Ideasroom

Make every day payday to foil predators

The scourge of payday lenders and high interest rates could be curbed by making workers' wage payments available to them daily, writes Alex Sims of the University of Auckland

Many people are forced to borrow money for expenses. For example, to fix a broken car that they need to get to work. If that loan is from a payday lender the fees and interest charges escalate rapidly. Two percent interest per day is common, and some charge even more. Even for those that can borrow from traditional banks, fees and charges need to be paid for accessing an overdraft.

The Government’s response to tackle the harm caused by short term, high cost loans was to pass a law. When it comes into effect the maximum interest rate will be “only” 0.8% interest per day, which still works out at 24% per month. And the maximum repayable is 100% of the amount loaned. So if a person borrowed $400 the maximum they need to repay is $800.

While passing a law is long overdue - the UK did it years ago - the law by itself is not sufficient. People will still pay very high interest rates. Secondly, it is inevitable that some lenders will break the law. A Commerce Commission review of whether lenders followed existing law when providing credit to people found that 21 percent potentially failed to comply.

Rather than simply attempting to treat the symptoms of people being forced to borrow money, why not address some of the causes of the problem?

One reason people use payday lenders is that they are often paid each fortnight. So, it’s not that they haven’t earned the money, it’s that they can’t access that money and are waiting to receive it. The same principle holds true for those receiving a benefit, even more so as many people on benefits are really struggling.

When people were paid in cash, it is understandable that wage payments were fortnightly. Payday was a logistical feat for employers who had to manually work out what each employee was owed. Next, employers had to go to the bank and withdraw the money in bank notes and coins and put the requisite amount with the pay slip in a labelled envelope and give it to the correct employee.

Technology intervened. It is relatively rare for people to be paid in cash, instead their pay is deposited in their bank. Yet the timing of the pay cycle remains the same.

One partial solution is to pay people weekly, indeed, weekly payments appear to be increasing in popularity. Some benefit payments are paid weekly. The benefits paid fortnightly are NZ Super, Child Disability Allowance and the Veteran’s Pension.

Better still, if people were paid daily, or had the ability to access their pay or benefit at the end of each day, this would reduce the need for people to use payday lenders and others would pay less in overdraft fees.

Not surprisingly, the simple idea of using technology to allow employees to access their money has been put into practice. A number of companies in the US enable their employees to easily access their wages on a daily basis.

In New Zealand there is a company offering the ability for employees to get part of their pay as they earn it through an app on their smart phone, although the release of the money is not instantaneous and cannot be done over weekends or public holidays.

One example of providing practical solutions to minimise harm has occurred in New Zealand in a related context. Mobile truck operators prey on poor communities and sell them goods at vastly inflated prices, and often lend them the money, again at very high interest rates, to purchase those goods. The Salvation Army has successfully operated its own mobile trucks in those areas with better goods, including beds, at much lower prices.

The payment of wages in New Zealand dollars is another example of old technology. If a person wants to transfer money to family overseas it costs them to do so. Some banks charge up to $30 to send NZ$200 from a New Zealand bank account to a bank account in Samoa. Plus it takes 3-5 days for the money to be transferred. Instead, if people were paid some of their wages in cryptocurrency they would be able to send that cryptocurrency in hours, if not minutes, and at a fraction of the cost.

To be sure, it is hard for a person in Samoa to use Bitcoin. But there are a number of remittance services in the Philippines, for example, that accept cryptocurrencies. One remittance service enables people to send Bitcoin to the Philippines and pay bills or the recipient can pick up Philippine pesos in cash from a number of outlets.

The payment of wages on a fortnightly basis, or increasingly, a weekly basis, is based on technology and ways of thinking which belong to a bygone era. And even though it may not suit a contemporary environment, it is the way we do it. This blind acceptance of outdated systems and habits, repeated time and time again in all sorts of environments, even has a name: path dependency. It’s the same way of thinking that means we still use a QWERTY keyboard which was designed for mechanical typewriters so that the keys did not stick. And, just like we adhere to an established and archaic system for the payment of wages and benefits even though there are better ways, we stubbornly stick with QWERTY.

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