The economic and sociological context of increasing demand for high-cost credit

The brief review of the policy context and research literature outlines some of the reasons that more people are turning to payday loans and other forms of fringe lending to make ends meet. Little social science research is being conducted into the provision of high-cost credit, although there have been some exemplary sociological studies that have examined the survival strategies of low-income households (Edin and Lein, Reference Edin and Lein1997; De Parle, Reference De Parle2004). There are also social policy scholars who have looked at the less regulated and less recognised methods of poverty survival, such as cash-in-hand work in the ‘black economy’ (Dean and Shah, Reference Dean and Shah2002; Jordan and Travers, Reference Jordan and Travers2002). However, very little research has been conducted into the role played by commercial businesses offering people on low income access to credit to manage the consequences of poverty.

From a neo-classical economic perspective, the growth of fringe lenders is a consequence of market supply meeting increased demand, when that demand is not being met by other segments of the financial services industry. In Australia, a survey conducted by the National Financial Services Federation (the industry representatives for payday lenders in Australia) revealed that 88 per cent of people accessing payday loans did not have access to credit provided by mainstream banks (Smiles and Turner, Reference Smiles and Turner2006). Not having access to basic banking and financial services such as bank accounts and insurance products are factors in ‘financial exclusion’ (Burkett and Drew, Reference Burkett and Drew2008). Financial exclusion is a term used to describe the proportion of the population who have no access to banking services, are uninsured and have limited or no capacity to raise credit (Connolly et al., Reference Connolly, Georgouras and Hems2012). An Australian study found that using this definition, approximately 15 per cent of the Australian adult population is severely financially excluded (Connolly et al., Reference Connolly, Georgouras and Hems2012). This kind of financial vulnerability may be temporary or enduring. Some members of the community are also more susceptible to financial vulnerability because of geographical location, race, age or marital status.

Limited access to mainstream credit can be traced back to the deregulation of the Australian banking sector in the early 1980s (Scutella and Sheehan, Reference Scutella and Sheehan2006). In Australia, the large banks have increasingly discouraged low-income consumers from using their services, both by raising basic transaction costs and by removing financial products tailored to their needs. As far back as the 1990s, Leyshon and Thrift (Reference Leyshon and Thrift1997: 226) suggested that in Australia ‘financial capital is retreating to a middle class heartland’. Financial exclusion is also exacerbated by the disempowering experience of mainstream banking. Many borrowers simply assume that mainstream borrowers will not assist them, they are wary of or ineligible for credit cards and they do not trust large institutions (Howell, Reference Howell2005). Borrowers also struggle with the loan amounts and loan periods available. In many cases, banks simply do not provide what low-income borrowers need. Fringe lenders have capitalised on the negative perception of banks and typically provide a quick and easy service and they work hard to make customers feel welcome (Howell et al., Reference Howell, Wilson and Davidson2008).

Consumer advocates reframe this friendly service orientation as predatory behaviour on the part of lenders. ‘Predatory lending’ is a term used to describe the way in which the fringe credit sector offers a loan with high fees and a high interest rate in a way that is less than transparent for the borrower (Wilson, Reference Wilson2004). Payday lending industry representatives claim they are offering a service of choice, rather than a predatory credit service of last resort. The notion of choice is hotly contested in the economic and sociological literature on poverty. Recent US research, for example, found that most low-income borrowers perceived that they had few, if any, alternatives to payday loans when it came to raising credit (Elliehausen, Reference Elliehausen2009). In the context of facing a choice about having the electricity cut off or paying a high price for a loan in order to pay a utility bill, it becomes a little easier to see why people will access a high-cost loan, regardless of the relatively high charges and fees. On the relationship between poverty and access to fringe lending, Wilson (Reference Wilson2004) estimates that around 40 per cent of payday borrowers in Australia are living below the Henderson Poverty Line.

