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MISC Australia Consumer Credit Report June 2006 Prepared exclusively for the Department of Justice Consumer Affairs Victoria MISC Consumer Credit Report 1 MISC Australia Consumer Credit Report For the Department of Justice Consumer Affairs Victoria MISC Consumer Credit Report 2 Table of Contents SELECTED GLOSSARY .......................................................................................................................................................4 1. INTRODUCTION..................................................................................................................................................................7 Response to CAV Research Brief - Initial Reporting .....................................................................8 A Review of Micro Credit And Fringe Credit Scope.....................................................................10 MISC Definition of Consumers .....................................................................................................12 CONCLUSION.........................................................................................................................................................................14 This First Stage Assists in Answering Questions.........................................................................15 ATTEMPT TO MEASURE - DEMAND FOR SMALL CREDIT..................................................................................18 Introduction: The Existing Consumer Research Evidence ..........................................................18 How current research has identified financial stress amongst consumers .................................21 Use of HILDA 2003 Survey by MISC Australia ............................................................................25 Updating HILDA Survey by MISC Australia .................................................................................25 Preliminary Quantification of Stressed Consumer in Victoria ......................................................26 Stressed Consumers. A Profile Summary - Initial Indicators 2003..............................................30 Accommodation Stress Profile Summary.....................................................................................42 THE INSTITUTIONAL STRUCTURE OF THE MARKET - INITIAL EVIDENCE OF MARKET FLOWS.......44 Methodological Review .................................................................................................................44 Historical Perspectives..................................................................................................................44 Macro Measurement Attempts......................................................................................................47 Domestic Australian Size Scoping - An Available Research Review..........................................50 Evidence of Domestic Aust Micro Credit Lender Size .................................................................52 Sanity/Reliability Testing ...............................................................................................................54 Evidence of Domestic Australian Micro Credit Lender Size ........................................................55 Global Market Estimates and Future benchmarks.......................................................................57 Anecdotal Evidence of US Micro Credit Lender Activity..............................................................58 Best-fit Profile of Lenders..............................................................................................................59 Cheque Cashing............................................................................................................................59 Payday Lending.............................................................................................................................60 Pawn Broking Lenders..................................................................................................................61 Car Title Lending ...........................................................................................................................62 Short-term Lender .........................................................................................................................63 PRODUCT ATTRIBUTES....................................................................................................................................................64 Assumptions of the Scope of the Database – Database Description .........................................64 Preamble .......................................................................................................................................65 Common Features of Micro Credit Market ...................................................................................66 A Product Perspective of Subsidiary Micro Credit .......................................................................66 Product Profiles of Subsidiary Micro Credit Lenders ...................................................................69 Evidence of Defining Features for Subsidiary Micro Credit Lenders...........................................74 Evidence of Defining Features for Mainstream Micro Credit Lenders.........................................78 EVIDENCE OF DEFINING FEATURES FOR MAINSTREAM LENDERS............................................................80 Product Profile ...............................................................................................................................80 Common Loan Features of Mainstream Market ..........................................................................81 Product Profiles .............................................................................................................................81 Mainstream Loan Cost Structure..................................................................................................86 MICRO CREDIT PROVIDER ACCESSIBILITY - A DISTRIBUTION AUDIT AND TRACE...............................88 Introduction ....................................................................................................................................88 Methodology and Classification ....................................................................................................88 Points of Presence Distribution in Victoria - Alternate measures ................................................90 Test of Coverage/Sanity Test .......................................................................................................91 Scope of Distribution Trace - Real extent of Distribution .............................................................93 Product Segmentation by Institution Type....................................................................................93 MISC Consumer Credit Report 3 Product Segmentation By Mainstream Lenders ..........................................................................94 Products Coverage By Micro Credit Lenders...............................................................................94 Institutional Presence ....................................................................................................................95 Regional Versus Metropolitan Presence......................................................................................98 Subsidiary lender Regional Presence ..........................................................................................99 Subsidiary Credit Regional / Metro Presence ............................................................................100 Population Service of Lender Distribution - Victoria...................................................................102 Comparative Institutional Population Coverage – Measures of Efficiency................................104 Institutional Service Benchmarks – California USA ...................................................................105 US National Benchmarks Review...............................................................................................105 PROPOSED STAGE 1.2 RESEARCH PROGRAMS............................................................................................... 107 A. Consumer Research Process - A 5-Stage Program for Stressed Consumer Behaviours ..108 2. Stressed Consumer Sampling................................................................................................110 Completed Programs in Stage 1.1 .............................................................................................112 4. To be completed programs in Stage 1.2: ...............................................................................117 4.2 CATI Phone Survey ..............................................................................................................120 B. The True Measure of Mainstream and Subsidiary Finance Flows in Victoria ......................122 APPENDICES....................................................................................................................................................................... 128 MISC - Consumer Credit Report 4 SELECTED GLOSSARY Accommodation Stress The initial analysis of HILDA data utilizes gross income against which net mortgage and rental payments are benchmarked. This is not ideal .At a gross basis we have selected a 20% threshold as the base line for calculation. This effectively translates into an after tax share of 29% meaning that 29%-30% + is incurred in rentals or mortgage payments before any living expenses. This is regarded as accommodation stress. Community Micro Credit This term is used herein to distinguish between Micro Credit that is provided either by mainstream financier or subsidiary financiers. It includes all community based lending schemes such as No Interest Loan Schemes (NILS) and Community Not-for-Profit Loan Schemes and Low Interest loan schemes. Cost to Borrower The effective interest rate describes the cost of a single loan extended to an annualised period. The annualised costs to borrower figures describe a theoretical concept of a customer borrowing beyond their means, and financing debt repayments with further debt. This concept is often referred to as a ‘debt trap’, but relies on the assumption that there are no rollover fees and that repayments on a $200 loan are paid for with further loans. This concept is highly theoretical and is used solely as a comparison between products, and does not simulate real world environments. This occurs simply because lenders will not continually renew loans to the same customer, without the customer paying off the loan with money other than additional loans. Note that shorter loan periods will inflate these costs to borrower figures significantly. The emergence and inclusion of ‘rollover’ fees are more than likely to reduce these figures to a far more realistic level. Effective Interest Rate The effective interest rate EIR describes the cost of a single loan extended to an annualised period. It describes a theoretical concept where a customer borrows beyond their means, and finances debt repayments with further debt. This concept is often referred to as a ‘debt trap’, but relies on the assumption that there are no rollover fees and that repayments on a relevant loan transaction are paid only with further loans. This concept is used to provide a worst case comparison between products, and in most cases will not simulate real world environments*, however for some period usually les than 12 months such a debt trap experience clearly does occur Note that shorter loan periods will inflate these costs significantly. The emergence and inclusion of ‘rollover’ fees are more than likely to reduce these figures to a far more realistic level but the calculation sued of EIR excludes any allowance for Roll over fees even though these do occasionally exist. *This occurs simply because lenders will not continually renew loans to the same customer, without the customer paying off the loan with money other than additional loans. Financial Exclusion A situation in which consumers are excluded or hindered, either physically or socially, from gaining access to financial services. For instance, consumers with low income or poor credit history may experience more difficulty in qualifying for financial services. Financially Stressed Consumers Consumers who are undergoing some form of financial difficulty. This difficulty may occur either through a temporary period of financial instability, or it may be a systemic, long-term circumstance. This stress may be reflected in one of the following conditions: asking for help from welfare, asking for help from friends or family, being unable to pay bills on time, being unable to raise $2000 in an emergency, being unable to meet rent or mortgage payments, resorting to pawning or selling items of value, foregoing meals or being unable to heat the home. MISC - Consumer Credit Report 5 Financially Disadvantaged Consumers Unlike financial vulnerability, which is a temporary condition, consumer disadvantage is a continuing, repeated susceptibility to detriment in consumption. A disadvantaged consumer is a person experiencing persistent, ongoing circumstances of financial difficulty. This includes people who exhibit attributes that may adversely affect financial viability, such as indigenous peoples, institutionalised or low income earners. Financially Vulnerable Consumers Consumer vulnerability is a temporary exposure to a risk of detriment in consumption due to interaction of market, product and supply characteristics and personal attributes and circumstances. The main cause of vulnerability is this interaction resulting in inadequate information, poor access to information and/or ineffective use of information by a consumer or in the deterrence of complaint of the pursuit of redress by a consumer. Vulnerable consumers are not necessarily disadvantaged consumers. Financially vulnerable consumers experience temporary financial instability most often due to a change in personal circumstances that creates short-term instability, or adverse market, product or transaction characteristics. Intermediary Market Products and services, either mainstream or micro, which are distributed to consumers via a third party acting for the provider. This includes mortgage broking and other third parties. Lending Flows This is the measure of annual new credit commitments expressed in dollar value terms. This new flow of credit will ultimately accumulate into outstandings or total accumulated debt. Mainstream Micro Credit A mainstream credit