Low income Australians use a variety of coping strategies to overcome financial crises, among them high-cost short-term credit provided by payday lenders. There is a large and growing demand for this consumer credit and a rapidly expanding network of companies willing to supply it (Infosys Technologies Ltd 2008). Recent research indicates that fringe lending has a market size of $800 million and is the fastest growing part of Australia's financial landscape (Infosys Technologies Ltd 2008). The first payday lender appeared in Australia in 1998 and by 2001, 82 payday lending businesses were offering 12,800 loans per month (T. Wilson 2004). Given this expanding supply of payday loans it is clear that this form of lending is becoming a more prominent dimension of the financial management strategies of low-income Australians.
Concerns have been raised by State and national governments in Australia about the negative impact on consumers of payday lending, which has led to interest rate caps being introduced in a number of Australian States (Manning & de Jonge 2006). More recently, there has been a national push to standardise regulation of this sector at the national level (Treasury 2008; 2010). Despite these policy initiatives, there is a lack of robust evidence on which to base policy proposals, particularly evidence about borrowers' perspectives and experiences of payday loans. This article reports on some research aimed at addressing this situation. The pilot study, undertaken in Queensland in 2008 and 2009 and reported here, has explored the characteristics and motivations of those who borrow from payday lenders, as well as the perspectives of lenders on the idea of responsible lending.
Current policy and legislative responses to borrower harm are largely regulatory, such as more stringent licensing to encourage responsible lending, greater contract transparency concerning fees and charges, and mandatory conflict resolution schemes to ensure sufficient rights of redress. While important in their own right we contend that these measures, by themselves, will do little to address the demand for these loan products. Similarly, pressure on policy-makers to ban payday lenders may be well intended, but in the absence of alternatives, the loss of payday lenders could worsen people's lives. By listening to borrowers, and understanding their pathways to fringe lenders, we can rethink the problem and consider more well-rounded solutions than those proposed in the sometimes shrill tone of the regulation versus non-regulation debate in Australia.
Conceptualising payday lending in Australia
In mapping the range of responses to financial need, Burkett and Drew (2008) depict the financial sector as consisting of four types of providers. Formal providers tend to be mainstream services such as banks, registered financial institutions and insurance companies, and superannuation funds. The welfare system provides social security payments, small loans, emergency relief and microfinance No Interest Loans Schemes (NILS). Between these two systems there is also an emerging sector known as social enterprise, which seeks to harness public, private and community resources to enable the provision of fair finance alongside profits redistributed to meet social objectives (see Burkett, 2010, for a much more detailed discussion of this important development). At the other end of the financial sector spectrum are what Burkett and Drew call informal systems such as borrowing from friends and family, and the sector known as the fringe economy which includes payday lenders, pawn brokers and cheque cashers.
In this paper our focus is on a particular aspect of lending in the fringe economy, called 'payday lending'. Known also as a 'cash advance', 'deferred deposit loan', a 'payday advance', 'payday loan', or, more recently, in an intentionally neutral, if somewhat wordy, phrase, the 'for-profit small-amount short-term lending market' (Treasury 2010), it usually involves a loan of less than $1000, although some lenders specialise in larger amounts. …