Studies into the typical borrower show that there is some variation between countries in terms of age, family status, race and gender; however, one of the common characteristics is being on a low wage. Researchers have found that in the US the typical payday borrower is three times more likely to be seriously debt burdened and four times more likely than all adults to have filed for bankruptcy (Elliehausen and Lawrence, Reference Elliehausen and Lawrence2001). A recent US study shows that those who disproportionately use these products are those who lack a four-year college degree, are home renters, African-American, earn less than US$40,000 per year, or are separated or divorced (Pew Charitable Trust, 2012). In an Australian study, Wilson (Reference Wilson2004) found a lower average income for the typical payday borrower: approximately A$24, 000 per annum, with many consumers earning less than A$401 per week.

Another common characteristic of payday lending on the demand side is repeat borrowing. In the US context, King and Parrish (Reference King and Parrish2007) found that over 60 per cent of loans go to borrowers with twelve or more transactions a year, while the average borrower has more than eight transactions a year. Twenty-four per cent of loans go to borrowers with twenty-one or more transactions a year; one in seven borrowers has been in payday debt every day of the past six months, and nearly 90 per cent of repeat payday loans are made shortly after a previous loan is paid off. King and Parrish (Reference King and Parrish2007) argue that the payday lending business model actually depends on trapping borrowers in loans. It is these kinds of patterns that lead critics to refer to payday lending as the credit market's equivalent of crack cocaine: a highly addictive source of easy money that hooks the unwary consumer into a cycle of debt (Stegman, Reference Stegman2007).

There are a variety of microfinance alternatives that are attempting to break this pattern of borrowing, with partnerships between banks, community groups and/or government. The uptake of small-scale lending activities by banks is often part of their social responsibility activities (see, for example, research commissioned by the ANZ Bank, Chant Link and Associates, 2004) and the National Australia Bank's No Interest Loan Scheme (NILS) program with Good Shepherd Youth and Family Service (National Australia Bank, n.d.). While it is important to acknowledge the role of these lenders, many of the community-based microfinance schemes do not meet the same credit need as payday lenders, as the microfinance schemes tend to tie the loans to small capital purchases, rather than provide loans for recurrent items (such as utility bills, rent and food). The Federal Government, through Centrelink (Australia's national income support agency), does offer a loan product that can be used for recurrent expenditure but is only available for pensioners in the form of an advance payment, which is a lump sum advance from future pension entitlement and is repaid from fortnightly pension payments over a period of thirteen fortnights. The maximum amount of the loan is A$1,074. Despite the availability of the Centrelink loan and the community-based microfinance schemes, the payday industry has continued to grow in response to increasing demand for small amounts of quick credit. This is likely due to the fact the schemes are not serving the same type of need and the fact that some people are likely to use both microfinance alternatives and private payday lenders at the same time, as such there is probably little substitution effect.

The political and economic context of lending has an important bearing on how people engage in the mixed economy of credit, which is a term we use to describe the different costs and calculations involved in making decisions about borrowing money from the (1) private sector, (2) the state, (3) family and friends or (4) through non-government microfinance schemes. As in the broader mixed economy of welfare, citizens are exercising constrained choices within the mixed economy of credit based on the location of different providers, cost, eligibility and knowledge of available options. This economic and geographical calculus is also influenced by the emotional dimension, as in the feelings of shame or guilt that may be associated with asking parents or friends for a short-term loan in societies where economic independence is a marker of a successful transition to adulthood. In this instance, the financial cost may indeed be low, with little or no financial interest charged for the loan, yet the emotional cost associated with taking the loan may be very high. The individual citizen must therefore weigh up the different transaction costs. The emotional dimension of decision-making within the mixed economy of credit is an important element in understanding how individual decisions are made (Collins, Reference Collins2004).

The relationship between the cultural and material dimension of access to credit are also important in understanding the nature of the issue. Singh et al. (Reference Singh, Myers, McKeon and Shelly2005) argue that with the inclusion of the social and cultural perspectives, financial decision-making no longer remains an individual economic issue. Their research discusses different cultural attitudes to money and credit, exploring the way in which culture influences the meaning of money, who money is shared with, management and control of money, attitudes to savings, attitudes to spending and credit and attitudes to financial institutions. So while money is an object – an inert thing – it also has subjective and affective meanings which influence people's attitudes and behaviour. Through this lens, gaining access to money, and relatedly access to credit, is about attaining achievement and recognition, status and respect, freedom and control.

