RESEARCHwww.policyalternatives.ca ANALYSIS SOLUTIONS
Swimming with the sharks
Poverty, pandemics and payday lenders
Ricardo Tranjan
Canadian Centre for Policy Alternatives
April 2020
Ricardo Tranjan is a political economist and
senior researcher with the Canadian Centre for
Policy Alternatives.
The author would like to thank Randy Robinson
and Stuart Trew for edits and comments that
improved the quality of this report.
----
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Swimming with the sharks: Poverty, pandemics and payday lenders
4
Swimming
with the sharks
Poverty, pandemics and payday lenders
Introduction
A broad consensus exists on the harmful impact payday loans have on
financially insecure individuals and families. In recent years, Canadian
governments have enacted necessary but insucient measures to protect
consumers. The sharks are still circling, and COVID-19 is throwing thousands
of people into the water every day, making them easy prey.
Canada’s response to COVID-19 ought to include strict regulation on
payday lenders. This is crucial in ensuring that families facing economic
hardship don’t fall into debt traps, and that public funds made available
for income supports don’t end up in the wrong hands.
The good news is that we know what needs to be done. There is a rich
body of research on payday lending in Canada, conducted by a wide range of
anti-poverty groups, faith-based and left-leaning think-tanks, municipal and
federal governments, journalists and academics. This research has examined
the practices of predatory payday lenders, as well as the characteristics and
attitudes of payday loan users, and presented concrete ways to enhance
consumer protection. This knowledge is more pertinent than ever.
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Canadian Centre for Policy Alternatives
This report assembles recent findings on this topic into one paper, and
builds on it.
The first section answers the question, What is a payday loan and how
much does it cost? It includes a chart comparing the cost of borrowing from
payday lenders in each province with the average cost of using a line of credit,
overdraft protection, or cash advance on credit cards. In some provinces,
payday loans cost 20 times more than cash advances, which aren’t cheap.
The second section addresses the question, What do we know about
payday loan borrowers? It includes two parts: an original analysis of the
types of households most likely to resort to payday loans, and a summary
of three recent surveys that examine the attitudes and behaviours of payday
loan users. While lone-parent tenant households are most likely to use
payday loans, a growing share of insolvent, moderate-income households
are taking loans of $2,500 and more.
The third section asks, What do we know about payday lenders? It
discusses the geographically targeted proliferation of payday outlets, the
expansion of online services and the profitability of all payday businesses.
There are as many payday outlets in the country as there are Starbucks;
which comes first depends on the neighbourhood you’re in.
The final section tackles the question, How do we curb payday lending
immediately? It looks at five types of regulations that have been implemented
with this aim. And it argues that while it is important to make ads more
transparent, loan rollovers more dicult, and stores less numerous, at a
time of COVID-19, governments need to axe interest rates at once and require
banks to oer adequate and inexpensive services to low-income households.
What is a payday loan and how much does it cost?
The Financial Consumer Agency of Canada (FCAC), the federal agency in
charge of consumer protection, succinctly describes payday loans as:
a short-term loan that you promise to pay back from your next paycheque,
usually within 14 days. Generally, you are able to borrow between 30 and 50
percent of your take-home pay. Payday loans are very expensive compared
to other ways of borrowing money.
1
To get a loan, a borrower usually needs to provide lenders with proof
of address and regular income and the details of a bank chequing account.
The loan agreement authorizes the lender to draw the money directly from
Swimming with the sharks: Poverty, pandemics and payday lenders
6
the borrower’s bank account or deposit a postdated cheque provided as part
of the application. Late payments are penalized with additional fees on top
of recurring interest charges. In the case of bounced cheques, banks may
charge additional fees. In the case of default, payday lenders may resort to
suing the borrowers, seizing their property, and garnishing their wages.
2
Traditionally, payday lenders have advertised loan costs as the total
interest paid on a particular amount for a limited amount of time (usually 14
days), as in the widely seen ads that say “Get $300 for $20.” (Recent changes
to advertisement rules are discussed below.) The real cost of loans, however,
is only visible when we calculate annual interest rates and compare them
with other options, as in Figure 1.
The FCAC warns Canadians that, “If you can’t make your payday loan
payment on time, it can be easy to get stuck in a debt trap.”
