers will never pay back more than double what they borrowed.
The new Google rules will not have an impact on the FCA regulations. But they will limit the advertising options that are available to lenders.
Google is paying attention to APR in the US. It is ignoring this aspect in the UK where fees are already under tight control.
How are advertisments changing?
Currently, when you search online, you will see two types of results.
In the most prominent positions are the advertisements that companies pay for.
These are the adverts covered by Google’s new rule.
Additionally you will see ‘organic’ search results, which are not directly paid for. The biggest, most well-known companies will usually show on the first page of the search results. Smaller and lesser-known companies could be many pages later.
Providers offering payday loans could make use of paid advertisements.
Lenders could configure their adverts so they would show whether you searched for ‘payday loans’ or for something less direct. Keywords such as ‘can’t pay bills’ or ‘struggling to afford groceries’.
The latter search terms were particularly controversial targets.
There were concerns about desperate consumers. If they were panicking about their next expense and searching for general advice. Well, they would seem encouraged to borrow a high interest, short term loan. As a result of these concerns, Google made some earlier policy changes.
The first policy changes, surrounding payday loans, restricted keyword targeting.
Adverts for payday loans would then only appear if people searched for ‘approved’ words or phrases. If a consumer searched for ‘can’t afford energy bill’, they would not see adverts for short term loans.
Google advert styles play their part
The blame for controversial advertising is not placed solely on the advertisers.
Adverts on Google have such limited character counts that little information can be shown. Advertisers, faced with these restrictions, would focus on the quick and powerful phrases. Phrases like ‘fast cash’, ‘instant loan’ and ‘easy money’.
With so little room for detail, lenders wouldn’t be using characters to detail restrictions and interest rates. Instead, consumers would see tempting offers without all the terms, conditions and important details. Details that they should use to make a decision.
In the UK, payday loan offerings (with terms of up to 60 days) can no longer feature in paid adverts.
A company that offers short term loans over many instalments, for between 6 and 12 months, can promote these services.
All loan companies are subject to more rules, following the latest changes. When consumers click on an advert, they must proceed to a page with term length and APR information. The new Google policy ensures that details are easy to find.
Payday loan companies will of course still feature in the ‘organic’ results that are not paid for.
What impact will the new payday loan rules have on potential borrowers?
There are two sides to every story.
It is important that consumers are careful when applying for any type of credit.
You should not take a payday loan if you’re feeling desperate or overwhelmed. It is important to borrow money with a level head and when you are certain that you can repay it.
Lenders run strict affordability assessments, rejecting more applications than they accept. This is not always enough.
The change to Google’s policy may protect provide further protection for consumers.
It could be a valuable safety barrier, alongside all other existing regulations. This is a change that a large number of people are happy about.
So, there are potential problems with Google’s new approach.
For many, a payday loan is a sensible short term credit option. These borrowers can afford repayment, but need a short-term boost to their bank balance to cover an unexpected cost. Many consumers might now be missing out on this option, if the adverts are not there to see.
Payday loan companies will now only show in the organic search results. In these lists, the biggest and most powerful companies are in the most prominent positions. New payday loan companies, and smaller ones, will be almost impossible to find.
The biggest lenders, including UK market leader Wonga, will receive the most attention. Smaller lenders, despite having a more suitable offering, will struggle to appear.
Google’s change might be a positive move for the biggest payday lenders, restricting competition. For consumers, the new policies may also restrict the variety of payday loans on offer.
According to SimilarWeb, 99% of Wonga’s search traffic comes from organic sources. Wonga’s success ensures that the lender does not need to pay to advertise with Google.
The Consumer Finance Association (CFA) has said of Google’s announcement:
“UK consumers enjoy a vibrant, competitive credit market. Yet we are interested to read the evidence Google uses to justify overruling open market advertising. Indeed of a legal, regulated industry to deny people freedom of choice”.
In an industry that is already regulated, there are concerns Google’s actions might restrict choice.
How permanent is this decision?
No change that Google makes is ever guaranteed to be permanent.
The needs of consumers change constantly. Google is always adapting to meet those needs, but often go far beyond.
In fact many of Google’s changes, far from adapting to consumers, actually shape and change consumer behaviour. The internet giant is a strong and powerful influence. An influence affecting almost everything that we do.
It is likely Google’s ban will remain in force. It is also possible the ban will change the landscape of payday loans worldwide.
Smaller providers may all but drift off the map, which makes loan brokers like Cash Lady all the more essential.
Applying for a payday loan through Cash Lady could introduce you to regulated, authorised and trusted lenders. Lenders that you had not before heard of.
If the changes made by Google stop the smaller lenders from competing with the bigger ones. Then this could be the only way to find the most suitable payday loan.
On Google’s public policy blog, it announced they would “continue to review the effectiveness of this policy”.
It is possible this change will be a positive move. One helping consumers to make more educated and considered decisions. If that is not the case, there will always be opportunities for Google to again change its thinking.
A catalyst for a changing market.
Understandably, Google’s policy change is daunting for many of the smaller lenders. There will be companies that invested in online advertising. But now find they are without their main source of website traffic.
Interestingly, the Guardian’s money editor Patrick Collinson believes Google could completely “change the marketplace. Especially with providers incentivised to cut their rates to more sensible levels”.
Whatever the outcome, lesser-known lenders will have to make changes to their offering. Or also their marketing if they hope to succeed going forward.
Could the new Google ruling increase debt levels?
If borrowers are only made aware of the biggest names in short term loans, they may not be able to find the best deal. Without exploring the broader short term loan market, could lead to people accepting higher interest rates. Or choosing the wrong loan terms and being unable to keep to them.
If the smaller loan companies retreat from the marketplace, the bigger companies might have more freedom. But, as Patrick Collinson suggested, lenders might cut their rates to access promotion opportunities.
Google may have identified a way to complement the work of the Financial Conduct Authority. So that loans are taken out more responsibly.
It may be that consumers become less likely to apply for loans in their most desperate moments. Times when they might not be thinking clearly.
A considered approach to borrowing, just like a responsible approach to lending, is the best way to reduce unnecessary debt.
Google’s latest strategy might work as consumers hope. If so, levels of impulsive borrowing might reduce considerably.
To limit their risk yet, consumers will need to be aware that some of the market may vanish at the bottom of the pile. Borrowers shouldn’t just look at the tip of the iceberg. But also research lenders below the surface that might have something unique to offer.
To protect users from harmful financial products, Google is making changes to advertising.
From July 16th, UK advertisers will no longer be able to advertise payday loan products below 60 day terms.
Lender websites will still appear in Google’s main search results. But they will not show as paid-for advertisements.
The move may protect consumers from adverts that target them at their most vulnerable. It is hoped this move will give people more time to consider the responsibility of taking out a payday loan.
Alternative viewpoints suggest that Google’s policy change will affect the smaller lenders. As such giving consumers fewer options and force them into taking out loans with one of the bigger companies. Companies such as market leader Wonga.
Also are concerns that removing advertisements could leave consumers unaware of payday loan options. Even if they would be suitable forms of credit.
Whatever the outcome, borrowers will have to make more of an effort to identify the loan product that meets their needs.
Consumers can always turn to an FCA approved broker to be introduced to a wide range of responsible, available lenders. Brokers like Cash Lady.