The moral codes governing decisions about debt also change over time. Margaret Atwood (Reference Atwood2008: 32) concludes that a fallout from the Global Financial Crisis is that ‘we seem to be entering a period in which national and personal debt has passed through its most recent harmless and fashionable period, and is reverting to being sinful’. While much attention has been given to the high levels of household debt in the US, Australia is by no means immune to the credit binge. In fact, Reserve Bank figures show that Australians now have higher levels of household debt than the average US household. On a national scale, household debt equates to 100.4 per cent of Australia's annual GDP (this includes both mortgage and non-mortgage borrowing), which is one of the highest ratios in the developed world. This is partly explained by the fact that Australia also has the highest number of unaffordable home ownership and private rental markets in the developed world (Demographia, 2013).

While the political debate about the appropriate personal and policy response to greater levels of household debt and failing financial and housing markets continue at the national and international level, there has been much less of a focus on knowledge about the competing pressures and new configurations of economic and social relations between governments, low-income citizens and markets at the local level. Finding productive ways to conceptualise these economic and social relations is important if we are to think clearly about what could or should be done to address growing income inequality and poverty. To appreciate the multi-dimensional nature of this cultural and material space requires practical and theoretical frameworks that are capable of responding to the contradictions and complexity at the street-level.

The shadow welfare state

Some scholars argue that the existence of fringe credit providers in urban settings functions as a ‘shadow welfare state’, which is a term used to describe the practice where local level market and voluntary actors fill the gap left by inadequate public welfare (such as education, housing and health) and conditional cash transfers. The term shadow welfare state first appears in 2000 to describe how the private sector involvement in health and welfare in the Unites States is supported by government policy (see Gottschalk, Reference Gottschalk2000). The term has since been extended by Fairbanks (Reference Fairbanks2009: 273) who defines the shadow welfare state as denoting:

The devolutionary trends referred to in Fairbanks's definition reflect the proposition that the state is either outsourcing or withdrawing from direct service provision in key areas of social policy, while at the same time the state remains involved as a regulator and auditor. We recognise that we must be cautious about over extending the metaphor of ‘state rollback’, given that most western welfare states have historically had a diverse mixed economy of welfare (Harris and McDonald, Reference Harris and McDonald2000) and that welfare states are proving more resilient to spending cuts than many of the welfare state crisis theorists would have us believe (Castles, Reference Castles2004; Whiteford, Reference Whiteford2011). However, aggregate figures about overall expenditure on social policy measures tend to hide various troughs and peaks across different policy fields. In Australia, for example, there have been some gains for aged pensioners over the past twenty years, in terms of increases in payment rates, but single unemployed adults receiving the lower rate Newstart allowance (the name of the unemployment benefit in Australia) are falling further behind. Peter Whiteford (Reference Whiteford2011) shows that since 1996, social security payments for the single unemployed in Australia have fallen from around 54 per cent to 45 per cent of the after-tax minimum wage.

Some writers, such as the political scientist Jacob Hacker (Reference Hacker2006) contend that this predicament of increasing debt and decreasing value of income support and wages is entirely predictable in contemporary liberal welfare states, in light of what he refers to as ‘the great risk shift’ where collective risk pooling is being eroded by various forms of self-management and individualisation of welfare and well-being. Individualisation of risk and income insecurity has multiple implications. In countries where the level of cash and in-kind benefits provided through formal work and state-funded cash transfers is insufficient, then people resort to less regulated and less visible forms of economic survival, such as participation in the informal economy of cash-in-hand work (Jordan and Travers, Reference Jordan and Travers2002), benefit fraud (Dean and Melrose, Reference Dean and Melrose1997) and an increasing use of high-cost credit provided by fringe lenders (Karger, Reference Karger2005).