provider, such as a finance company, that provides Micro Credit products as part of its range of financial services. This provider may provide such Micro Credit products directly to the consumer, or in conjunction with another provider, such as a community organisation. A common example of Mainstream Micro Credit is a finance company that offers unsecured finance for 12 months or less. Micro Credit There is some debate about the correct use of the term Micro Credit. This document uses the term to describe any lender that provides immediate or unsecured financial solutions to consumers, whether it be a small or large amount or on a short-term or long-term basis. This term is broken down into three categories to avoid confusion between profit and not-for-profit organisations. The categories include: Mainstream Micro Credit, Subsidiary Micro Credit and Community Micro Credit. Micro Credit Community This refers to not for profit lending and subsidized lending aimed specifically at alleviating consumer suffering. Metropolitan Area Melbourne city and surrounding suburbs. Outer Regional Area Regional Victoria, not including major centres such as Bendigo, Ballarat and Geelong. MISC - Consumer Credit Report 6 Points of Presence The number of retail sites or physical locations of a financial institution within a particular area that provide physical access to the consumer. Expressed, as a ratio to population as is the case in this report this ratio of population to a site is the theoretical potential that is serviced by that site. This is used as a crude benchmark when comparing the availability of credit providers in different states areas even countries Regional Centres Major Regional centres, including Bendigo, Ballarat and Geelong. Roll Over Fee This is the fee charged by a lender to extend the original term to a new negotiated term .It is accompanied by a ”one off” fee charged usually for the additional period. Service Population The population served by a financial institution. This is calculated as the number of financial institutions in a particular geographic region against the total population in that area. Single Loan Rate Calculated annual rate of interest on the loan often charged at a fixed rate per $100 borrowed. Subsidiary Micro Credit Market Micro Credit products and services that are provided by non-mainstream for profit lenders. This includes payday lenders, payday loans; loans against goods, unsecured personal loans, short-term loans, small consumer loans and title loans. MISC - Consumer Credit Report 7 1. INTRODUCTION A controversial part of the Victorian Credit environment in Victoria is the small amount short-term credit market. Small amount credit comprises that part of the market that MISC will report on in this research response to the Consumer Affairs Credit Inquiry. There is clearly a need to review current Credit legislation in Victoria. It may be the case that current legislation is out of touch with modern credit practices and offerings, and as a result, an unnecessary burden may have been imposed on some of the electorate in Victoria. The mandate of the ‘Consumer Credit Review’, a review of the consumer credit laws in Victoria, is underpinned by several assumptions. Two of the assumptions underlying the review are partially addressed in the scope of this report. This report represents the first stage of a three-stage report proposed in response to the Consumer Affairs Victoria Research Brief. The first assumption of the review appears to be that a number of consumers in Victoria are financially disadvantaged and vulnerable. However, the extent of this issue remains to be measured. The current review has received a wealth of feedback to conclude that the numbers of consumers affected are significant. The full measurement of this consumer impact has wide ranging implications. Firstly, the size of the consumer problem will no doubt impact on the resources expended to address it. Secondly, the size of the problem will determine the ultimate feeds into the modelling of the economic costs of solving it. The second assumption, underpinning the review, is that a large amount of lending flows are accessed by this financially disadvantaged and vulnerable consumer group. It may be further assumed that some of these flows are directly or indirectly imposing an additional (unnecessary) burden on the consumer and this may, as a consequence, eventually impose a burden on the state. Thus the measure of flow size is important not only as a measure of economic size of the potential problem, but also a measure of the size of the state’s potential economic burden. It is essential therefore to trace the size of the flows, to ultimately permit the modelling of the economic cost of improving the situation. A further assumption underpinning the initial decision to not immediately attempt a measurement of consumers affected or the demand for Micro Credit via stakeholder submission and intelligence already accessible and accordingly that such size scoping research would not be necessary. In fact, despite a plethora of research and dozens of submissions (see later section for discussion) no insight was possible of the scope of the financial commitments involved, nor any, measures of the extent of the consumer involvement. In the process of the consumer research stage however it was possible to at least quantify from existing research and census works some extent of likely consumer exposure. This proposed first report is presented in Modules. Each of these modules is dedicated to describing the result of a single research step commissioned by Consumer Affairs. The final Module describes in particular two of these steps which MISC believes requires additional research to fully complete and will assist in fully quantifying the real size of the economic benefit. MISC - Consumer Credit Report 8 Response to CAV Research Brief - Initial Reporting Stage 1.1 This Report This is the first stage of the MISC response to the CAV Consumer Credit Review. The MISC full research proposal in 3 stages was developed in response to the initial CAV brief, which was designed as a holistic review of the entire traditional and micro credit market and credit environment in Victoria. In this first stage, CAV chose to select four research programs from more than 15 research programs recommended by MISC. The four chosen programs were the more dedicated Micro Credit components, and all were short-term focussed. Two of the research components could not be completed within the existing budget, and require additional research works. These additional works are described in Module 5. MISC considers that the components now completed can stand alone, but the results that flow from them provide only part of the picture. However, these reported results do in themselves provide answers to some of the fundamental questions posed by the Consumer Credit Review. The additional works and those underpinning this report are presented as steps and are summarised in the table. The proposed additional works form the basis of two Modules of this 4Module report. Stage 1 Research Brief Selected Programs Component Credit Provider Distribution Survey Tasks Primary research lender survey of sub-prime trace from 150 Lender database, and trace back of sub-prime activity in Victoria; plus Delphi micro lender survey in two states by 20 groups. ABS integrated register trace of sub-prime Micro Credit retailer distribution Melbourne and regional. Syndicated outsourced access to micro lending product Attribute and sub-prime product attribute databases. Secondary research undertaken by MISC through its bank and financial institutional databases plus global databases for year ending June 2005 remaining sub-prime product innovations. Mystery Shopping: The subsequent requirement of Mystery Shopping was deemed to be essential in completing the database of lending products as for many providers’ contracts and supporting documentation of term could not be accessed or was unavailable. Some 100 Mystery shopping interviews were undertaken Primary research sub-prime Micro Credit customer survey; telephone survey of 500 consumers based on Micro Credit provider’s databases of consumers. Short-term Micro Credit product Data Base -Mystery Shopping Consumer Research Pilot and research method development Plus not quoted but included Market Size Scoping Preliminary Views of Flow Size An additional Module considered essential to the reporting but not specifically requested. Plus Additional steps to complete Stage 1.2 See Module 5 Micro and Traditional Credit Consumer Usage and Attitude survey Micro Credit Market Flow measurement – An econometric Model of Micro credit flows by location A stakeholder co-operative survey drawn from 10,200 identified Micro credit users from which 6000 interviews will be conducted. Results correlated with HILDA 2003 surveys and census weighted SLA based survey and modelling of lender credit flows by location with projections of revenue by lender type and regional and capital city analysis. Market share reporting by lender class MISC - Consumer Credit Report 9 These resultant research steps were completed to provide some selected insight into aspects of Micro Credit markets in the state. It was the intention of CAV that these steps alone might answer some of the objectives set in its fuller credit research brief. In particular the consumer research originally proposed, and the promise of some stakeholder co-operation, was seen as facilitating a relatively simple and inexpensive process of direct Micro Credit consumer contact permitting a single stage CATI phone interview process. It was thought that this could be completed without the need for incentives, and the usual wastage that accompanies such surveys i.e. difficulty in contact, respondent refusals etc. The reality was quite different. The extent of stakeholder commitment was restricted to payday lender stakeholders, imposing biases on Micro Credit experience (which would be payday lender experience only). Next, existing agreements with customers prevented third party direct contact. Finally depth research showed that consumers with Micro Credit experience were significantly more sensitive than other consumers with Mainstream Credit exposure, and thus needed to be approached with sensitivity and provided with incentives. When extensive literature research was undertaken of previous Micro Credit consumer research it was clearly established that alternative sampling without direct contact would be an entirely unacceptable and cost prohibitive option. Stage 1.2 Further Research In order to complete stage one of the original full research proposal as outlined it was determined that several additional research programs would need to be employed. This insight arose in the process of data collection with the identification of significant barriers that would prevent adequate coverage. Two pieces of work in particular are fundamental to the research, and comprise the subject of a detailed outline (see research descriptions in Module five). They include the construction of an econometric model to estimate and forecasts the flows and flow shares of all credit especially hidden credit in the Victorian metro and regional environments. This will match the results of the distribution trace described in Module four of 2009 identified short-term lenders. The second piece of additional work that is considered fundamental is the consumer research. The method originally proposed for consumer research has proven to be inappropriate in the absence of an additional and considerable selection phase. It is envisaged that the initial selection phase for potential participating consumers would involve the stakeholders providing access to 10,200 customers from whom an expected participant rate of 71% will be achieved. This large-scale consumer research component was not allowed for in the original full proposal. Full descriptions of the additional research inputs are contained and amplified in Module five “Further research Works”. Stage 2 Final Reporting It is recommended that in the final reporting, the additional steps necessary to complete stage 1 and the remaining research programs outlined in the MISC proposal to CAV should be deployed to ensure a complete and definitive response and true measurement of the entire Victorian credit market inclusive of both mainstream and Micro Credit. Much of the initial research and this report is concerned with the measurement of less mainstream credit and more micro credit. The final stage will complete the picture. Note: Unlike the original proposed suggested approach, the full research program will now be better directed in the examination of other credit options. The consumer research if completed will provide specific direction as to the precise credit being used by Victoria’s stressed individuals. It is hoped that these inputs will eliminate the need for study of less relevant credit options as originally proposed. MISC - Consumer Credit Report 10 A Review of Micro Credit And Fringe Credit Scope There has been considerable debate concerning the true nature of micro credit or fringe credit. Indeed even the terms are often varied creating further confusion between the two concepts. Micro Credit / Micro Finance In a global context, the term ‘Micro Credit’ has, more often than not, been associated with the Grameen Bank perspective. It is this notable group that defines Micro Credit narrowly as: “The extension of small loans to entrepreneurs too poor to qualify for commercial lending.” Source: S Mc Donnell The Grameen Bank Micro Credit model This puts the definition squarely at the foundation of those who argue that Micro Credit options are created for financially excluded consumers, and if taken strictly, would be inappropriate for this review. Ordinarily, this definition would exclude the scope of the Consumer Credit Review. However, many other authors have used a much broader definition of Micro Credit. This is when the label ‘micro finance’ is used. This too relies on the concept of exclusion, and it has been argued that lenders who do not aim products at those financially excluded consumers to alleviate suffering, are not captured in this description. As Ingrid Burkett argues: “The key features of micro finance are as follows: provision of financial services to people who are economically poor; using means which are as just, fair and sustainable as possible; has a community and/or social agenda inherent in its purpose, mission and/or goals; the size of the transactions are relatively small; includes a full range of financial services to which poor people need access - it is not