What do we know about payday loan borrowers?
Using Statistics Canada’s most recent (2016) Survey of Financial Security
(SFS),
3
this section describes the main characteristics of payday loan borrow-
1Maximum interest rates on payday loans, by provice, compared to other credit products
0% 100% 200% 300% 400% 500% 600% 700% 800%
Cash advance on a credit card 23%
Borrowing from a line of credit 21%
Overdraft protection on a bank account 8%
Prince Edward Island
Newfoundland
Nova Scotia
Manitoba
Saskatchewan
Alberta
British Columbia
New Brunswick
Ontario
Quebec 35%
652%
548%
495%
443%
443%
391%
391%
391%
391%
SourceFinancial Consumer Agency of Canada, “Payday loans”; Newfoundland & Labrador Regulation 11/19; Office de la protection du consommateur (Québec); calculations by
the author.
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Canadian Centre for Policy Alternatives
ers across the country. Next, it complements this information with findings
from surveys that have looked at their attitudes and behaviours.
In 2016, the SFS estimated that in 3.4% (520,000) of all Canadian
households, at least one family member had used a payday loan over the
past three years. This figure varied from province to province, from 1.8% of
households in Prince Edward Island and Quebec to 5.5% of households in
Nova Scotia and Alberta.
At first, these figures may look small, but that’s because these services
are targeted. The more economically vulnerable a family, the more likely it
is to resort to payday loans.
4
• Tenant households were four times more likely than home-owning
households to use payday loans; 76% of all borrowers were tenants
(against 38% of all households).
•
Lone-parent households were almost four times more likely than two-
parent households to use payday loans, with female-led households
more at risk than male-led households.
• Lone-parent tenant households were six times more likely than the
average household to use a payday loan (one in five had used them).
•
Other family types
5
were 1.5 times more likely than the average
household to use a payday loan, and three times more likely if they
were tenants.
The FSF also provides valuable insight into the financial choices available
to payday loan users.
•
80% of payday loan borrowers didn’t have a line of credit, compared
to 49% of households who didn’t use these services.
•
Households without a line of credit were almost four times more likely
to use payday loans than households with lines of credit.
•
43% of payday loan borrowers didn’t have credit cards, compared to
12% of the households that didn’t use these services.
• Households without credit cards were five times more likely to use
payday loans than households with credit cards.
•
Nearly half (46%) of payday borrowers had been refused a credit card.
Swimming with the sharks: Poverty, pandemics and payday lenders
8
Many smaller surveys have looked beyond the demographic and financial
characteristics of payday loan users, also focusing on their attitudes and
behaviours. We briefly review the findings of three recent surveys, which
were conducted by very dierent organizations.
6
In the spring of 2016, the FCAC conducted a national survey with 1,500
payday loan users (random sample).
7
The survey found that:
•
only 43% of respondents knew that a payday loan was more expensive
than an outstanding balance or a cash advance on a credit card;
•
45% of respondents took a loan to pay for a necessary and unexpected
expense (e.g., car repair), while 41% used it to pay for a necessary
but expected expense (e.g., rent); and
•
when asked why they used a payday lender instead of other financial
institutions, 27% said a bank or credit union would not lend them
money, 55% said payday lenders oered the best customer service, and
90% said payday lending was the fastest or most convenient option.
2Share of households who borrowed from payday lenders
0%
5%
10%
15%
20%
25%
All Canadian
households
Households without
lines of credit
Tenant
households
Households without
credit cards
Lone-parent
households
Lone-parent
tenant households
3.4%
5.4%
6.4%
11%
13%
21%
SourceStatistics Canada, Survey of Financial Security: Public Use Microdata File, 2016; calculations by the author.
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Canadian Centre for Policy Alternatives
In 2016, ACORN, a national anti-poverty group, surveyed 286 of its mem-
bers, 52% of whom had used financial services oered by payday lenders.
8
Among other things, the survey found that:
•
43% of respondents who used payday loans didn’t have a line of credit,
45% didn’t own credit cards, 45% didn’t have overdraft protection,
and 20% had a maxed-out credit card;
• 30% spend payday loans on food, 17% on housing, 16% on bills, 5%
on “bank issues,” and 5% on medical-related expenses;
•
60% reported they had a major bank branch less than five blocks
away from home; and
• 73% said they would change banks if they knew of one that oered
services targeted to low- and moderate-income earners.