Arguably the size of the shadow welfare state bears a direct relationship to the extent of universal coverage of the public welfare state. If people are able to manage the social and economic risks of life through secure public and private employment, universal public services and an adequate income support system, then we might assume they are less likely to turn to informal and market-based forms of welfare (as these forms of provision are crowded out by public sector dominance). As Karger (Reference Karger2006: 15) argues, cost containment welfare reform initiatives and the ‘fringe economy’ are like two peas in a pod:

As a consequence of these institutional shifts, there are many small businesses that have quickly established themselves in localities where poverty has become spatially concentrated on the urban fringes of capital cities. In the US, cheque cashiers, payday lenders and pawn shops lease shops that were previously tenanted by retail outlets and local grocery stores (Karger, Reference Karger2005). A similar spatial pattern emerges in Australia; however, the presence of the bureaucratic welfare state often co-exists in the same geographical space as the private payday lending outlets. For example, in outer urban suburbs of major capital cities, income payments (Centrelink) offices are often on the same street as the payday lenders and these payday lending businesses openly advertise social security benefits through billboards and websites that have slogans such as ‘Pensioners Welcome’. Moreover, the friendly face of the payday lender that greets the citizen when they walk in off the street stands in stark contrast to the indifference and disrespect that many people encounter in Centrelink offices in Australia (Murphy et al., Reference Murphy, Murray, Martin, Chalmers and Marston2011; de Parle, Reference De Parle2004). This contrast between the indifferent state and the friendly face of the payday lender reaffirms the analytical importance of emotion and identity recognition in understanding individual decision-making in the mixed economy of credit.

The spatial proximity between the payday lending outlets and the Centrelink offices is also symbolic of the ‘economic interdependence’ between the public welfare state and the shadow welfare state. Government-provided income support payments to social security recipients are used to secure loans from private lenders and/or used to repay existing loans. In a recent empirical study in Australia of around 120 borrowers, it was found that almost 80 per cent of borrowers were on a full-time social security pension or unemployment benefit (Banks et al., Reference Banks, Marston, Karger and Russell2012). This economic interdependence between government and markets reinforces the classic political-economy thesis that in post-industrial revolution societies there is no such thing as a ‘natural’ self-regulating market (Polanyi, Reference Polanyi1944). The state props up and regulates market activity, while in turn market failure provides a justification for state intervention. The next section will discuss the social policy implications of the growing reliance on payday lenders by people on low to moderate incomes.

Social policy implications

The analysis of the context and the available research literature reveals some interesting implications for welfare state theorists and anti-poverty policy-makers and activists. The first implication is the size and scale of the fringe lending sector. The fringe economy is growing at a time when welfare state expenditure remains steady as a proportion of GDP in most developed countries (Castles, Reference Castles2004; Whiteford, Reference Whiteford2011). Despite overall expenditure levels remaining steady, there have been reforms to income support payments that have made tax and transfer systems less redistributive and less progressive across the OECD in recent years (OECD, 2011). In the Australian case, this has partly been a result of ‘welfare-to-work’ policies over the past decade that have moved hundreds of thousands of income support recipients from the more generous pension payments to activity-tested and less generous unemployment allowances. These allowances also have less earning capacity before the income support payment is reduced, thus increasing the effective marginal tax rate for low-income earners moving into low-paid casual or part-time employment.

In countries such as the US, it is evident that the fringe economy has grown to eclipse both income and wealth distribution efforts via government social programmes. With an annual volume of A$230 billion, the fringe lending industry easily eclipses the value of cash assistance for working families, such as Temporary Assistance for Needy Families (A$16.5 billion) and the Earned Income Tax Credit (A$40 billion) (Committee on Ways and Means, 2008). At a practical level, the existence of fringe lenders limits the effectiveness of state programmes and tax assistance measures, such as government sponsored savings and tax credit schemes because any lump sums can be diverted to repay existing debts to private lenders (Rivlin, Reference Rivlin2011). In terms of anti-poverty policy-making, there needs to be a much wider recognition that formal policy responses and workfare strategies can inadvertently contribute to the growth of the fringe economy and that the fringe economy subverts the effectiveness of state-funded social programmes aimed at alleviating poverty. In effect, inadequate wages, ‘bureaucratic disentitlement’ (Lipsky, Reference Lipsky1980), in the form of active deterrence from seeking state assistance, and harsh financial sanctions associated with welfare-to-work policies for those on income support encourage a greater reliance on the fringe economy.