limited to the provision of credit.” Source: Burkett, I. (2003). Current Realities and Future Possibilities. The common adoption of the term micro finance is usually intended to embrace community not-for-profit schemes. Fringe / Fringe Credit There are other groups that use these terms to embrace the inclusion of lenders that are not mainstream but referred to commonly as fringe lenders or Community Lenders. A distinction is made (as in the example below) between lenders exposed to this sector who have “a community or social agenda inherent in the purpose or mission” and those lenders who are not concerned with the alleviation of suffering. Some argue that a subjective assessment of the lender’s motivation is necessary, as those lenders who are not concerned with helping the community should be excluded from the micro finance label. For example: “Any definition of micro finance that includes payday lenders such as applied in the issues paper is incorrect, as these lenders do not have a focus on poverty alleviation or to the goals of community strengthening”. Source: Good Shepherd and Brotherhood of St. Laurence cited in The Report of the Consumer Credit Review, 2006. MISC - Consumer Credit Report 11 The views expressed conveniently appear to embrace the charter of the group. It is not uncommon therefore for charitable organisations to regard the use of the term fringe as excluding their charitable credit programs, and including only those higher cost, for-profit, lenders: “e.g. In this [fringe] market, products and services are offered by commercial entities, on a for profit basis, but often at a higher cost and/or more onerous terms than those offered by mainstream market”. Source: Howell, N. (2005). Financial exclusion and microfinance: an overview of the issues. A further term ‘fringe credit’ is equally mystifying and has attracted several interpretations. These fall into two streams: 1) Those that define fringe lending by the lenders included or excluded, in other words by lender characteristics; and 2) those that take a view that such lending is aimed at consumers financially excluded from mainstream credit or other consumers with a broader perspective, in other words by borrower characteristics. Essentially, regardless of where these arguments originate, they have in common three themes: 1) Certain operators in the environment do not wish to be associated with others, for example, charitable not for profit demand separation; 2) Mainstream Lenders are reluctant to be associated with some subsidiary lenders such as payday lenders, but not others such as finance companies, even those non conforming companies; and 3) there is a definite argument as to who characterises the consumer market (i.e. financially excluded and poor or not poor). The MISC View Our preliminary consumer research and that of other organisations worldwide, suggests that it is not necessarily the financially excluded and the poor that are the predominant users of newer forms of lending, be they not for profit or other. As the Australian Financial Services Cooperative states: “It is important to remember…that 70% of micro-borrowers, in Victoria, are not socioeconomically disadvantaged. They have substantial and continuing employment and are not borrowing in circumstances of desperation. Rather, they borrow as a matter of convenience because they have temporarily failed to budget for a current need and/or because they prefer to utilise micro-lenders’ services, rather than continue with, or attempt to acquire bank provided credit cards.” Source: Australian Financial Services Cooperative, cited in The Report of the Consumer Credit Review, 2006. We believe, on the basis of our pilot research and that which will follow with our Stage 1.2 reporting, that the consumer research will clearly demonstrate the robustness of our view. If the Consumer test is not one of financial exclusion but one of financial stress, such stress being short or long-term, it will automatically subsume some of the poor (financially excluded) but not all. Hence, any lender or party, who offers a credit solution, should in theory not be excluded. Accordingly, MISC adopts a Micro Credit label as opposed to fringe lending or micro finance, and makes no profit distinction or lender distinction. For example the term Micro Credit may have 3 branch extentions: Micro Credit Divisions: • • • Branch 1: Community finance (to steal from the UK definition including not for a profit and LILS) Branch 2:Mainstream Lender provider Branch 3: Subsidiary lender provider MISC - Consumer Credit Report 12 MISC Definition of Consumers Next, the sensitive issue of identifying the consumers in Victoria affected and the key question: “What consumers are regular and periodic users of this Credit environment?“ The Consumer Credit Review is especially concerned with creating fairer treatments for “vulnerable and disadvantaged consumers”, but it is primarily concerned with non-permanent disadvantage. (This is quite separate from the boarder objectives of the CAV whose charter embraces all groups including those permanently disadvantaged and removed from the credit environment.) This distinguishes the review from one specifically directed to those more long-term disadvantaged in the community, e.g. homeless, indigenous institutionalised etc., and those considered as the poor or at the bottom tier of the economic ladder. In the context of a short-term prerequisite, the two terms can be interpreted in numerous ways and indeed have been. However, the MISC view is that they can be treated as mutually exclusive in setting the framework on which consumer research is ultimately derived. MISC believes ‘disadvantaged and vulnerable’ will by nature include those consumers who might be excluded from the normal financial networks, as well as those who have access. The classification of Kempson (UK) suggests five types of exclusion: Access Exclusion (e.g. Credit risk related), Condition Exclusion, Price Exclusion, Marketing Exclusion, and Self Exclusion. Most of these may be either permanent or periodic and only some (e.g. access exclusion) might prevent consumers from any credit access. However, financial exclusion in all its expressions is not a prerequisite characteristic of financially disadvantaged and vulnerable. Additionally MISC adopts the view that while long term disadvantaged consumers are outside the scope of its research we acknowledge that some of these consumers, may become Micro Credit consumers at various times. Financial disadvantage and vulnerability can both arise when financially included consumers have some short-term conditions. Such conditions make them more vulnerable or they may even make a choice to be excluded. These conditions by nature are not all permanent. MISC is thus concerned with vulnerable and disadvantaged consumers who are undergoing some periodic stress whether they be long-term disadvantaged or short term. The MISC consumer research therefore is specifically directed to financially stressed consumers who are experiencing this condition. In the short and long term they will represent all financially included consumers. In the long term, they will include some of those financially excluded. Thus they will comprise consumers from all of the financially included camp, and those periodic financially excluded consumers who are price excluded, marketing excluded or self-excluded. The chart below encapsulates this conceptual framework. MISC - Consumer Credit Report 13 MISC - Consumer Credit Report 14 CONCLUSION This document was intended to report on several selected aspects of Micro Credit activity in Victoria and the typical consumer who might use those credit options. In particular, the objective was to trace all providers of Micro Credit so that a view could be derived of regional versus metropolitan on the basis of coverage and availability. Product options provided by lenders to Victorian consumers were also considered. These options could be accessed by Victorians, in regional and metropolitan areas, in particular those consumers who might be financially disadvantaged and vulnerable. Next the report quantified the extent of Micro Credit usage or financial flows that resulted from this availability and finally how, when and why financially disadvantaged and vulnerable consumers used those lenders and those products. The research process enabled a conclusive view to be taken of some of these aspects but not all. In the latter cases, further consumer research and market scoping or market size research has been proposed to correct this deficiency. Nevertheless a picture has already emerged which permits a partial description of aspects of the issue the Credit Inquiry seeks to address. First, the consumer issue may well be far more insidious than so far has been considered. While there is no real measure of borrowings and debt involved, at least some 1.3 million Victorian consumers will be financially vulnerable and disadvantaged and thus specific targets of Micro Credit products solutions (as well as mainstream). This means that 38% of all adults in 2003 were potentially financially vulnerable and disadvantaged in a periodic sense. Most are likely to reside in Metropolitan Melbourne but 26% are also regionally domiciled. Most will have experienced some financial stress, either short-term or periodic (though not permanent) and in 2003 most of this stress was mortgage or rent related. Options for alleviating consumer stress or available support options are in fact quite numerous and include credit options either mainstream or Micro Credit. Micro Credit options are those that have so far been surveyed and these are considerable. Consumers are faced with a choice of 277 different products sourced across eight major credit product groups. However, this choice is deficient in regional areas and clearly consumers may be more disadvantaged in these regions than their colleagues in Melbourne. This is especially so of Micro Credit product provided by subsidiary lenders, not mainstream, where the opposite is the case. The choice is greatest for unsecured lending and payday loans and less so in other chattel lending (not pawnbroking) and unsecured small amount lending. The imposition of fees rather than interest is a more common cost regime deployed. When available in regional areas Subsidiary Micro Credit Lender rates are higher than for Metropolitan consumers. In comparison, for Mainstream Micro Lending, however, consumers in Regional Centres can be better off cost wise. Consumers can be subjected to what might be termed as obscene debt traps. In some cases after continuous borrowing the amount of debt outstanding for 10 weeks can be 1680% of the original. While product options cannot be independent of distribution, the availability of lenders (be they mainstream or subsidiary) is limited with some 2000 lender sites distributed throughout the state and each site serving some 2400 persons. Here, Mainstream Lenders are the most viable accounting for two thirds of all distribution with regional coverage, for them, far more important. In fact subsidiary micro lenders are not well site represented. This is especially so in country Victoria. Their representation is largely the result of larger number of pawnbrokers than any other subsidiary lender type and is followed next by short-term loan specialist (many lending on an unsecured basis). Not coincidentally it is this group that provides the greater product choice but this is largely Metropolitan restricted. MISC - Consumer Credit Report 15 In essence this preliminary research stage (1.1) clearly shows that a serious issue exists in Victoria, in which a large number of potentially vulnerable or disadvantaged consumers are experiencing financial stress. They have a choice of financial solutions but these are mostly from mainstream lenders, who on one hand provide a more limited product choice but on the other hand make that more widely available. The subsidiary lenders and product choice they offer are the very opposite. When these consumers seek these options out, their financial stress may be further exacerbated enhancing hardship not alleviating it. If they do not seek these options and instead rely on the state the economic cost will be considerable. If they instead accept this burden and the credit environment provides a short-term fix the long-term economic cost is amplified. Thus the key issue remains i.e. measuring the value of the burden. (Their behaviour as a result and the size of the debt they accumulate is yet to be measured and clearly must be.) The report, limited as it is, nevertheless is successful we hope in answering certain questions of relevance to the Credit Inquiry. This First Stage Assists in Answering Questions Limited, as it is the report, nevertheless we trust, is successful in answering certain questions relevant in the Consumer Credit enquiry immediately. The questions presented below represent some, but certainly not all, of the fundamental issues that are posed by the current credit review. The initial results of this five-part report provide some insight into possible responses. Question 1: What defines the consumer market that is embraced by the term “Financial Disadvantage and Vulnerability” and are these consumers financially excluded or included or both? How can we find these consumers? Answer: Existing stakeholder reporting to the CAV and other research often cited can sometimes be contradictory, but some research assumes consumers must be financially excluded. Is this right? Overseas research shows it may not be. Overseas research shows it is more feasible and accurate to find consumers that are under financial stress regardless of exclusion. This will allow proper measurement Question 2: How do we find among them those financially disadvantaged and vulnerable consumers so that they can be assisted /supported? Answer: Considerable research experience both domestically and globally has shown that certain stress factors can be articulated, and that these factors can be used to identify consumers. MISC research reveals additional identifiable stress factors that are even more intrusive. Nine stress conditions that allow the identification of the financially disadvantaged and vulnerable consumer have been articulated by MISC, for example: a) Stress from mortgage/rental payment versus income imbalance b) Inability to heat home c) Went without meals d) Unable to raise $2000 MISC - Consumer Credit Report 16 Question 3: How do we describe these consumers and their experience in such a way that they can be identified and specifically accessed to provide meaningful evaluation of their circumstances? Answer: