Wonga's move into the business loans market shows the banks are not providing a service that they exist to provide
What sort of bank fails to support good businesses in difficult times? A bad one, writes Deborah Orr. Photograph: Rosie Hallam/Wonga
Every crisis brings its opportunities. It's paradoxical, but not surprising, that the credit crisis has provided an opportunity for the "alternative credit industry". Not many new businesses are opening in the nation's high streets. But payday loan companies have never had it so good. The payday loan sector is now "worth" £1.7bn, having expanded five-fold in recent years. This week, brash and breezy payday loan company Wonga announced that it was moving into small business loans. This is yet another sick symptom of the continuing bind that the economy is in.
It's appalling enough that such companies were allowed to operate pretty much as they pleased during the boom, when credit was cheap and plentiful. Back then, it's fair to say, there was a prevailing, if delinquent, view that those who delivered themselves into the clutches of "alternative usurers" had only themselves to blame. Now, in recession, that's a harsh argument to make. These alternative loan businesses have expanded in direct response to the economic crisis. Anyone can see that this new post-crash penury is intimately connected to woeful general circumstances, not personal moral failings.
Now, surely, is a good time for society to realise the basic and repugnant folly of making access to cash significantly more expensive for those who need it most desperately. Wonga is careful to emphasise that its small business loans will be short-term, aimed at companies with cash-flow problems, rather than companies seeking capital investment. Wonga will provide, it says, a service that is supplementary to banking services.
Can there be a more damning indictment of the banking sector's failure to do its job than this? What kind of bank supports a viable business so inadequately, at such a difficult time, that the business is compelled to go to a different lender, to take out and pay off the same loans over the same cycles, but at a higher cost? A bad bank.
Wonga has been shy so far about informing the public of its interest rates. But it doesn't take a financial genius to work out that they will be higher than bank rates. That, after all, is the nature of the beast. Payday loan companies rely on the high rates paid by those who don't default to supplement those who do. They can therefore afford not to be choosy. For them, it's win-win. Their overheads are low because they ask few questions and make few checks. But with the banks being so cautious in their own lending, Wonga can be sure lots of their customers will pay up and cover the costs of those who don't. That's right. Good businesses will be triply disadvantaged at this time when they need to be nurtured. They will pay extra for the cash they need to keep things ticking over, and that cash will supplement their less disciplined competition, and consign some of their own profit to this growing vulture sector. Lovely. The "deserving businesses" will finance the growth of the "undeserving businesses".
Talk of the "deserving poor" and the "undeserving poor" underpins much debate about which individuals should be afforded society's protection. Yet, all this serves further to obscure a basic fact about money and economics that is constantly referred to, but rarely explicitly acknowledged. Capitalism isn't just a way of generating wealth. It's a system that distributes reward and punishment in the form of access to goods and services via money. That's why people find it so stingingly unfair that some people are rewarded just by the circumstances of their birth while others are punished by them. Money is a reward for success; some humans are given generous acknowledgement of their massive success from their very first breath.
Suck it up. That won't change. But the responsibility of advantage can and should be understood and managed better.
The biggest flaw in capitalism is that it's usually the people with the money who decide who deserves to be rewarded. That was what the bankers' bonuses rows were really all about, and the MPs' expenses rows. People who have never experienced life without enough money are, of course, likely to have little idea of how hard it is to achieve success from nothing. But, again, that doesn't matter quite as much as people think it does. This flaw in capitalism is quite easily rectified.
If economists would only see that growing inequality is prima facie evidence that rewards are being stockpiled by the prize-givers, instead of distributed deeply and widely enough to maintain the consensual and stable society that capitalism needs in order for it to function smoothly, then we'd save ourselves much grief.
It was perfectly obvious during the boom that the economy was not working well, precisely because inequality was rising. Likewise, free-marketers will always argue that welfare state activity is hampering capitalism. Again, welfare state activity is a booming klaxon, declaring loudly that capitalism is failing adequately to make room for Adam Smith's invisible hand to make its general gesture of support with sufficient flourish. I was glad this week to read a piece by German economist Till van Treeck, which reported: "Renewed interest among economists in inequality as a macroeconomic risk is highly encouraging."
It's time for capitalists to understand that they failed to regulate themselves, and that unless they come up with a credible plan for self-regulation, there will be consequences. The banks are still arguing that regulation will stifle them. Instead, lack of regulation continues to stifle other businesses – all other businesses except those more venal than the banks themselves.
The government is always banging on about "helping" small businesses. Here's an idea. Give small businesses the power to sue banks that refuse to give them loans that prove viable. The banks should then be obliged to make good any extra cash that went the way of the alternative providers. After all, they have been asked nicely to start lending to small businesses for a number of years now. Wonga's move into this market simply shows that, despite the protestations of the banks, they are not providing a service that they exist to provide.
Of course, that still leaves personal borrowers at the mercy of loan companies. The Labour MP for Walthamstow, Stella Creasy, has been campaigning for two years for a cap to be put on the cost of credit.
Unbelievably, the government agrees that the proposed Financial Conduct Authority (FCA) should be allowed to cap the cost of credit – in theory – but refuses to give it explicit power to do so. This means that any attempts to curb interest rates by the FCA would be subject to expensive and possibly fruitless legal challenge.
In other words, even after such a seismic financial crash, ministers have no real interest in paying more than lip-service to the idea that risky and exploitative lending should be discouraged. Payday loan companies are one of the few sectors with "growth". Curbing their activities would have a detrimental effect on Britain's economic figures. A debt bubble is being replaced with a smaller, but even more aggressively unforgiving debt bubble.
Smart.
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