These consequences reinforce the metaphor of a ‘shadow welfare state’ to describe these institutional changes – a shadow that grows longer in the face of inadequate public welfare. What to do about these issues raises questions about the extent to which national governments are willing to regulate market behaviour and establish and support public and community alternatives to for-profit payday lenders.

Lenders construct the policy problem as a minor matter of having the industry ‘cleaned up’. Light market regulation, they argue, will best bring the sector into the mainstream of Australian finance capitalism. In contrast, consumer activists consider the existence of the payday industry as an opportunistic problem that needs to be curtailed or abolished. The difficulty of investigating, researching and responding in policy terms to the fringe credit industry, or what Rivlin (Reference Rivlin2011) simply calls the ‘poverty industry’, is that it is broad, multi-faceted and forever changing its products in response to new regulations. Nonetheless, it is worth canvassing some of the broad policy options and more specific practical measures that are likely to make an immediate and positive difference to low-income citizens in both Australia and other countries facing similar challenges.

Evaluating policy options

Similar to other countries, Australian policy-makers and law-makers, consumer advocates and industry lobbyists are all immersed in an intense political debate about how best to regulate access to credit whilst protecting ‘vulnerable consumers’ from exploitation. The arguments made in this paper point to the limitation of strategies aimed at improving financial literacy among the poor. The main problem is not lack of knowledge among low-income citizens about the high costs of the loan (Shevellar and Marston, Reference Shevellar and Marston2011). The decision to borrow is often a pragmatic choice that is made on the basis of economic and social constraints, in a context where there are few alternatives in the form of borrowing money from informal sources or mainstream credit providers such as banks (Banks et al., Reference Banks, Marston, Karger and Russell2012). In other words, consumers are likely to borrow from fringe lenders regardless of warnings about the high costs of the loan. As such, many borrowers tend to resist the proposition that fringe lenders be put out of business by tough government regulations (Banks et al., Reference Banks, Marston, Karger and Russell2012).

Moreover, it is too easy to simply blame consumer culture and an instant-gratification society for the popularity of the payday lending industry. As argued throughout this paper, there are deeper, structural reasons for the rise in payday lending in countries such as Australia, the UK, Canada and the US, not least of which is a pressure for a smaller social state and the rise of precarious employment and growing income inequality (Rivlin, Reference Rivlin2011). As already noted, the payment rates for social security in Australia are falling behind increases in wages and are well below standard poverty measures. However, even if structural social inequality is addressed to a satisfactory level and cash transfers are substantially increased for social security recipients, a socio-legal policy response is still required about the appropriate supply of fair credit, given the institutionalised nature of this form of financial exchange in contemporary western societies.

One obvious legal response to the borrowing patterns identified above is a complete ban on payday lending, which has been tried in other jurisdictions. Two states in the US provide a case study of this option. In May 2004, the state of Georgia in the US banned payday loans, with North Carolina following suit in December the following year. In examining the effects of the bans, researchers concluded that the absence of storefront payday lending has not had a significant impact upon the availability of credit for households in North Carolina (University of North Carolina Center for Community Capital, 2007). Further they argue that it has had a positive rather than negative effect on households, with nine out of ten households surveyed claiming ‘payday lending is a bad thing’ (University of North Carolina Center for Community Capital, 2007: 1). Participants reported using several credit alternatives to payday loans, including pawn shops, overdrafts and internet providers. Others developed lower cost strategies, took on additional jobs, changed their spending habits and chose to simply do without. While this would seem to lend support to a banning strategy, it is worth noting that of the 400 people surveyed, only twenty-three were former payday lending clients. Some in the study feared that unless a large-scale viable alternative was put in place to offer fair credit, then people would be left with little option other than to turn to illegal means of accessing credit.