Initial evidence after isolation from existing research sources, i.e. Census and HILDA survey shows 800,000 Victorians may be under financial stress, or one adult in every four. Plus 500,000 are rent and mortgage stressed. This was a total of 1.3 million Victorians. This may suggest that the “vulnerable and disadvantaged consumers in Victoria are a substantial number of stressed consumers. Question 4: Are these consumers financially excluded? Answer: No. These consumers will have access to the credit environment at times. If we further count those excluded the numbers will be far greater. Question 5: Does the current credit environment in Victoria provide financially disadvantaged and vulnerable consumers with financial solutions? Answer: Credit appears better in Mainstream Lending contexts than subsidiary where the consumer has a choice and is not forced to choose only certain products and providers. Micro lenders provide more limited choice. Question 6: Can this financial solution be accessed in Metropolitan Melbourne? Can it be accessed in regional Victoria? Answer: Conditions are very different in country versus Metropolitan. Country is better served by Mainstream Lenders and products. Metropolitan is better served by both, but Subsidiary Micro Credit Lenders still have relatively low presence. No tangible evidence to date of real growth all anecdotal. Question 7: What is the actual experience of these consumers and what is the financial extent of that experience in a Victorian economic context? Answer: Past research provides no insight as methods often fail to find sufficient samples of consumers. All research to date has been unsuccessful in applying any significant or worthwhile consumer representation. The consumer remains hidden, as traditional research methods cannot isolate them. The solution is to go direct. With further research, stakeholders will provide 10,200 direct consumer contact opportunities from which it is possible to derive a useable sample of 7000. MISC - Consumer Credit Report 17 Existing domestic research shows conflicting and unreliable speculation of financial context. These suggest Micro Credit Lending Australia wide is tiny but omits measures of 10 key hidden sectors, e.g. community lending, unsecured personal loans. Global benchmarks are no better but suggest potential Micro Credit Lending might approach $US113 billion. Furthermore, there is no data accessed by any research to date on Mainstream Lending exposure to this market. In the absence of micro credit flow evidence the USA experience would if analogous to Aust reveal a potential micro credit environment in Aust of $10b plus. Question 8: Does that experience seriously disadvantage these consumers further thereby imposing an avoidable burden on the state? Answer: [Subject to further research in Stage 2 – Market Flow Measures] Question 9: Have mainstream and subsidiary lenders penetrated this consumer market, how and to what commercial extent? Answer: [Subject to further research in Stage 3] MISC - Consumer Credit Report 18 ATTEMPT TO MEASURE - DEMAND FOR SMALL CREDIT In this module we outline the existing evidence to assist us in defining and describing the consumer in this market. The results of our literature review culminate with an interrogation of an existing National survey database to isolate Stressed Consumers and the measurement of them at 2003. Further pilot research undertaken by MISC in 2006 as a pre cursor to a direct Micro Credit user survey is described ion Module 5 along with recommendation for additional 2006 research required. The flow chart described fully in Module 5 depicts those research steps already completed and partly described herein and those additional stages recommended. Introduction: The Existing Consumer Research Evidence Having defined who we mean are the target consumer the next issue is how can we find and measures these affected Victorians .In order to assess the size and extent of credit use by those financially and disadvantaged consumers, research must adopt an economic perspective in measuring both supply and demand. The measure of supply of credit (Micro or Mainstream) serving the financially disadvantaged and vulnerable is facilitated at an institutional level (see discussion in Module 4). The measure of demand can only be done from referable consumer works. This section of the reporting describes the methods by which consumers and their Micro Credit demand can be first identified and measured. MISC reviews the attempts to date and proposes that the best method of identifying financially vulnerable and disadvantaged consumers is achieved by tracing those consumers who are undergoing financial stress and thus are more easily identified from those “financially vulnerable and disadvantaged”. The existing understanding of consumers exposed to conditions that lead to financial disadvantage, and leaving them financially vulnerable, has been hamstrung by considerable difficulties in establishing a means of identifying and isolating consumers who might be described as financially vulnerable or disadvantaged. Another difficulty occurs in finding sufficient numbers of respondents to make the research process worthwhile. Various attempts to do this have been undertaken domestically and globally. Research attempts to date show that the Australian experience has yielded useful responses of no more than 400 for Victorian consumer experiences, and usually less than 100 of specific borrower types. The largest collection of 418 respondents conducted in 1999 is now well dated. Based on more than 7,800 telephone interviews conducted with a sample drawn from the general population, the aim was to isolate those consumers who had taken out any loan in a specific period. Wastage even at that more expansive qualification was high as 7,800 consumers had to be screened first to yield 1,600 national respondents, and 418 from Victoria (i.e. a one in five strike rate). More recently in Australia, the Australian Government Department of Family and Community Services has commissioned and funded the Melbourne Institute at The University of Melbourne to conduct a survey of the Household, Income and Labour Dynamics in Australia (HILDA). For this stage of the MISC report, the HILDA data from this study has been used and analysed. Although the study was conducted across Australia, only the data from Victorian consumers has been used, and this was on the basis of those living in Melbourne, Regional Centres, and Outer Regional areas. In total, more than 3,000 people aged over 16 years old were in the sample for the data collected in 2003 (referred to as Wave 3 having commenced in 2001 as Wave 1). For the purpose of the MISC report, this sample was weighted to the population. MISC - Consumer Credit Report 19 The same necessity to construct large samples to yield usable groups has been adopted overseas. Because of the high wastage (i.e. low strike rates obtained) through normal sampling, it has not been uncommon for final useable samples to be small. In the US for instance, a face-to-face and telephone survey of 1,532 adults yielded a qualifying sample of 735. This one in two strike rate was achieved as the survey could identify populations with low income before sampling. The latest UK research, which has been the most ambitious, was focused on poorer consumers. As a probability sample it was not concerned with smaller segmentation and all interviews could be used. Because of this, a large sample of more than 5,000 homes were included in the interviews. When including student loans, only 19% of the sample who were all classified as poor, were identified as having used Micro Credit, questioning the use of Micro Credit in the UK. The researchers found it necessary to offer a £10 incentive (AUD$25-$28) in order to attract cooperation across a wide range of finance issues, thereby adding further to the cost of the research. These examples are typical of research approaches wherein researchers are forced to sample large populations that yield low strike rates. The only example where this was not the case is the Canadian experience where a survey specifically isolated 2,000 payday lender customers. This was possible only through lender/stakeholder cooperation, and supply of direct customer contacts (similar to the proposal for MISC Stage 1.2 research). Globally, the research pictures are not much better than in Australia currently, except where initial direct contact has been enabled through a specific unique research phase. MISC - Consumer Credit Report 20 The table lists some of the previous studies that have been conducted into consumer behaviour in the consumer credit market and more particularly, the measure of success they have achieved in isolating Micro Credit users. Global and Domestic Review of Consumer research Methodology approaches and Customer segmentation evidence Date Research Title Source Justin Malbon, Law School, Griffith University Country Australia Method Telephone survey Personal Loans National Erxc WA 6 Focus Groups Cathy Avram for the Australia Consumer Credit Legal Service Australian Bankers Association Dean Wilson for the Consumer Law Centre Victoria Australia Telephone survey Personal Loans 6 Focus Groups Actual No. of people Responde contacted nts 7,812 1,620 (including 418 Victorians) 60 597 Sep-99 Taking Credit: A Survey of Consumer Behaviour in the Australian Consumer Credit Market 1997 Information and Consumer Credit Decisions Aug-97 Uniform Consumer Credit Card Code Research: Key Results Jul-02 Payday Lending in Victoria - A Research Report 48 Australia Street Survey (One Respondent per Hour) In-depth Interviews 10 Surveys and 18 Interviews Telephone Interviews and Directed Subsidiary Market Customer Contacts Approximately twothirds telephone interviews, one-third face-to-face 11 Localities 78 12 74 Borrowers Contacted Canadian Lender Customer List 28 Sep-04 Solicitor Lending to Consumers Jun-05 Understanding Consumers of Canada's Payday Loans Industry Nicola Howell for Australia Consumer Credit Legal Service Inc. (Vic) Environics Research Canada Group for CACFS 2,000 1999 Christopher Berry for To Bank or Not to Bank: A Survey of Low- MetroEdge income Households US Jul-04 Mar 2006 Managing Multiple Debts: Experiences of County Court Administration Orders among debtors, creditors and advisors Financial Capability Baseline Survey Elaine Kempson and Sharon Collard for the Department of Constitutional Affairs UK In-depth Interviews 735 1,532 (from 500 households in 3 cities: Chicago, Los Angeles and Washington D.C) 30 Financial Services Authority UK Dec 2003 Affordable Credit: The Way Forward Collard, E. and Kempson, E. UK Face-to-face Interviews. Offered £10 incentive for participants Face-to-face Interviews. 5,328 1,070 Source: MISC Australia compiled research; See Appendix for complete list of references MISC - Consumer Credit Report 21 How current research has identified financial stress amongst consumers The identification of financial stress is not new, nor is the attempt to measure a consumer according to a particularly stressful condition, whereby research into characteristics of financially stressed individuals has been conducted in recent years. The Australian Bureau of Statistics (ABS) Household Expenditure Survey 1998-1999 highlighted the distinction between poverty and financial stress. The ABS study raised questions about household cash flow problems and difficulty in accessing financial resources as an indicator of financial stress, rather than relying on the benchmark poverty line as an indicator of poverty. While the poverty statistic may be a good indicator of financial stress due to low income, it does not reflect those people who live above the poverty line, but are still financially unstable. The experience of financial stress is not limited to poor people. In other words, people who are financially better off may also experience periods of financial stress. Based on previous research into the area, this study has identified nine key indicators of financial stress. 1. Asked for help from welfare The first indicator is whether the individual required assistance from welfare. Research conducted for the Consumer Law Centre Victoria (CLCV) found that consumers of payday lending, who tend to be financially stressed, also have some tendency to rely on welfare payments. The study found that welfare payments from CentreLink constituted the main source of income for 38% of the respondents. This is supported by Australian research into the payday lending industry. 2. Asked for help from family and friends The Personal Finance Research Centre (PFRC) 2006 Research into Financial Capability in the UK found that people often borrow informally by asking for help from friends, family or someone else in the community. 11% of the respondents indicated that they engaged in these informal lending practices. The study also found that those who borrowed from friends and family often had other types of loans, such as a personal loan, a student loan or a car loan. The researchers suggest that these people borrow because they may be unable to obtain additional credit from the mainstream market. Loans from pawnbrokers and a Social Fund, another indicator of financial stress, were found to be more common amongst people who asked for help from family or friends. Also, according to the 2002 study on the characteristics of debt in the UK, people who are in debt are more likely to receive money from friends and family in the form of gifts or loans, than those who are not in debt. 3. Could not pay bills on time The ABS 1998-99 study found that 16% of the population are unable to pay bills on time. Also, in a 2002 study on the characteristics of debt in the UK, the Personal Finance Research Centre (PFRC) defined people ‘in debt’ as people who are unable to pay utility bills or other household payment commitments on time. The inability to regularly meet bill payment deadlines is an indicator of constant financial strain, which may result in a continual cycle of debt. Four in ten families in the UK indicated that they had been experiencing this kind of financial stress for more than a year, while 25% of people who paid their bills in arrears also had other financial commitments, such as consumer credit loans. The CLCV study of payday lending in Victoria in 2002 also found that one of the main reasons for consumers to take out a payday loan was to pay household bills or other necessary expenses. 