Insolvency trustees Hoyes, Michalos & Associates Inc. conduct an annual
survey of insolvent debtors that looks at payday loans. The 2019 analysis,
which reviewed 5,800 personal insolvencies in Ontario within that year,
shone a light on a dierent group of borrowers: those who had access to
credit but, on their way to insolvency, used payday loans as a last resort.
9
• Over time, insolvent debtors have become more likely to have taken
out payday loans, from 12% in 2011 to 39% in 2019.
• The value of loans has also increased, with loans of $2,500 or more
jumping from 1% of all loans in 2011 to 21% in 2019.
• In 2019, on average, insolvent debtors had outstanding loans with
3.6 dierent lenders. On average, only 20% had only one loan; 4%
had at least 10 dierent lenders.
• Among debtors who filed for bankruptcy, those most likely to have
used payday loans had a monthly income between $2,000 and $4,000.
Combined, these findings provide a sobering picture of payday loan
borrowers. Households in economically vulnerable situations are much
more likely than others to use these services, in part due to lack of options,
in part lack of knowledge, but almost always out of extreme necessity. Payday
lenders also extend high-interest loans to moderate-to-high earners on their
way to insolvency. Overall, financial insecurity is the common feature of all
payday loan users.
Swimming with the sharks: Poverty, pandemics and payday lenders
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What do we know about payday lenders?
The Conference Board of Canada put the estimated number of licensed
payday lenders in 2016 at 1,408,
10
or one payday lender for every four bank
branches.
11
Toronto has one payday lender for every Tim Hortons.
12
The first payday lenders appeared in the mid-1990s, initially as an additional
service in stores that cashed cheques. But then small loans became the main
service of these stores and the driving force behind their fast proliferation.
The total number of outlets is believed to have peaked around 2011, possibly
suggesting the market has reached a saturation point.
13
A closer look, however, points to corporate consolidation, with fewer
independent stores. Today, one chain (Money Mart) owns nearly half of the
market, and the five largest chains own as much as 65% of it.
14
Corporate
consolidation—and the economies of scale and higher profit margins it
brings—suggest payday lenders are not planning to go anywhere. The sharks
are getting bigger.
Traditionally, payday lenders cluster in low-income neighbourhoods,
while mainstream bank branches relocate from poor to better-o neighbour-
hoods.
15
A 2015 Toronto Star data analysis mapped a clear overlap between
the densest pockets of lenders and the city’s low-income areas.
16
A similar
analysis conducted by Momentum found the same in Calgary.
17
For ACORN,
a key battleground in the Greater Toronto Area is Weston, a low-income
neighbourhood where banks are being completely replaced by payday
lending outlets.
18
While low-income areas remain the geographical target of payday lend-
ers, online services represent a growing share of payday loan transactions.
The Conference Board of Canada shows that between 2010 and 2014, the
value of loans advanced online grew by 49%, compared to a 15% growth
in regular stores.
A survey conducted by the FCAC found that nearly 50% of users who took
loans over $1,500 did so in an online platform. The prominence of online
services has direct consequences for regulation, as it limits the impact of
regulations aimed at controlling the proliferation of outlets, which has been
the major focus of municipal governments (more on this below).
To sum up, payday lenders are everywhere, especially in low-income
neighbourhoods and increasingly online.
Little attention has been paid to the profit margins of payday lenders,
with the notable exception of economic analyses by Chris Robinson, of
York University, whose work shows that lending rates could be significantly
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Canadian Centre for Policy Alternatives
reduced without driving these firms out of business.
19
Robinson has also
argued that corporate consolidation is driving fixed costs down and profits
up, allowing lending rates to be capped at even lower levels without aecting
the feasibility of these businesses.
20
In turn, Jerry Buckland, of the University of Manitoba, contends that
the profit margins of these firms are not so relevant. The broader context
is that low-income people pay high fees for bad financial services, while
middle-income people pay less for high quality services.