In terms of law reform, there is also the option of capping interest rates of lenders; however, this can mean that fringe lenders get creative in finding ways around these caps by increasing fees and charges (Gillam, Reference Gillam2010). As such, any legislated interest rate cap must include fees and charges in the cap, not just the interest rate itself. In principle, the fringe lending industry is opposed to interest rate caps, arguing that they make their business unprofitable and that if they go out of business then borrowers will turn to less regulated and potentially more harmful credit options. Recent policy developments in Australia are focused on developing a national and uniform code for regulating the maximum amount that lenders can charge for loans, in terms of interests and fees. Consumer advocates have been arguing for a comprehensive 48 per cent cap on what consumers can be charged for payday loans (including loan interest and fees). The payday lending industry has resisted, arguing that this would no longer make them viable. At the time of writing, it appears likely that in proposed laws the Australian government will adopt a compromise position of allowing higher percentages to be charged for small amounts and less for larger amounts.

Policis consumer research in France, Germany and the UK all show that use of illegal lenders is concentrated among those who have experienced credit refusals from legitimate lenders (Ellison and Forster, Reference Ellison and Forster2008b). Ashton (Reference Ashton2008) argues that the substitution hypothesis is not an accurate reflection of the reality, suggesting that the reduction of one form of credit will not result in a substantially identical increase in another form of credit. Lott and Grant (Reference Lott and Grant2002) suggest that people are unlikely to turn to ‘loan sharks’, and usually are unacquainted with them. Rather they would be more likely to turn to family and friends for help if this is an option. Ellison and Forster (Reference Ellison and Forster2008a) show that informal borrowing is an inadequate substitute for commercial credit. ‘If payday lending is welfare improving for at least some portion of the population, a move to ban payday lending is ill advised’ (Morse, Reference Morse2007: 35). Karian and Zinman (Reference Karian and Zinman2009) observe that restricting supply does not restrict demand. Instead they argue for the asking of more nuanced questions, such as: how do we make markets work better and how can we create an environment that allows those who would benefit to borrow, and leads those who would be harmed to avoid expensive traps? Law reformers and antipoverty activists in Australia, such as The Consumer Action Law Centre, argue that product demand in the marketplace does not necessarily legitimate product supply (Ashton, Reference Ashton2008: 30). Robert Shiller (Reference Shiller2004) suggests the need to provide the financial sector with incentives for undertaking investments with high social benefit and punish those if its investments cause social loss, as a means to managing risk and developing appropriate price management.

In addition to the legal and regulatory policy responses, there are other anti-poverty measures that aim to increase capacity among borrowers so that they are in a better position to avoid relying on payday lenders in the first place. Clearly, some of these measures require considerable investment and long-term change at the individual, economic and social level. In this overall approach, education and financial literacy clearly have a role to play. Research shows that credit counselling has a positive effect on personal debt levels, provides a buffer against financial hardship and facilitates long-term change (ANZ Bank, 2005; Courchane and Zorn, Reference Courchane and Zorn2005). If coupled with structured opportunities to save, financial education can increase participation in savings plans and increase the level of savings for people (Barr, Reference Barr2004). Financial counselling serves a developmental function, assisting borrowers to develop the skills and knowledge they need. However, in the Australian context most people access counsellors for more corrective measures when debt spirals out of control, to negotiate directly with lenders and banks and to assist in reestablishing financial control (Shevellar and Marston, Reference Shevellar and Marston2011).

There are other measures that would help reduce the costs of being poor and accessing credit. Some mainstream banks in Australia (e.g., National Australia Bank, Commonwealth Bank) are now providing accounts that do not charge dishonour fees when direct debits are unable to be processed due to insufficient accounts. These dishonour fees can range from A$25 to A$50 for each failed transaction. One option to reduce these costs would be for the national government to mandate that mainstream financial institutions and banks pro-actively offer dishonour-fee-free accounts to all their clients who receive a social security and income support payment or pension. Alternative financial products and services that target low-income clients have also increased in recent years, as mentioned in the first part of the paper.