32% of respondents indicated that bill payment was the main reason for taking out a payday loan, while 26% indicated the purpose was to cover day-to-day living expenses. MISC - Consumer Credit Report 22 4. Could not raise $2000 The 1998-99 ABS Household Expenditure Survey found that 19% of respondents were unable to raise $2,000 for something important. This indicates that a relatively high proportion of the population experience financial stress, particularly when major events or unforeseen circumstances occur that require the provision of a substantial sum of money. Medical or funeral expenses, for example, may require lump sums of money to paid for services. People who are unable to obtain $2,000 quickly for such circumstances are deemed to be experiencing financial stress. 5. Could not pay rent/mortgage The CLCV report on payday lending in Victoria found that another reason for taking out a payday loan was to pay rent or mortgage. 7% of respondents took out the loan in order to meet rent or mortgage payments. This indicates that some financial stress may be a result of the need to meet regular rent or mortgage payments. The 2002 PFRC study on the characteristics of debt found that people who pay rent are more likely to have additional non-mortgage debts than people who pay mortgage. This is reflected in the different levels of income of the two groups and different priorities. Rent was found to be one of the first commitments that families allow to fall into arrears, while mortgages tend to be the last. 6. Pawned or sold something Another indicator of financial stress is whether people have resorted to pawning or selling personal items of value in order to raise immediate funds. The CLCV found that 15% of people who had taken out payday loan in Victoria had also used a pawnbroker in the previous 12 months. This indicates that financially stressed individuals who use payday loans may also turn to pawnbrokers or other similar institutions for financial assistance. 7. Went without meals The 2006 Report of the Consumer Credit Review in Victoria found that consumers with a high risk of financial difficulty may compromise on some expenses such as rent and food. This suggests that financially stressed individuals may go without meals for a period of time in order to save money for other expenses. 8. Was unable to heat the home The ABS Household Expenditure Survey of 1998-99 also used an inability to heat the home as an indicator of financial stress. Although the ABS study found that only 2% of the population were unable to heat the home, this indicator is included in this research as a measure of comparison in order to better understand the characteristics of people who are financially stressed. 9. Accommodation stress The Tenants Union of Victoria have said it was concerned that those people who are paying 30% or more of their income of residential expenses may be experiencing housing stress. Their findings showed that almost 10% were spending more than half their income on rent. The HILDA data allows Gross revenue assessment against outgoings and with further manipulation allows a net income prospective .We believe that at a Gross measure some 20% + of gross income expended on Rental and Mortgage payment is equal to the benchmark established by the Tenants Union i.e. 29% -30% + Hence, this dimension has been added as a separate variable as a measure of financial stress. MISC - Consumer Credit Report 23 The table provides a summary of the research available across the identified indicators of financial stress. Summary of Domestic and Global research attempts to identify stressed consumers Stress Group Asked for help from welfare Publication Dean Wilson for Consumer Law Centre Victoria, Payday Lending in Victoria - A research report Payday Lending: The Case for re-regulation of the fringe-credit market PFRC, Incentives to save: encouraging saving among low-income households Year 2002 Country Australia Findings 20% of payday loan consumers had received the CentreLink Advance Payment in the previous 12 months. 2002 Australia Payday loans are usually accessed by welfare recipients. 2005 UK Asked for help from family/friends PFRC for Financial Services Authority, Financial Capability Baseline Survey– Results ABS, Household Expenditure Survey PFRC, Incentives to save: encouraging saving among low-income households 2006 UK Included claiming social security benefits as a possible response to a hypothetical question about becoming unable to work for three months or more. 11% of respondents say they borrow from friends, family or someone else in the community. 10% of the population indicated that they borrow from friends and family. Included borrowing from friends and family as a possible response to a hypothetical question about becoming unable to work for three months or more. People are said to be 'in debt' if they have fallen behind with the payments of their household bills or other consumer credit commitments. 18% of households experienced financial difficulties and were behind in bill payments. 32% of respondents indicated the reason for taking out a payday loan was to pay bills and 26% of respondents said the purpose was to cover living expenses. 16% of respondents indicated that they were unable to pay bills on time. Only 1% of respondents considered themselves to be experiencing “real financial problems” and fall into arrears with bills. Families with children are more likely to experience difficulty. 199899 2005 Australia UK Could not pay bills on time PFRC, Characteristics of Families in Debt 2002 UK Dean Wilson for Consumer Law Centre Victoria, Payday Lending in Victoria - A research report 2002 Australia ABS, Household Expenditure Survey PFRC for Financial Services Authority, Financial Capability Baseline Survey– Results 199899 2006 Australia UK MISC - Consumer Credit Report 24 Summary of Domestic and Global research attempts to identify stressed consumers (cont’d) Stress Group Could not raise $2,000 Publication ABS, Household Expenditure Survey Year 199899 Country Australia Findings 19% of respondents indicated that they were unable to raise $2000 for something important. 92.5% of people aged 18-64 living on low income in the UK say they would find it difficult or impossible to raise £200-300 in an emergency. 7% of respondents indicated that the loan was used to pay for rent or mortgage. 15% of payday loan consumers had used a pawnbroker in the previous 12 months. Affordable Credit: The Way Forward 2005 UK Could not pay rent/mortgage Pawned or sold something Dean Wilson for Consumer Law Centre Victoria, Payday Lending in Victoria - A research report Dean Wilson for Consumer Law Centre Victoria, Payday Lending in Victoria - A research report ABS, Household Expenditure Survey 2002 Australia 2002 Australia 199899 2006 Australia Went without meals Consumer Affairs Victoria, The Report of the Consumer Credit Review Australia 4% of respondents indicated that they pawned or sold something in order to raise funds. Consumers with a high risk of financial difficulty can be forced to compromise on discretionary expenses (such as rent and food). 3% of respondents went without meals. 2% of respondents were unable to heat the home. Was unable to heat home ABS, Household Expenditure Survey ABS, Household Expenditure Survey 199899 199899 Australia Australia Source: MISC Australia compiled research; See Appendix for complete list of references MISC - Consumer Credit Report 25 Use of HILDA 2003 Survey by MISC Australia The Household, Income and Labour Dynamics in Australia (HILDA) Survey is a statistical report covering the areas of households and family life, incomes and wealth, employment and unemployment, and life satisfaction and well-being. Conducted on an annual basis, the data provides an overview of Australia’s social profile that can then be compared to determine what and how changes are occurring. The Survey began in 2001 where all members of the household form the basis of the panel to be interviewed as well as in each subsequent wave. Wave 3 data from 2003 has been used. In Wave 3, the consumers are divided into areas on the basis of Melbourne, Regional Centres, and Outer Regional. The sample size was 3,070 with 2,195 living in Melbourne, 727 in Regional Centres, and 148 in Outer Regional. The sample was weighted by MISC to the population in Victoria. It is important to be mindful that the Discussion Paper released by Consumer Affairs Victoria in 2004 titled “What do we mean by vulnerable and disadvantaged consumers?” acknowledges that both market and personal dimensions contribute to the vulnerability and disadvantage faced by consumers. However, when using the HILDA data, there is no allowance for the impact of market dimensions and their potential impact on consumers, including consumers’ information, the motivation of buyers and sellers, and the capacity of markets to ‘fail’ in ways that are detrimental to consumers. In addition, personal dimensions impact on consumers and consist of attributes and/or circumstances that affect how purchase decisions are made and how a consumer is positioned in a transaction relative to the seller. The personal dimension incorporates mental and physical capabilities, and personal circumstances (e.g. income, age, class, ethnicity). As the HILDA questionnaire relies on the completion of a questionnaire, those consumers with mental impairments, are illiterate, or are unable to read or speak English to a minimum standard given it is their second language would have been unable to complete the survey and would therefore have been forced to be excluded from the sample. The homeless as well as those living in institutions are also excluded. It is important to remember that those who are the most vulnerable or disadvantaged and therefore under the most financial stress are homeless people and those living in institutions, or those facing other personal circumstances resulting in the level of financial stress being higher than the HILDA data suggests. Updating HILDA Survey by MISC Australia In order to verify the HILDA Survey data, the Census of Population and Housing data is proposed may be further analysed to compare similar dimensions. The Census aims to count every person who spent Census Night in Australia. In comparison to the HILDA Survey, the Census aims to include homeless people and people camping out. Stage 1.2 of the MISC research program will ultimately upgrade the HILDA data with the full population and correlate results with projected population census data. Foot Note: It has been proposed that in the event that Stage 1.2 proceeds, the consumer data collected in 2006 by MISC from the stakeholder panels will be reviewed and compared to the earlier HILDA 2003 results so as to report on the changing nature of stressed consumers in Victoria. Given that the HILDA study is longitudinal one and the same individuals are surveyed every year, this will help to determine the long-term financial stress being experienced by Victorians and whether it has improved or got worse from 2003 to 2006. MISC - Consumer Credit Report 26 Preliminary Quantification of Stressed Consumer in Victoria Based on the Wave 3 the HILDA Survey data from 2003 (using a sample in Victoria of 3,070 and weighted to the population) suggests that some 1.3 million Victorians could well be currently exposed to financial stress and thus be classified according to the Inquiry definition of financially disadvantaged and vulnerable. This is more widespread than perceived by any literature on the subject and suggests that the credit inquiry is not only timely but may have a substantially impact on the Victorian community. Nearly 800,000 of these financially distressed consumers have other than rental or mortgage payment stress but more than 500,000 or 27% of all households in Victoria have additional burden imposed by a serious short fall of funding after payment of rent or mortgages from net available incomes. Note: As consumers that are suffering certain personal characteristics that increase their risk of being vulnerable or disadvantaged are excluded from the HILDA survey and any further analysis, the picture of Victorian households that is painted should be treated with caution as the results may be understated. MISC - Consumer Credit Report 27 Quantification of Victorian Stressed Consumer including Accommodation costs stress. Evidence from 2003 survey results: TOTAL (Population 3,472,145) Number under Financial Stress 524,039 Melbourne (Population 2,579,685) Number under Financial Stress 418,420 Regional Centres (Population 744,778) Number under Financial Stress 86,286 Outer Regional Population 147,682) Number under Financial Stress 19,333 Measure of Financial Stress Residential expense as proportion of income exceeds 30% (*) Asked for help from family/ friends Could not pay bills on time Could not raise $2,000 Could not pay rent/ mortgage Went without meals Pawned or sold something Asked for help from welfare Unable to heat home Total: Duplicated Total: Duplicates Removed (Residential Expenses Excluded) Total: Duplicates Removed (Residential Expense Added but may contain duplicates) % 16% 10% 9% 9% 6% 4% 3% 3% 2% n.a. 21% % 12% 11% 11% 11% 6% 3% 4% 3% 1% n.a. 24% % 13% 14% 16% 13% 4% 2% 5% 7% 4% n.a. 36% 369,442 336,535 332,537 189,806 112,310 115,506 107,199 74,009 1,822,946 793,280 259,882 227,256 225,867 141,822 89,154 80,751 70,349 60,109 1,307,818 552,723 88,347 85,342 87,160 42,529 20,890 28,021 26,475 8,635 414,763 186,745 21,213 23,937 19,510 5,395 2,266 6,734 10,375 5,265 100,365 53,812 1,317,319 971,143 n.a. 273,031 n.a. 73,145 n.a. * Footnote: Measured initially as the share of Gross income at 20%. This equates to 29%-30% if net after tax income is alternatively measured Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria MISC - Consumer Credit Report 28 This analysis is concerned first with the 8 primary measures of financial stress .In the next sections we will deal specific ally with the ninth measures or Accommodation stress. Overall, those living in Outer Regional areas are more likely to suffer from financial stress on the basis of the eight measures of financial stress from the consumer data. That is, 53,812 or 36% of people living in Outer Regional areas are suffering from some form of financial stress. In addition, those people living in Regional Centres in Victoria are more likely than those in Melbourne to suffer from financial stress. That is, 186,745 or 24% of those living in Regional Centres compared to 552,723 or 21% in Melbourne suffer from financial stress based on the eight dimensions. Across Victoria, this translates into almost 800,000 people aged over 16 years who are under financial stress. On the basis of residential stress where more than 20% of one’s gross income (i.e. 29% to 30% if on net income) across all sources (i.e. wages, government benefits, business income, investments etc.) is spent on either rent or mortgage payments, one is also considered to be suffering from financial stress. These people living in Melbourne were more likely to be suffering residential-based financial stress where 418,420 or 16% of people were affected. In Outer Regional areas, 19,333 or 13% of people aged over 16 are paying more than 30% of their total household income on rent or mortgages. Finally, 86,286 12% of people living in Regional Centres of Victoria are affected by residential-based financial stress. Across Victoria, this equates to 524,039 people or 15% of the Victorian population. When added to the number of people suffering from financial stress across the nine dimensions measured by the HILDA, as many as 1.3 million people could be affected across these nine different measures of financial stress. However, this does not account for the possibility that there may be some overlap in those people suffering financial stress across the eight measures and those suffering from residential-based financial stress. As the largest individual stress group of the eight dimensions measured by the HILDA people considered to be under financial stress were most likely to ask for help from their family and friends. This is probably the least costly form of financial assistance as interest repayments may be non-existent. It may also be the first sign that people are starting to enter into a cycle of financial stress. People may start to become embarrassed or ashamed if they have to ask for financial assistance from friends or relatives on too many occasions so may have to resort to other means. Those living in Outer Regional areas were more likely to ask for help from family and friends (21,213 people or 14%), followed by Regional Centres (88,347 people or 11%) and Melbourne (259,882 people or 10%). The second highest number of the population who indicated that they were under financial stress was on the basis of not being able to pay their bills on time. Outer Regional areas were most likely to be affected with 23,937 people or 16% being put under financial stress on this basis. 