What is a ‘Payday’ loan’?
Short Essay 1
– Small Amount Loans
Referring to the article “Payday loan caps come into force”, address the following, word limits are in square brackets.
- What is a ‘Payday’ loan’? hint: in Australia they are referred to Short Amount Credit Contracts (SACC). [50 words] • Identify the main characteristics of customers for this form of credit.
[50 words] • Profile a SACC provider that operates in Australia [50 words]
- How might this industry be conceived as a market failure? [50 words]
- Discuss what you think are the major “costs of production” for SACC providers – remembering to justify your answer [50 words]
- Identify at least one substitute of a SACC – explain to what degree it is a substitute. [50 words]. • Identify a complement of a SACC, remembering to explain why you think it is complement. [50 words]. • Using demand and supply side tools explain the likely effects of the price cap? [100 words]
- What might be the unintended consequences of a price cap? [50 words]
Short Essay 2
Read the article “Retail Outlook: big retailers feel pressure of new challenges”.
Using your economic skills answer the following [word limit 500 words]:
- What is the level of market competition?
- What are the implications for this level of competition?
- What are the likely impacts of the key strategies identified by Woolworths and Coles (hint: demand and supply will be useful)
- Using your knowledge of elasticities, what items might they focus on more/less. Explain your answer using one or two examples.
2 ECON1314 Semester 1, 2016
Article 1 Payday loan caps come into force
New regulations introduced by the FCA mean loans will now be capped at 0.8% a day, as over 1 million borrowers benefit Well over a million people will see the cost of their borrowing fall now that new price caps on payday loans have taken effect. However, early indications are that many of the sector’s bigger players will be charging the maximum amount allowed to under the new regime, rather taking the opportunity to set their fees below the cap. Interest and fees on all high-cost short-term credit loans are now capped at 0.8% per day of the amount borrowed. If borrowers do not repay their loans on time, default charges must not exceed £15. In addition, the total cost (fees, interest etc) is capped at 100% of the original sum, which means no borrower will ever pay back more than twice what they borrowed, said the Financial Conduct Authority (FCA), which has introduced the new rules. Someone taking out a £100 loan for 30 days and paying it back on time will not pay more than £24 in fees and charges. Payday lending is a multibillion-pound sector: the Competition & Markets Authority said there were 1.8 million payday loan customers in 2012-13, while the FCA estimates that in 2013, 1.6 million customers took out around 10m loans. However, some lenders quit the market before the changes took place. These include Minicredit, which ceased its lending on 10 December. Consumer organisation Which? said the new regime “comes not a moment too soon”. Richard Lloyd, Which? executive director, said: “The regulator has clearly shown it is prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review.” Which? carried out research into the amounts payday lenders were charging just before Christmas, to see if they had cut the cost of borrowing ahead of the price caps taking effect. It found that some of the bigger payday lenders had already brought their charges in line with the price caps. Wonga, QuickQuid, PaydayUK and MyJar were charging the maximum £24 to borrow £100 for 30 days, with default fees charged at £15. 1 http://www.theguardian.com/money/2015/jan/02/payday-loans-caps-fca Accessed 22nd March 3
ECON1314 Semester 1, 2016 When the Guardian checked some of the lender websites on 31 December, it found some had not yet updated their pricing. Peachy.co.uk’s website was quoting a cost of £135 for a £100 loan over 30 days, while Quid24.com showed a cost of £134.70 and Safeloans quoted £130. Which? said London Mutual credit union was the only payday loan provider it looked at that charged less than the maximum allowed under the cap, with borrowers having to pay just £3 in interest on a loan of £100 over one month, with no default fees. Martin Wheatley, chief executive of the FCA, said the new caps would make the cost of a loan cheaper for most consumers. “Anyone who gets into difficulty and is unable to pay back on time, will not see the interest and fees on their loan spiral out of control – no consumer will ever owe more than double the original loan amount,” he added. However, it appears the new regime will not spell the end of the huge annualised interest rates quoted on payday loan websites. Despite the changes, Wonga is still able to charge a representative APR of 1,509%, while QuickQuid’s site was promoting an APR of 1,212%. New rules covering payday loan brokers have also taken effect after the regulator was deluged with complaints over practices such as imposing charges that consumers often knew nothing about until they checked their bank account. These firms cannot now request an individual’s bank details or take a payment from their account without their explicit consent first. Payday loan brokers will also have to include their legal name, not just their trading name, in all advertising and other communications with customers, and state prominently in their ads that they are a broker, not a lender. 4 ECON1314 Semester 1, 2016
