Can New Zealand payday lenders survive?

OPINION: Former British Prime Minister and sometimes storyteller Harold Wilson noted that “a week is a long time in politics”.

It’s a sentiment I guess Simon Bridges and Jacinda Ardern have some sympathy for as they’ve had to deal with a plethora of colorful issues lately, from renegade MPs to kickboxing drug dealers.

This is a sentiment that also applies to start-ups, albeit with a slightly longer lead time, normally. More like a year, according to a Harvard Business School study.

Coincidentally, a year ago, short-term online lender Moola placed second in the Deloitte Fast 50 Awards. This made it New Zealand’s second fastest growing and fastest growing tech company, growing 1013% in three years.

READ MORE:
* Complaints on the rise about expensive short-term lenders
* Short-term lender Moola under investigation over fees
* Google boycots payday loan ads

At the time, responses in the public forum were overwhelmingly favorable. A few pointed out that the company’s business model – where it offers up to $ 5,000 in cash loans in an hour – makes it an online Shylock.

However, most observers were enthusiastic about the “scalable business” which used technology to “advance unsecured loans” with “responsible lending policies” at its heart.

A year later, this responsibility is in question now that the Trade Commission has confirmed that it has opened a formal investigation into Moola.

Mike O'Donnell:

PROVIDED

Mike O’Donnell: “A year is a long time in business.

ComCom’s investigation focuses on whether Moola meets the criteria for responsible lending and whether the fees charged are reasonable.

“Reasonable” is a key concept here.

On Moola’s website, the company magnanimously points out that “when you see our annual interest rate, you might have a slight panic.” This is an understatement.

Short term Moola loans up to 44 days are charged at an interest rate of 620.5% per annum. Meanwhile, longer-term loans with terms of between two and four months are charged 328 percent interest.

It doesn’t seem super reasonable to me.

In fact, for the four month loan, it’s about 15 times what my very profitable credit card company charges me for a cash advance and about 25 times what they charge me for the interest rate of purchase.

A few weeks ago, I wrote a column about Trade Minister Kris Faafoi’s welcome review of the Consumer Credit, Contracts and Finance Act.

The exam cleans up much of the third level financial industry. In particular, it sorts out the bottom of this level, where providers are often seen not only as the lender of last resort, but as the sole lender.

The <a class=government targets third-tier lenders.” style=”width:100%;display:inline-block”/>

TOM PULLAR-STRECKER / FAIRFAX NZ

The government targets third-tier lenders.

The review recommends that interest and charges on personal loans be limited to 100% of the amount borrowed. For people like Moola, this will take the jam out of their business model.

At the time, I was of the opinion that one area the MBIE exam missed was the new generation of online buy it now and pay after services that were taking off in New Zealand and Australia. Services like Afterpay, Openpay and Zip Pay. Services which, in my opinion, still deserve to be covered by the updated law.

Since that time, a number of people have contacted me to tell me that these new services have eliminated the need for third-level lenders. Lenders like Moola.

This new type of finance provider is effectively providing an interest-free relief service; So, as long as you repay the money on staggered dates (normally four), you pay no interest.

Here, it is the merchant who pays for the service.

For retailers and service providers, this is a useful way to enable higher throughput and higher revenues for their businesses. And since the buyer is already on their website or store, they can apply their marketing expenses to cover the on-hold costs.

For the consumer, he benefits from a completely free credit, on condition of respecting the four repayment deadlines. And contrary to what I understood, these companies do a credit check before you can sign up.

In the case of Afterpay, this means that I can buy Christmas gifts for children from Hallensteins or health items from Kmart, although my salary may be out of step with my need for these products. But I have to make sure that I can meet the repayment dates or I will have late fees.

Meanwhile, unlike traditional money lenders who may require people to incur additional debt to pay off their loan, Afterpay immediately suspends a customer’s account if a payment is not made on time.

In other words, you can’t take on more debt and there is a cap on what you could end up paying. If you cannot swim safely between the flags, you are not allowed to continue swimming.

Another great quote from Harold Wilson was his scathing attack on the Liberal Party, where he said he offered a mix of healthy and original ideas, but sadly noted that none of the original ideas were healthy. The same may be true of the business model of the 200 third-tier financial firms in New Zealand.

That means there might be a little less this time around next year. After all, a year is a long time in business.

Mike “MOD” O’Donnell is a professional manager and advisor. His Twitter handle is @modsta and this column is his personal opinion.

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