85,342 people or 11% of people living in Regional Centres were also unable to pay their bills on time Finally, those in Melbourne did not find it as difficult to pay their bills on time, but 9% of the population, or 227,256 people were still under financial stress. Across Victoria, over 332,000 people would be unable to raise $2,000. Again, those in Outer Regional areas faced greater financial difficulty and were least likely to be able to raise $2,000 (13% or 19,510 people). This is followed by those in Regional Centres and then Melbourne where 11% of the population or 87,160 people, and 9% of the population or 225,867 people respectively would not be able to raise $2,000. MISC - Consumer Credit Report 29 Rent or mortgage payments made out of time, by those people living in Melbourne and Regional Centres of Victoria suffered the same amount of financial stress. That is 6% of the population or 141,822 people in Melbourne and 42,529 people in Regional Centres found it difficult to pay their rent/mortgage on time. In comparison 4% or 5,395 people living in Outer Regional areas could not pay their rent/mortgage on time. People living in Melbourne were also more likely to go without meals, another indicator of financial stress. That is 4% of the Melbourne population or 89,154 people went without meals. Across Victoria, those in Regional Centres were next most likely to go without meals at 3% or 20,890 people, followed by those in Outer Regional areas at 2% or 2,266 people. Perhaps Outer Regional areas are more community based so friends and neighbours may be more inclined to invite people in need over for a meal than those in more built up city areas where people are less community oriented. People living in Outer Regional areas were more likely to pawn or sell something at 5% of the population or 6,734 people. Within Regional Centres, this percentage fell to 4% or 28,021 people. In Melbourne 3% of the population or 80,751 people stated they had pawned or sold something. Across Victoria 115,506 people stated they had pawned or sold something. Those people more likely to ask from help from welfare are living in Outer Regional areas, with 7% or 10,375 people asking for help. This was followed by those living in Regional Centres with 3 % or 26,475 people asking for assistance from welfare. Finally, in Melbourne, 3% or 70,349 people have asked for help. Within Victoria over 74,000 people stated they have been unable to heat their home, another factor identified as an indication of financial stress. Using this measure, those in Outer Regional Victoria were most likely to face this difficulty with 4% or 5,265 people. A further 2% in Melbourne or 60,109 people and 1% or 8,635 people in Regional Centres Victoria were unable to heat their home. MISC - Consumer Credit Report 30 Stressed Consumers. A Profile Summary - Initial Indicators 2003 As people sometimes appear across more than one form of financial stress, duplicates were removed so the true number of people in Victoria suffering from financial stress is revealed. Across Victoria, this number stands at almost 800,000 or 23% of the population. This unduplicated group is now examined to reveal profile characteristics. Summary of Key Profile Characteristics of Financially Stressed Victorians (excludes accommodation stress): Gender Age Employment Status Melbourne Female 16-34 years old Non-working student Regional Centres Female 16-34 years Employed working less than 35 hours per week; Not employed but looking for work; Home duties Between $10,000 and $30,000 pa. Lone person (with or without children) 3 Outer Regional Female 16-24 years Not employed but looking for work; Home duties; Non-working student Less than $20,000 pa. Lone person (with or without children) 2-4 Income Family Structure: Single vs. Couple with or without Children Family Structure: number of children living at home more than 50% of the time Household Structure: Living arrangements Household Structure: Rent Payments Household Structure: Mortgage Payments Receipt of Government Benefits and Allowances Less than $15,000 pa. Lone person (with or without children) 0 Renting/ Board $1 - $199 $200 - $299 Yes Renting/ Board $1 - $99 $1 - $199 Yes Renting/ Board No significant difference $1 - $299 Yes Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria Those who were facing the greatest level of financial difficulty across the three areas of Victoria (Melbourne, Regional Centres, and Outer Regional) were females, single people (either with or without children), were receiving some form of government assistance or benefit, and those who were paying rent/board. On the basis of age, those in Melbourne and Regional Centres were most likely to be aged 16 to 34 while in Outer Regional areas they were 16 to 24 years. In Melbourne, non-working students faced the greatest level of financial stress compared to those in Regional Centres where people may have either been employed working less than 35 hours a week, not employed but looking for work, or performing home duties. Those in Outer Regional areas were also not employed but looking for work and performing home duties, in addition to being non-working students. Across the three areas, there were significant differences in the number of children living in the family home more than 50% of the time and the affect they had on financial stress. In Melbourne, surprisingly those with no children were under the greatest financial stress. In Regional Centres they had three children, while in Outer Regional areas there were between two and four children. MISC - Consumer Credit Report 31 Of those households found to be paying rent, financial stress was more likely in Melbourne when payment amounts were less than $200, and less than $100 in Regional Centres. Within Outer Regional areas, financial stress on the basis of rental payments was proportionate to the population and no significant differences were evident. Of those households paying a mortgage, in Melbourne those under more financial stress were paying between $200 and $299 a week. In Regional Centres this amount was less than $200 while in Outer Regional areas it was less than $300. Selected Demographic Characteristic of Financially Stressed Population Male versus Female: Melbourne Financial Population Difficulty 316,396 236,327 552,723 1,335,181 1,244,504 2,579,685 Regional Centres Financial Population Difficulty 100,509 86,236 186,745 384,503 360,275 744,778 Outer Regional Financial Population Difficulty 37,108 16,704 53,812 92,386 55,296 147,682 Gender Female Male Grand Total Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: While women make up slightly more than half of the sample of those living in Melbourne, they were considerably more likely to be experience some form of financial stress than men, with 57% or 316,396 females experiencing at least one of the eight factors of financial stress. ii. Regional Centres: Women represent almost 52% of the total Regional Centres population, but they represent a slightly higher proportion of people who experience some form of financial difficulty, with 54% or 100,509 financially stressed people being female. iii. Outer Regional: Women in Outer Regional areas are more likely to experience some form of financial difficulty than men. Females represent 69% of financially stressed people in Outer Regional areas, which is equivalent to 37,108 people. This figure is higher than the proportion of women in the total population, which is 63%, or 92,386 people. MISC - Consumer Credit Report 32 Selected Demographic Characteristic of Financially Stressed PopulationAge profile: Melbourne Age Group <16 16-24 25-34 35-44 45-54 55-64 65+ Grand Total Financial Difficulty 19,981 155,009 139,191 84,201 65,248 39,419 49,674 552,723 Population 38,516 418,328 546,385 495,491 402,806 286,968 391,191 2,579,685 Regional Centres Financial Difficulty 4,561 51,566 54,254 24,858 15,411 18,198 17,897 186,745 Population 7,430 102,661 117,202 137,725 129,933 121,647 128,181 744,778 Outer Regional Financial Difficulty 0 20,208 8,026 8,353 10,172 2,163 4,890 53,812 Population 0 38,050 22,064 18,572 25,916 12,052 31,029 147,682 Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: Those aged between 16 and 24 are most likely to experience some form of financial difficulty. This group comprises 28% or 155,009 people in Melbourne who experience financial difficulty relating to the eight factors, despite only representing 16% of the overall population in Melbourne. This difficulty may be associated with their previous lack of opportunities to accumulate enough funds given their shorter working life. A lack of credit history would also lead to them having fewer options in raising a fairly large amount of money and may be more reliant on support from family and friends during periods of financial difficulty. Financial difficulty appears to decrease after the age of 25 and is under-representative of the total population for all cohorts after age 25 when people are more likely to be employed and earning a steady wage. ii. Regional Centres: Within Regional Centres, younger people, those who are aged under 25, are more likely to experience financial difficulty than those above the age of 25. The population sample is evenly spread across most of the age cohorts, although there is a significantly higher proportion of young people in the sample of financially stressed people. The group most likely to experience financial difficulty is aged between 16 and 34, slightly older than for those in the Melbourne city area. That is, while 30% of the population are aged 16 to 34, 57% (or 41,434 people) are aged 16-34 and experience financial difficulty. Similar to those in Melbourne, Regional Centres residents face fewer financial difficulties as their age increases. People aged over 45 comprise of over 50% of the population, but only 28% (51,506) of those facing financial difficulty. MISC - Consumer Credit Report 33 iii. Outer Regional: In Outer Regional areas, the situation for the young is similar. Those aged 16 to 24 are more likely to experience financial stress, than is proportionate of the population, with 38%, or 20,208 people who experience financial stress being in this age group. However, unlike in Melbourne and the Regional Centres, the situation does not necessarily improve for over 25 year olds. Residents aged between 35 and 54 also experience some financial difficulty. This group comprises 34%, or 13,525 people who experience financial stress, which is a higher proportion than the 30% of 35-54 year olds in the total population. This suggests that older people in rural areas face different financial hardships during their life than those living in Melbourne or Regional Centres. Selected Demographic Characteristic of Financially Stressed PopulationEmployment status: Melbourne Employment Status Employed - usually works 35+ hours per week Employed - usually works less than 35 hours per week Home duties Non-working student Not employed but is looking for work Other Retired Grand Total Financial Difficulty 195,626 Population Regional Centres Financial Difficulty 56,159 Population Outer Regional Financial Difficulty 16,632 Population 1,101,056 273,928 47,484 122,585 53,405 69,448 22,767 18,102 70,790 552,723 502,064 241,245 147,420 66,809 49,665 471,426 2,579,685 47,638 23,078 12,452 8,444 9,659 29,315 186,745 163,527 68,578 30,830 17,672 15,564 174,680 744,778 11,589 10,426 7,533 3,747 1,601 2,284 53,812 30,138 23,750 16,146 6,397 2,992 20,775 147,682 Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: The largest proportion (35%) of people experiencing financial difficulty is full-time workers, those that are employed and usually work more than 35 hours a week. However, compared to the proportion of full-time workers in the total population (43%), this figure is low. Although students only make up 6% of the total population, they represent 13% (or 69,448) of those experiencing some form of financial stress. Hence, proportionately, students face much greater financial difficulties than other segments within the population. Other groups likely to experience financial difficulty are people who are employed, but work less than 35 hours a week and people who are not employed but are looking for work. While people who work less than 35 hours a week represent 20% of the total population, they represent 23% of people experiencing financial stress. People who are unemployed but looking for work represent only 3% of the population, but 4% of financially stressed people. MISC - Consumer