Retail outlook: big retailers feel the pressure of new challengers
It’s reporting season, and over the past few weeks some of Australia’s biggest companies have been releasing information on how they’re travelling. These reports reflect key themes of how things are going in key sectors of the economy. Over coming days we’re going to report on the results a handful of major companies in key sectors, transport, construction, retail, mining, insurance and banking. Today we look at the retail sector. Dominant retail giants Wesfarmers – owner of Coles supermarkets – and Woolworths hold a 70% of market share of Australia’s fresh food grocery market, but have had contrasting fortunes over the past few years. Half-year results for Wesfarmers and Woolworths for 2016 show very different outlooks. CC BY-ND Meanwhile, the major retail players are continuing to feel the disruptive impact of smaller players such as Aldi and highly competitive market conditions; both will have employ new strategies away from the tried and true defensiveness that has worked in the past. Wesfarmers reported a net profit after tax of $1.4 billion, up 1.2% since the same time last year, while Woolworths reported a net loss of $973 million after a profit of $1.3 billion. Over the last few years Coles has seen stronger sales growth and comparatively better market share. 2 http://theconversation.com/retail-outlook-big-retailers-feel-the-pressure-of-new-challengers-54745 5 ECON1314 Semester 1, 2016 By contrast, Woolworth’s strategy problems with its home improvement business, Masters, has been widely ventilated. The company attributed $1.8 billion loss to the costs related to its exit from Masters. Woolworths’ underlying profit was $925 million, still down 33% on prior year. Woolworths would hope that its exit from the ultimately costly Masters endeavour will serve as a boost to investor confidence. Woolworths has also struggled with branding and has seen advertising agency changes over the last few years the most recent being the dropping of Leo Burnett and a return to M&C Saatachi. Perhaps more revealing to the outlook of the industry are some of the underlying similarities in strategy. Both Woolworths and Wesfarmers emphasised price deflation, cost reduction and further price cutting, as key strategies. The companies expect highly competitive market conditions and consumers to remain price sensitive, and will largely focus on improving supply chain productivity, through cost reduction. Woolworths is reducing its spending on activities such as marketing, property acquisition and rent as part of $500 million in cost savings during the 2016 financial year (July 2015 to July 2016). Likewise, Wesfarmers has highlighted similar measures, with cost cutting objectives, the company hopes will allow them to lower their prices in the supermarket even further. In an industry where profit margins are already low, such intense competition would carry significant risk. If sales don’t meet expectations, the retailers have little room to lower prices when margins are low. As a consequence, covering fixed costs like maintenance and rent of stores becomes increasingly difficult and the likelihood of making a loss is higher. To some extent these price wars reflect the two retail giants directly competing against each other, but another factor is the disruption caused by new entrant Aldi. The supermarket chain has gained 11% of the market since it came onto the scene in 2002, using its streamlined, low cost supply chain to undercut Woolworths and Wesfarmers on price. 6 ECON1314 Semester 1, 2016 Aldi is a unique player in this space. In the past Coles and Woolworths could exercise their market share and size to squeeze out small producers; but Aldi is a different beast, a global company with a presence in both Europe and the USA. Aldi may not even be the biggest problem facing the locals, if reports that European retailers such as German retailer LIDL are sizing up the Australian market prove true. LIDL is the fourth biggest retailer in the world, with $128 billion in annual sales. Whatever hold true for Aldi is doubly true for LIDL. Other hypotheticals floated around Danish discounter Netto and UK grovery giant, Tesco. The traditional defensive strategy against competitors employed by the Aussie giants relies on economies of scale, being larger than your rival and being able leverage this efficiency to deliver a cheaper end product or more controversially to loss lead and force your opponent out of business maintain your market share and eventually maximise your profit. Woolworths and Coles are falling back on their old ways to try and beat Aldi, the companies’ corporate strategy for the most part is focused on a doubling down on the traditional squeeze out all newcomers approach. However Aldi brings global resources to the table that Woolworths and Coles don’t have access to. In the retail sector Aldi will continue to steal market share from Wesfarmers and Woolworths more so if the companies continue with old strategies and don’t think of a way to innovate the retail space.