Exploitation, in this case, goes beyond the margin of profit of the lender;
it has “more to do with the lack of general support from social and economic
institutions and an absence of appropriate financial services from mainstream
banks.”
21
Fringe financial institutions are filling a void.
How do we curb payday lending immediately?
Regulations aimed at protecting payday loan borrowers fall into five large
buckets listed below. They are all useful and complementary, but in the
3Number of payday lender outlets in perspective
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
7-Eleven Dollarama Shoppers
Drug Mart
Payday
lenders
Starbucks McDonald’s Tim Hortons Bank
branches
Post
offices
SourceVarious online sources for the years 2016 to 2019; for illustrative purposes only.
Swimming with the sharks: Poverty, pandemics and payday lenders
12
context of the financial insecurity brought by COVID-19, there is no time for
policy tweaks. Governments must pull the big levers.
Advertising
Some jurisdictions (e.g., British Columbia) have passed legislation requiring
ads to be less deceitful and include phrases like “Annual Percentage Rate=
__%”. These are positive changes, especially in light of the FCAC’s findings
about lack of knowledge among payday loans users. But such measures
do not alter the need for such loans or the terms on which they are oered.
Number of outlets
Municipalities (including Hamilton and Toronto) have created caps on the
number of payday business licences and minimum distance limits for new
outlets. This is a clever use of municipal power and it may have a positive
impact, especially on land use and development. But this change also doesn’t
alter the need for such loans nor their terms. The increased use of online
platforms also limits its impact. And a possible unintended consequence
is the creation of local oligopolies of existing outlets that no longer face
growing competition.
22
Rollovers
The Alberta government, among other jurisdictions, has tightened the rules
about rollover loans and lending to borrowers who have outstanding loans.
In practice, these measures have proved hard to implement, as borrowers
simply walk to a dierent store. Central databases of borrowers would make
such measures more eective, but at too great a cost to privacy.
Interest rates
In recent years, Alberta, Ontario, British Columbia and New Brunswick have
approved a lower fee ceiling of $15 per $100 borrowed on a two-week loan.
That’s still a 391% annual interest rate. In Quebec, the annual interest cap
on payday loans is 35%. There is no reason for this limit not be implemented
nationally. There are many reasons to implement it now, including a skyrock-
eting unemployment rate and the fact that up to one-third of unemployed
Canadians may not be eligible for employment insurance or the Canada
Emergency Response Benefit.
23
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Canadian Centre for Policy Alternatives
Access to banks
Financially insecure families need access to banks. The literature has
emphasized access to credit unions as an alternative to payday lending.
While that is not a bad option, these families should have access to all
financial institutions. Canada’s largest banks, which post extravagant profits
year after year, should be required to have more and better products for
low-income customers, including free overdraft protection, free financial
advice, very-low-interest lines of credit, and very-low-interest credits cards.
While it is encouraging that banks are willing to discuss mortgage deferrals
and low-interest lines of credit, these are measures for their best clients,
i.e., middle-class families, and won’t improve conditions for low-income
households.
For years, a consensus has been building on the need to regulate preda-
tory financial practices further. The government response has been slow
and timid. Now the time is up. There is blood in the water, and the sharks
look hungrier than ever.
Swimming with the sharks: Poverty, pandemics and payday lenders
14
Notes
1Financial Consumer Agency of Canada, “Payday Loans: An Expensive Way to Borrow,”
September 2012. Retrieved from http://publications.gc.ca/collections/collection_2012/acfc-fcac/
FC5-3-2012-eng.pdf
2Ibid.
3Statistics Canada has two surveys that ask respondents about payday loans: the Survey of
Financial Security (SFS) and the Canadian Financial Capability Survey (CFCS). The most recent
public use microdata file (PUMF) for the SFS is from 2016, whereas the CFCS PUMF is from 2014.
Statistics Canada has published a report with the key findings of the 2019 CFCS, but it doesn’t
contain information about payday loans.
4The SFS doesn’t collect data on race, immigration status or gender identity, which prevents us
from conducting a detailed intersectional analysis.
5In this survey, Statistics Canada defines “other families” as “all other economic families where
the major income recipient was aged 64 or under at the time of the interview and not included in
the couples, couples with children, or lone-parent family types.”