Credit Report 34 ii. Regional Centres: The employment status profile for people experiencing financial difficulty in Regional Centres residents is similar to that in Melbourne. While full-time workers represent the greatest proportion of people who experience financial stress, they are overall less likely than is representative of the population. Instead, those less than 35 hours a week face greater financial difficulty than those working more than 35 hours. That is, 25% or 47,638 people working less than 35 hours are under financial stress. Other groups that are under financial difficulty on the basis of employment classification are those who stay at home, non-working students, and those not employed but looking for work. This is not surprising, as these groups typically have limited access to disposable funds compared to those with full time or part time work. iii. Outer Regional: Within Outer Regional areas of Victoria, those facing a greater level of financial strain are among the cohort who are not employed but are looking for work. Despite representing only 4% or 6,397 people within the population, this percentage almost doubles to 7% or 3,747 people of those facing financial difficulty. Hence almost 50% of people classified as not employed but looking for work are under financial difficulty. Non-working students also face financial difficulties. Representing 11% of the population, 14% or 7,533 students of those under financial difficulty were non-working students. Those performing home duties and working less than 35 hours a week are also facing more financial difficulties than represented in the population. Selected Demographic Characteristic of Financially Stressed Population – Income profile: Melbourne Financial Population Difficulty 187,579 90,198 31,460 32,028 40,000 42,460 31,769 16,467 80,763 552,723 653,386 336,798 170,527 147,867 161,711 163,486 135,183 145,027 665,701 2,579,685 Regional Centres Financial Population Difficulty 54,005 35,374 21,805 16,370 24,111 9,308 10,255 4,006 11,512 186,745 200,163 126,706 63,992 45,092 56,549 39,265 39,605 35,954 137,453 744,778 Outer Regional Financial Population Difficulty 16,853 16,373 8,091 1,471 2,062 3,641 2,066 961 2,294 53,812 37,398 36,393 16,912 7,037 11,673 10,878 6,500 3,627 17,264 147,682 Employment Status < $10,000 $10,000 – $15,000 $15,000 – $20,000 $20,000 – $25,000 $25,000 – $30,000 $30,000 – $35,000 $35,000 – $40,000 $40,000 – $45,000 > $45,000 Grand Total Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria MISC - Consumer Credit Report 35 i. Melbourne: While only 38% of the population earns less than $15,000, it is not surprising that this cohort of the population is over-represented in terms of financial difficulty whereby 50% or 277,777 are under financial stress. Although 15% of the population earning more than $45,000 are under financial difficulty, more than one quarter of the population is in this cohort. Hence, as income increases, financial difficulty tends to fall. ii. Regional Centres: Within Regional Centres, those earning between $10,000 and $30,000 face the greater financial struggle. Consisting of only 39% of the population, 52 % or 97,660 people are facing financial difficulty. iii. Outer Regional: Unlike Regional Centres residents, those living within Outer Regional areas face greater difficulties the lower their income is. That is, 61% of the population earns less than $20,000 but 77% or 41,317 people within this group are under financial difficulty. Those earning between $40,000 and $45,000 make up 3% of the population but were much more likely to be under financial difficulty, consisting of 4% or 961 people from a population in this band of 3,627. Selected Demographic Characteristic of Financially Stressed Population – Family Structure– Single vs. Couple with and without children: Melbourne Financial Population Difficulty 203,547 97,671 88,126 163,379 552,723 1,187,885 682,876 256,069 452,855 2,579,685 Regional Centres Financial Population Difficulty 80,706 35,967 31,223 38,849 80,706 359,043 232,666 51,056 102,013 744,778 Outer Regional Financial Population Difficulty 14,977 7,837 8,800 22,198 53,812 44,500 42,754 13,787 46,642 147,682 Family structure Couple family with children Couple family without children Lone parent with children Lone person without children Grand Total Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: Couple families with children consist of the largest band within the population. Couple families with children also face the greatest financial difficulty given the financial demands required when raising children. However, this trend is less than representative of the population. That is, 46% of the population are couple families with children but 37% of these families are facing financial difficulties. MISC - Consumer Credit Report 36 In Melbourne, lone parents without children face financial difficulties, comprising of only 10% of the population but 16% or 88,126 in this cohort. Hence, raising children without the support of a second adult places financial stress on the family unit are they are unable to share the financial difficulties with a partner but have more expenses and commitments to meet. Lone persons without children also face higher levels of financial difficulty representing 18% of the population, but 30% or 163,379 people. Again, the lack of a supporting person to share financial burdens with creates increased stress. ii. Regional Centres: Couples without children living in Regional Centres are less likely to have the same financial difficulties compared to their representation within the population as they generally have fewer financial burdens than those with children. Similarly to those living in Melbourne, lone parents with children face an increased level of financial difficulty. Representing just 7% of the population, 17% or 31,223 people who are single parents were facing financial difficulties. This represents more than half in this cohort who are facing financial difficulty. Single persons without children in Regional Centres also face financial difficulties. Comprising of just 14% of the population, 21% or 38,849 people of those facing financial difficulties are from this group. Hence, even without the financial burden of having children, single people are significantly more likely to struggle financially. iii. Outer Regional: Although 29% living in Outer Regional areas are couples without children, only 15% or 7,837 people facing financial difficulties are from this group. In comparison, lone persons without children are significantly more likely to face financial burdens. Consisting of 32% of the population, 41% or 22,198 people of those facing financial difficulty are from this group. Lone parents with children comprise of 9 % of the population but 16% or 8,800 people who are facing financial difficulty. Hence, those in a single relationship are most likely to struggle financially. MISC - Consumer Credit Report 37 Selected Demographic Characteristic of Financially Stressed Population Family Structure – Number of children living at home more than 50% of the time: Melbourne Number of own children living at home more than 50% of the time 0 1 2 3 4 >5 Grand Total Financial Difficulty 109,821 63,975 53,884 20,893 3,892 0 252,465 Population 595,731 395,278 424,518 146,924 27,904 9,496 1,601,702 Regional Centres Financial Difficulty 41,159 25,864 18,481 18,504 2,077 0 106,086 Population 242,300 132,755 95,148 64,315 14,226 7,174 555,918 Outer Regional Financial Difficulty 10,240 3,457 6,470 5,809 2,311 0 28,286 Population 54,226 11,637 15,013 7,494 2,311 0 90,680 Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: Most households with children living there more than 50% of the time have two children. However, in terms of financial difficulty, people living with two children more than 50% of the time appear to have fewer financial difficulties than represented by the population at 21% or 53,884 people. Hence, households with two children face fewer financial difficulties than single child households when compared to their representation within the population as a whole. Surprisingly, the 37% of the population with no children living with them at least 50% of the time had more financial difficulties than represented by the population. That is 43% or 109,821 people. ii. Regional Centres: Within Regional Centres, those with one or two children were only slightly more likely to struggle financially than represented by the population. That is, 41% of the population have one or two children and 42% of those facing financial difficulties are from these cohorts. In comparison, those more likely to be struggling financially in Regional Centres have three children. With only 12% of the population from this group, 17% or 18,504 people with three children face financial difficulties. iii. Outer Regional: In Outer Regional areas of Victoria, those with between two and four children faced greater financial difficulties than represented by the population. That is, 27% in the population have between two and four children compared to 52% or 14,590 people who are facing financial difficulties. MISC - Consumer Credit Report 38 Selected Demographic Characteristic of Financially Stressed Population – Household Structure – Living arrangements: Melbourne Living arrangements Live here rent free Own/Currently paying off mortgage Rent/Pay board Involved in a rent-buy scheme Grand Total Financial Difficulty 5,910 322,093 224,721 0 552,723 Population 26,273 1,946,239 607,173 0 2,579,685 Regional Centres Financial Difficulty 10,742 109,149 66,854 0 186,745 Population 29,770 599,183 113,542 2,283 744,778 Outer Regional Financial Difficulty 4,827 25,547 23,437 0 53,812 Population 9,501 96,760 41,422 0 147,682 Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: Although more than 75% of the population is currently paying off a mortgage or they own their own house, they were less likely to face financial problems compared to those paying rent. That is renters constitute 24% of the population but 41% or 224,721 of those facing financial difficulties. In effect, more than one in three renters are facing financial difficulty. ii. Regional Centres: Similar to the experience in Melbourne, renters face the greatest level of financial difficulty. With 15% of the population renting, 36% or 66,854 people with financial difficulties are from this group. In addition, those who are living rent-free are also facing financial hardship. While 4% of the population in Regional Centres live rent free, they face greater financial difficulties with 6% or 10,742 people from this cohort. iii. Outer Regional: Within Outer Regional areas, again renters face a greater difficulty raising $2,000 than those with a mortgage. That is 28% of the population are renters, but 44% or 23,437 of those facing financial difficulty are from this cohort. Surprisingly, a greater number of those living rent-free also face financial difficulty. That is, 6% of the population is living rent free, but they make up 9% or 4,827 of those facing financial difficulty. This is equivalent to one in every two people within this group. MISC - Consumer Credit Report 39 Selected Demographic Characteristic of Financially Stressed Population Household Structure – Residential related expenditure – Rent Payments: Melbourne Financial Population Difficulty 46,740 118,642 40,169 5,688 7,434 218,675 86,465 296,743 152,345 40,740 24,833 601,127 Regional Centres Financial Population Difficulty 28,376 30,573 7,068 0 0 66,017 41,187 58,988 14,814 0 0 114,989 Outer Regional Financial Population Difficulty 7,467 15,011 0 0 0 22,477 12,455 26,109 0 0 0 38,564 Weekly Rent Payment $1 - $99 $100 - $199 $200 - $299 $300 - $399 > $400 Grand Total Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: Almost 50% of the total population pays between $100 and $200 in rent each week and yet they are even more likely to face financial difficulty at 54%, affecting 118,642 people. Furthermore, 64% of the population pay less than $200 a week but 76% (or 165,382 people) of those facing financial difficulty are from this cohort. Hence, as weekly rental payments increase, financial difficulty decreases suggesting that those with higher expenses are not only earning more but also better manage their money. ii. Regional Centres: Within Regional Centres, 36% of the population are paying less than $100. However, those paying less than $100 find it more difficult, consisting of 43% or 28,376 people. Of the 41,187 paying less than $100 in rent two in three struggled financially. iii. Outer Regional: While considerably more people pay between $100 and $200 in Outer Regional areas, there was no difference in those suffering from financial difficulties on the basis of rental payments. MISC - Consumer Credit Report 40 Selected Demographic Characteristic of Financially Stressed Population – Household Structure – Residential related expenditure – Mortgage Payments: Melbourne Financial Total Difficulty Population 67,627 320,630 71,003 19,732 7,930 6,935 1,625 6,573 181,424 314,689 122,041 55,453 40,941 31,321 32,130 917,205 Regional Centres Financial Total Difficulty Population 43,417 154,905 13,368 1,654 2,707 0 1,104 1,389 63,640 63,675 14,049 13,360 4,825 3,946 5,807 260,567 Outer Regional Financial Total Difficulty Population 9,924 23,690 2,481 1,128 0 0 0 0 13,533 5,599 3,552 0 0 988 0 33,829 Weekly Mortgage Payment $1 - $199 $200 - $299 $300 - $399 $400 - $499 $500 - $599 $600 - $699 > $700 Grand Total Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: A similar pattern exists for those paying mortgages as those paying rent. Even though the total population paying more than $400 per week is 17%, only 13% of this cohort are facing financial difficulties. Those paying less than $300 per week consists of 69% of the population but 76% or 138,630 people are suffering financial difficulties. Hence, those paying smaller amounts off a mortgage and would be expected to earn smaller wages still have greater financial difficulties than those paying more per week for their mortgage. ii. Regional Centres: Within Regional Centres, those paying less than $200 a week face greater difficulties than other bands. That is, while they make up 59% of the population, 68% or 43,417 facing financial difficulties are from this group. iii. Outer Regional: Within Outer Regional areas of Victoria, those facing financial difficulties were generally representative of the population, with those paying less than $300 slightly more likely to be under financial pressure. That is, representing 87% of the population, of those facing financial difficulties, 92% or 12,405 people were paying this