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Features of PDL market in the USA

 

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Payday loan offices began to spread across the USA in the 1980s and soon became a common thing. There were nearly 15000 such offices in 2017. As a comparison, at that time there were only 14000 McDonald’s restaurants across the country.  And in the 1990s there was another growth in the development of this industry when the advent of the Internet provided the opportunity to apply for loans remotely from home.

PDLs usually charge a certain interest or cash equivalent for every $100 borrowed. This fee amount varies from $10 to $30 for every $100 borrowed. This amount depends on the law of each state and usually, it is $15 for every $100. In this case, the annual interest rate for PDL with a two-week term is equal to 400%. Then, for example, if the customer wants to borrow $300, it will cost him $345.

20 million Americans use payday lending services every year. Although this service is being marketed as a tool to cover contingencies, 7 out of 10 borrowers in the United States use payday loans to cover basic expenses such as rent and utility bills. This is not surprising, because 61% of borrowers in the United States have difficulty paying monthly expenses.

Payday loans satisfy the needs of many people, especially those who have no access to traditional loans or consumers with low credit scores. According to experts, in 2019 6.5% of American families (8.4 million) had no bank account, while 18.7% (24.2 million) made full use of banking services. It means that they had a bank account but they preferred to use alternative financial services, such as PDLs. Consumers with a low credit score are often unable to get traditional loans so they turn to alternative lenders.

Features of British PDL market

The UK is the second-largest PDL market in the world after the United States. In 2019, approximately 15% of adults in the UK (more than 9 million people) applied for such loans. More than 18 million applications for 3.2 million people were approved. The total volume of the microcredit industry in the UK is £3.7 billion per year and the annual interest rate is 500% on average.
The major part of PDL activities take place online (or through mobile phone applications). This allows borrowers to take out loans within a few minutes, usually through automated decision-making systems.
This is the main difference with the US market. The British market is dominated by online lending, which is significantly more profitable compared to common lending through offices. Online lenders can access borrowers’ bank accounts remotely.
This contrasts with the United States, where lenders are usually staff members who visit branches of banks or other financial institutions and formalize their requests in person. It involves higher expenses.

The active shift of the British PDL market to the Internet has led to the rise of so-called Third-Party Agents. These third parties are involved in the cash flow process and provide financial support for loans from microcredit organizations, claiming a percentage of their profit. These platforms often provide creditors with better terms than traditional banks. Therefore, more and more representatives of the PDL industry apply for funding to these advanced organizations.

One of the pioneers of this kind of activity is the London IT company named Hoffman-Graham. They were among the first to realize the profitability of this area and developed software that allowed them to receive and process funding applications from microcredit organizations around the world, assess their reliability by a number of indicators, and screen out those that could not reach the required trust level. The approved applications are financed by the company’s budget fund that is formed from money deposits of the users of this platform. The profit from such transactions is shared between the platform and its users. Therefore, anyone has the possibility to fund PDL organizations and not vice versa.

Due to the financial literacy of the population, as well as the use of modern technological solutions, the UK is one of the first countries that implement innovative approaches to the PDL market. This is why despite the smaller volume and demand for the PDL market in comparison with the United States, Great Britain ranks first in the world in terms of the level of development of this industry.

PDLs provide an opportunity to quickly receive funds. Usually, the transfer occurs instantaneously or at least within 24 hours of the loan application. They are convenient and for many consumers, they are the only available source of credit. Their widespread use, the trend towards further rapid growth in the popularity of this area, and the growing interest from third parties show that the volume of this market will only increase in the future.

The pandemic had a positive impact on the PDL industry and the value of the world PDL market increased by 18% in 2020. This is related to the active development of this field in African and Asian countries and the global economic recession.
At this stage, there is a dramatic overall increase in the use of scoring systems. These systems are used to rank clients who want to take out a loan. Also, along with the global growth of the PDL industry, there is a tendency for private companies to enter this market. These companies provide various lending services directly to private entities.
We believe that PDL is an extremely interesting and promising area and we will follow its further development since it is quite possible that in the nearest future the PDL market will be able to become a serious competitor to the traditional banking system.

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