Should High Street Banks Provide Microloans For The Poor?

Extravagant bonuses, poor lending activity and high street’s risky banking investments have muddled Britain’s financial forecast with ominous clouds that don’t seem to be clearing anytime soon.

The credit crunch has created a lucrative gap that has allowed payday lenders to emerge and many of the less wealthy British families have been turning to them for financial services.

But as Gillian Guy, CEO of activist charity Citizens Advice, pens in this recent piece for the Financial Times, payday lending can often trap the very people they purport to help through tough financial times.

Through customer-focused marketing strategies and a strong drive to satisfy new customer needs, payday lenders have been able to expand their customer reach. Bigger high street banks have been forced to raise the bar for lending procedures, and tighten the application process. Individuals who are being denied of loans and accounts are typically the ones with unreliable or low income, or have bad credit.

Payday lenders have targeted these denied customers and grant them short-term credit loans. The payday loan industry specializes in supporting the poorer families who need short-term loans.

Unfortunately, these loans come at a high pay back price and customers are asked to repay the loans in addition to extreme interest rates.

As Guy notes, the Citizens Advice Bureaux in the UK has acknowledged this issue as a significant social problem and is concerned about the high growth of payday lenders across the country in the last four years. They refer to the payday companies as ‘legal loan sharks’.

While the debate of payday lenders’ business ethics remains arbitrary, according to Guy, what is clear is the argument that they are the only industry responding to the unmet customer demand. There is concern that as the financial state continues to slide downward, customers may become more desperate. This desperation and vulnerability will give payday lenders more power to take advantage of the already problematic situation.

Guy states that the decrease in employee income and the increase of citizens relying on the national benefit system is disconcerting as well. There are future cuts to come that will require some benefit payments to become monthly instead of weekly, and families will have to readjust on accordingly.

How can such problems be avoided? Guy suggests several steps.

Guy suggests that high street banks take partial responsibility for the surge in payday loan companies, and match services by offering an alternative. Banks do not typically deal with micro-loans that incur high interest, but to avoid more damage, this position should be reconsidered. Big name banks should challenge payday lenders.

Secondly, Guy states that the banks and government should work together to come up with strategies to help consumers manage their money more effectively and simply. Technological support such as text messaging account information or budget advice has been suggested as a viable solution.

A third suggestion from Guy includes offering a personal face-to-face budget support program for customers faced with drastic changes in financing. This can be a government or bank facilitated-program.

Lastly, publicly subsidized banks should also inherit responsibility and allow reopening of current accounts to undischarged bankrupt individuals. The government could work together for an agreement of how to allocate customers to retail banks to avoid a single bank dominating the market share.

“High street banks would do well to act now for low-income households and demonstrate that social responsibility can be a decent earner,” Guy stated in the piece.

So what do you think? Who holds responsibility for helping to break the payday lending cycle in Britain? Let us know in the comments below.

And to read the full story at The Financial Times click here.