A recent Australian Treasury discussion paper Strategies for Reducing Reliance on High-Cost, Short-Term, Small Amount Lending proposes ‘one-stop shop financial services hubs’ be created to:

However, the claim by the Australian Government that the hubs would ‘directly compete . . . with payday and fringe lenders’ remains untested. The timeframes and purpose of the product may not meet the needs of many payday lending customers. NILS and other microfinance schemes offer products for one-off purposes and usually take days to process a claim. Borrowers want cash quickly and are twice as likely to take out a loan to help meet their day-to-day, rather than irregular, expenses (Banks et al., Reference Banks, Marston, Karger and Russell2012). Microfinancing schemes therefore operate in a complementary market space in the mixed economy of credit, compared with the payday lending industry.

In the mixed economy of credit, the state itself could be doing more in terms of reforming the way it offers credit through its income support agency, Centrelink. Currently the minimum Centrelink advance payment a single person can request is:

1. (a) A$361.55 (Age Pension, DSP, Carer Payment, Widow B Pension and Wife Pension); or

2. (b) A$250 (ABSTUDY, Austudy, Newstart Allowance, Parenting Payment Partnered and Single, Widow Allowance and Youth Allowance); plus

3. (c) A$188.20 (FTB)

Access to advance payments is restricted to Centrelink customers who have been in receipt of a pension or payment for at least three months. An advance payment can only be taken once in six months (groups (a) and (c)) or twelve months (group (b)). Group (a) clients can ‘draw down’ their advance payment in three tranches. The default repayment schedule set by Centrelink is thirteen fortnights. There are only two ways a person can repay an advance payment more promptly. The first is to know about the poorly explained provision that they can negotiate a faster repayment schedule with a Customer Service Adviser at the time of claim. The second is to go into a Centrelink office with cash. Nearly all the complex restrictions currently applying to advance payment eligibility, amounts and repayment schedules need to be removed for transfers of less than A$500. For example, a real alternative would enable a person to go online or ring to take out a A$50 advance, receive it in their bank account by the next day, repay that amount in two weeks and immediately be able to take out another payment. This kind of reform would potentially reduce the attractiveness of the commercial payday loan.

Clearly there is no single solution to the problems identified in this paper. What is clear from this discussion is that poverty researchers and policy-makers need to take fuller account of the complexity of the causes and consequences of increasing demand for payday lending and other fringe lending products. While simple solutions such as banning payday lending may be enticing, they beg the larger question of what would be done to reduce demand and address the underlying economic insecurity, which from a political-economy perspective is linked to increasing social inequality and unequal opportunities in relation to the Australian economy. Precarious work and precarious welfare associated with welfare-to-work programmes are making people's economic situation insecure.

Along these lines, one way forward is to reframe the policy debate away from a simplistic regulation versus non-regulation debate and understand the rise in demand for these services as principally a social issue, which makes sense if one accepts the proposition put forward in this paper that the explosive growth in the fringe economy is linked to an inadequate and patchy welfare state, which is being further weakened by the growth in precarious work in countries such as Australia, the UK and the US where the value of real wages is deteriorating. The argument here is that structural changes to the labour and housing markets combined with coercive workfare policies are creating growing social and economic insecurity among a large and growing proportion of the citizenry (Standing, Reference Standing2011), which in turn creates demand for additional money in the form of credit to meet everyday expenses.

In the context of discussing access to credit, we need to get past the conventional logic put forward by the fringe lending industry that the only way to serve lower-income households is to charge them more for credit, given their perceived ‘riskiness’. Such practices only serve to entrench the truism that ‘the poorer you are, the more things cost’ (Brown, Reference Brown2009). This ‘poverty premium’ has been identified in various studies of access to finance and the impacts of regressive taxes, such as consumption taxes. A recent UK study has attempted to aggregate this poverty premium:

Academic and policy interest in addressing this differential has tended to focus on the effectiveness of formal strategies, such as the adequacy of state-funded cash assistance, tax credits and ‘making work pay’. As discussed, these measures are important and necessary as they can provide buffers against financial shocks and irregular expenses and reduce demand, but they are only part of the picture when it comes to proposing effective solutions and assessing the merits of existing formal and informal survival strategies being used by people living in poverty.