Can I be the first to say that there’s an innovation coming in credit cards that’s going to take huge chunks out of the payday market?
Payday’s growth has been astonishing in speed and scale. The credit crunch and recession that followed left an enormous, underserved gap in the loans market beneath the high street lenders who suddenly only wanted to lend to the very lowest risk consumers. Payday lenders filled the gap and filled their boots. In the opinion of many commentators, me included, these products represent poor value for a lot of consumers, particularly when rolling over payday debts month after month. Now, I hope, a far superior alternative is on the way.
To take on payday, alternatives need to address three advantages that payday has over “normal” credit: speed, ease and acceptance for relatively “poor credit” customers. Recent advances mean that all three can now be offered by a credit card.
This week, Capital One gave TotallyMoney.com exclusive access to their new Balance Plus card. Balance Plus offers several months at 0% on transferred balances (a 3% fee applies to transferred balances) and is able to accept sub-prime consumers. It’s really the first 0% balance transfer we’ve seen for the poor-credit market. It also allows money transfer, i.e. the ability to transfer funds not just from other credit cards as normal but directly from the Balance Plus card account to your bank account – just like a loan. So, that matches the ease and the acceptance of payday – two out of its three advantages. And all at 0% followed by 34.9% APR versus payday’s 4,000% APR or more – that’s pretty compelling value.
Crucially, Balance Plus is nearly an ideal product for those who’ve become trapped in a cycle of rolling one payday loan into the next. Whilst the payday industry say they shouldn’t be judged on the basis of longer-term borrowing, this kind of behaviour appears widespread with the UK average being 3.5 loans a year (source: Consumer Focus, 2009).
The 0% period offered by the Balance Plus card allows several months of respite, giving time to pay down the debt gradually and get back on track (ideally, before the 0% interest ends since interest will then jump to 34.9% APR – vastly lower than payday or expensive overdrafts but not exactly cheap). Balance Plus’ only weakness is speed. Like most credit cards it takes you up to a couple of weeks to receive the card and only then can you transfer your balance or start spending. So you’d need to be pretty organised and apply well before your payday loan rolls over.
But a couple of months ago, TotallyMoney.com reported on an innovation over at Barclaycard that addresses that final weakness of speed. Barclaycard are the first UK issuer to offer “instant access”. Right after your application is accepted, you receive an SMS message with your account details and can start spending straight away. Clever stuff. But it doesn’t appear that Barclaycard has identified or focussed on the potential of this innovation to take on payday: they haven’t yet matched instant access with a product that suits those in the market for a payday loan.
However, it can’t be long. We’ve had confirmation that others in the credit card market are working on instant access. When instant access is combined with the money transfer and accessibility features of the Balance Plus card, it’s going to be payday-killing dynamite. And that would be a great thing for literally millions of UK consumers.
Listen to Will’s radio interview on payday loans.