6A review of earlier surveys is found in Brian Dijkema and Rhys McKendry, “Banking on the
Margins: Finding Ways to Build an Enabling Small-Dollar Credit Mart.” CARDUS. February 2016.
Retrieved from https://www.cardus.ca/research/work-economics/reports/banking-on-the-margins/
7Financial Consumer Agency of Canada, “Payday Loans: Market Trends.” October 2016. Retrieved
from https://www.canada.ca/content/dam/fcac-acfc/documents/programs/research-surveys-
studies-reports/payday-loans-market-trends.pdf
8Joe Fantauzzi, “Predatory Lending: A Survey of High Interest Alternative Financial Service
Users.” December 2016. Canadian Centre for Policy Alternatives. Retrieved from https://www.
policyalternatives.ca/publications/reports/predatory-lending
9Hoyes, Michalos, “Payday Loans and Bankruptcy.” 2019. Retrieved from https://www.hoyes.
com/press/joe-debtor/how-insolvent-borrowers-use-payday-loans/
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Canadian Centre for Policy Alternatives
10The Conference Board of Canada, “Filling the Gap: Canada’s Payday Lenders.” November
2016. Retrieved from https://canadiancfa.com/wp-content/uploads/2016/11/cboc-filling-the-
gap_final-nov-2016.pdf
11According to the Canadian Bankers Association, there were 6,190 bank branches in 2016 and
5,907 in 2017. Banks included: BMO, CIBC, Canadian Western Bank, HSBC, Laurentian Bank of
Canada, National Bank of Canada, Royal Bank of Canada, Scotiabank, and TD. Retrieved from
https://cba.ca/bank-branches-in-canada
12There are 190 Tim Hortons outlets in Toronto and between 187 and 212 payday lender outlets.
13Dijkema and McKendry, “Banking on the Margins.”
14Jerry Buckland and Brenda S. Visano, “Introduction,” in Jerry Buckland, Chris Robison, and
Brenda S. Visano (eds.), Payday Lending in Canada in a Global Context: A Mature Industry with
Chronic Challenges. Springer, 2018.
15Jerry Buckland, Hard Choices: Financial Exclusion, Fringe Banks, and Poverty in Urban Canada.
Toronto: University of Toronto Press, 2012.
16Sara Mojtehedzadeh, “Payday lenders sub in for banks in poor areas.” January 9, 2015. Toronto
Star. Retrieved from https://www.thestar.com/news/gta/2015/01/09/payday_lenders_a_visible_
marker_of_citys_income_disparity.html
17Momentum Community Economic Development Society, “Opportunities for Municipal Ac-
tion on Payday Lending.” July 2014. Retrieved from http://momentum.org/files/Publications/
Municipal%20Micro-Lending.pdf
18Megan Delaire, “Weston residents lament replacement of banks with payday lenders.” October
9, 2019. Toronto.com. Retrieved from https://www.toronto.com/news-story/9613019-weston-
residents-lament-replacement-of-banks-with-payday-lenders/
19Chris Robinson, “An Economic Analysis of the Payday Loan Industry and Recommendations for
Regulation in Manitoba.” A Report to the Manitoba Public Utilities Board. March 2016. Retrieved
from http://www.pubmanitoba.ca/v1/payday_loan_review2016/cac_5_tab_3_economic_
analysis_c_robinson.pdf
20Chris Robinson, “A Business Analysis of the Payday Loan Industry,” in Jerry Buckland, Chris
Robinson, and Brenda S. Visano (eds.), Payday Lending in Canada in a Global Context: A Mature
Industry with Chronic Challenges. Springer, 2018.
21Jerry Buckland, Hard Choices, p. 143.
22Brian Dijkema, “The Changing Face of Payday Lending in Canada.” June 2019. CARDUS.
Retrieved from https://www.cardus.ca/research/work-economics/reports/the-changing-face-
of-payday-lending-in-canada/
23David Macdonald, “Which unemployed Canadians will get support?” April 2, 2020. Behind
the Numbers. Canadian Center for Policy Alternatives. Retrieved from, http://behindthenumbers.
ca/2020/04/02/which-unemployed-canadians-will-get-support/