amount of rent. MISC - Consumer Credit Report 41 Selected Demographic Characteristic of Financially Stressed Population – Receipt of Government benefits and allowances: Melbourne Financial Total Difficulty Population 149,121 397,855 403,602 2,179,093 0 2,737 552,723 2,576,948 Inner City Financial Total Difficulty Population 65,775 148,541 120,074 594,528 896 1,709 186,745 744,778 Outer Regional Financial Total Difficulty Population 24,620 36,922 29,191 110,760 0 0 53,812 147,682 Receipt of Government Benefits and Allowances Yes No Don’t Know Grand Total Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria i. Melbourne: Approximately 15% of the population receives some form of Government benefits. However, this band also seems to struggle more than the general population. Hence, Government assistance may provide overall support for those in need, but does not erase financial difficulties. ii. Regional Centres: A greater proportion of people living in Regional Centres receive government benefits and allowances than in Melbourne and these people were also most likely to face financial difficulties. Representing 20% of the population, 35% or 65,775 (more than two in five of those receiving benefits) faced financial difficulties. iii. Outer Regional: One in four people living in Outer Regional areas receive some form of government assistance. These people were also more likely to struggle financially, consisting of 46% or 24,620 people. This is three in five who are facing financial hardship. MISC - Consumer Credit Report 42 Accommodation Stress Profile Summary Accommodation stress is financial stressed caused by accommodation expenses representing a relatively high proportion of a person’s income. Accommodation stress occurs when residential expense exceeds 30% of a person’s net income. (20% of gross) Using the HILDA 2003 Survey data from Wave 3, across Victoria, this number stands at almost 525,000 or 15% of the population. It should be remembered that since 2003 conditions in respect to Mortgage debt have changed significantly as the level of borrowing against Household asset has reached all time levels (See Reserve Bank Research). It is likely therefore that the same research when completed in 2006 would show an even more significant incidence. Summary of key Profile characteristics of Accommodation stressed Victorians: Melbourne Male 16-44 years All except Retired Regional Centres Female 16-44 years Employed working more than 35 hours per week; Employed working less than 35 hours per week; Not employed but looking for work; Non-working students Between $15,000 and $45,000 pa. Outer Regional Female 16-34 years Employed working more than 35 hours per week; Employed working less than 35 hours per week Gender Age Employment Status Income Family Structure: Single vs. Couple and with or without Children Less than $10,000 pa; $15,000 to $20,000 pa. Lone person (with or without children) Between $15,000 and $30,000 pa. Couple family with children; Lone person without children 1 to 2; more than 4 Family Structure: number of children living at home more than 50% of the time Household Structure: Living arrangements Household Structure: Rent Payments Household Structure: Mortgage Payments Receipt of Government Benefits and Allowances 1 to 3 Couple without children; Lone person without children 1 and 3 Renting/ Board $200 - $299 $200 - $399; more than $500 Yes Renting/ Board $1 - $199 $200 - $299; more than $400 Yes Renting/ Board $100 - $199 $300 - $399; $600 to $699 No Source: MISC Australia analysis using HILDA Survey data Wave 3 (2003); sample size 3,070 across Victoria Across Victoria, those who were facing the greatest level of financial difficulty across the three areas of Victoria (Melbourne, Regional Centres, and Outer Regional) were employed (either working more than 35 hours per week or less than 35 hours per week) and were paying rent/board. Hence, employed people are finding it harder to pay off their mortgage or meet rental payments even though they would be earning a relatively consistent wage. This may be because they are paying higher rates of rent or mortgage repayments and are struggling to meet these large financial burdens. With the exception of those living in Melbourne, females were paying more than 30% of their possible net income on residential expenses. In all areas, those aged between 16 and 34 were exceeding 30% of their possible net income, with the addition of those aged 35 to 44 in Melbourne and Regional Centres. MISC - Consumer Credit Report 43 Income levels across the three areas varied significantly. In Melbourne income levels where people were paying more than 30% of their possible net income on residential expenses were either less than $10,000 or between $15,000 and $20,000, in Regional Centres these amounts were between $15,000 and $45,000,while in Outer Regional areas they were between $15,000 and $30,000. The family structure where more than 30% of possible net income was spent on residential expenses was by single people in Melbourne and Regional Centres. This is not surprising given that total household income would be lower overall, as there is no dual income source. In Outer Regional areas, there were no significant differences. In Melbourne, the family structure paying more than 20% was more likely by a lone person (with or without children), in Regional Centres it was a couple family with children or a lone person without children, and in Outer Regional areas a couple without children or a lone person without children. Hence, the influence of children does not appear to have a direct impact on whether households are paying more than 30% of their possible net income on residential expenses. Where children were living in the house more than 50% of the time, in Melbourne there were one to three children present, in Regional Centres either one or two or more than four, and in Outer Regional areas either one or three. Where households were paying rent, in Melbourne those paying between $200 and $299 were exceeding 30% of their possible net income, while in Regional Centres the amount was lower at less than $200. In Outer Regional areas this amount was between $100 and $199. Hence, the rental payment amounts of those paying more than 30% of their possible net income on residential expenses are generally between $100 and $300 across Victoria. For those paying off a mortgage, repayments increase to between $200 and $399 or more than $500 in Melbourne, between $200 and $299 or more than $400 in Regional Centres, and between $300 and $399 and $600 and $699 in Outer Regional areas. Those receiving government benefits and allowances in Melbourne and Regional Centres were paying more than 30% of their possible net income on residential expenses compared to those in Outer Regional areas who were not receiving benefits. MISC Consumer Credit Report 44 THE INSTITUTIONAL STRUCTURE OF THE MARKET - INITIAL EVIDENCE OF MARKET FLOWS Methodological Review There is a presumption, well founded by various commentators, that in the context of a financial service environment in Victoria of some $55 billion (includes the measure of all borrowing from ADI’s in a year), the level of financial commitment across traditional and MicroCredit is considerable. The question is how considerable? This is a fundamental question as it potentially either supports or undermines the value concept of the whole Credit Review in Victoria. There are essentially two ways of responding to that question: 1) In the past response has been based on anecdotal evidence of various (though not all) exposures. It has been impossible to reconcile these and even more problematic to present a reliable and robust collective assessment. In this preliminary paper we review the scope of these often misleading but well meaning attempts. 2) The alternative is to survey all traditional and Micro Credit Lending activity in the state at a common point in time. In some cases such a collective survey can confidently rely on existing measures. In other cases (where no statistically reliable measure is available), primary research methods must be developed and implemented. This is the step to be deployed in the stage 1.2 of this research program. Here we review current evidence to hand and that already reviewed as part of the inquiry. We further recommend supplementary research no yet commissioned in order to fully scope the Victorian Micro Credit environment. The flow chart described fully in Module 5 depicts those research steps already completed and described herein and those additional stages recommended Historical Perspectives Introduction The process of arriving at this review has been a long and evolving one in which legislation change has been at the forefront of leading credit policy. To set the context for this document we review some of that process. Considerable works have preceded this research and it is worthwhile first to review this. Legislation The Uniform Consumer Credit Code (UCCC) commenced in November 1996. In 1998 as a response to the changing dynamics in the market, the Queensland Office of Fair Trading investigated the phenomenon of consumer credit and released a public report of their findings based on the experiences of 59 borrowers. A post implementation review was conducted of the UCCC. In 1999, the finance/mortgage broker registration scheme in Victoria was abolished in favour of a negative licensing arrangement. Meanwhile, the Queensland Office of Fair Trading followed up their earlier public report by preparing an issues paper on Micro Credit. MISC Consumer Credit Report 45 In December 2000, the National Competition Policy Review of the UCCC was submitted to the minister in Consumer Affairs. In August, a comprehensive and objective study of micro lending was undertaken across Australia. This report was published as “The Payday Lending – A Report to the Minister for Fair Trading, Queensland.” In 2001 amendments affected by the Consumer Credit (QLD) Amendment (Payday Lenders) Act 2001 resulting in a significant shift in the way that predatory lending in Australia was being regulated, by closing the short-term loophole in the UCCC. The year 2003 saw the Financial Counselling Association of NSW partner with Newcastle University in order to conduct an analysis of clients presenting for financial counselling between 2000 and 2003. Problems with broker arranged finance leading to over commitment of consumers were noted in a 2003 report prepared by the Consumer Credit Legal Service (NSW) for ASIC, A Report to ASIC on the Mortgage and Finance Broker Industry. The Victorian Government amended the Fair Trading Act 1999 in 2003. In July, the mandatory comparison rate regime was introduced into the UCCC for a fixed period of three years, introducing a series of measures to promote fair contract terms, though credit was specifically excluded. In June, the Federal Government released a discussion paper calling for community consultations titled ‘Australia Consumer and Money’. September saw the Wesley Mission commence operating a Credit and Debt Hotline with the Consumer Credit Legal Centre (NSW). During December, The Ministerial Council on Consumer Affairs released a detailed policy framework on national regulation of finance and mortgage brokers designed for comment from the market. In 2005, the NSW Government introduced a draft Consumer Credit (NSW) Amendments (Maximum Annual Percentage Rate) Bill. By January, the NSW Consumer Credit Administration Amendment (Exception of Certain FInance Brokers) Regulation 2005 commenced. In May, the Minister for Consumer Affairs announced a comprehensive review of Victoria’s consumer credit laws, and released an Issue Paper in June. MISC Consumer Credit Report 46 Selected Chronology of Key Events Regulatory Process and Significant Reviews Date 1992 Nov 1996 1998 1998 1999 1999 2000 Aug 2000 2001 Dec 2001 Dec 2001 2001/2002 2003 2003 2003 Jul 2003 Jun 2004 Sep 2004 Dec 2004 2005 Jan 2005 May 2005 Jun 2005 Mar 2006 Event Release of the Credit Reporting Code of Conduct (Cth) Uniform Consumer Credit Code (UCCC) commenced Public report issued by The Queensland Office of Fair Trading (OFT) Post Implementation review of Consumer Credit Code Finance/mortgage broker licensing scheme abolished in Victoria; replaced by negative licensing arrangement The Queensland Office of Fair Trading prepared an issues paper on fringe credit National Competition Policy Review (NCPR) of Consumer Credit Code Micro-lending study published as "The Payday Lending - A Report to the Minister for Fair Trading, Queensland" Introduction of the amendments made by the Consumer Credit (NSW) Amendments (Payday Lenders) Act 2001; regulatory changes to predatory lending in Australia. The Consumer Credit (QLD) Amendment Act 2001 (the Act) commenced operation Consumer Credit Code applied to payday lending; Closure of short-term lending loop-hole UCCC Second Hand Dealers and Pawnbrokers Act (VIC) Joint analysis conducted by Financial Counselling Association of NSW and Newcastle University Consumer Credit Legal Service (NSW), A Report to ASIC on the Mortgage and Finance Broker Industry Fair Trading (Amendment) Act 2003 (VIC) Introduction of the mandatory comparison rate regime in UCCC Federal Government released the discussion paper "Australia Consumer and Money" Consumer Credit Legal Centre (CCLC) began a Credit and Debt Hotline operated by Wesley Mission Ministerial Council on Consumer Affairs (MCCA) released policy framework on national regulation of finance and mortgage brokers Release of the Credit Report Advice Summaries from Baycorp Advantage submission on CCR Commencement of NSW Consumer Credit Administration Amendment (exemption of certain finance broker) Regulation 2005 Minister for Consumer Affairs announced a comprehensive review of Victoria's consumer credit laws Consumer Law Centre Victoria research NSW annual legislation capping the total cost of credit commences Source: MISC Literature Review. CAV Stakeholder Submissions MISC Consumer Credit Report 47 Macro Measurement Attempts The Stage 1.2 Report of the Consumer Credit Review – a wide-ranging discussion of contemporary evidence and submissions attempted to provide some insight as to the economic context in which this inquiry was framed. There are at least 22 classes of lending where no measure of lows in Australian or Victoria is currently available or ever has been In the preliminary report of the Consumer Credit Review, reliance is made on both anecdotal and “official“ collections to scope likely market size and some of these. These market-scoping attempts in some instances are reflective of Micro Credit (the exceptions), but mostly the measures reflect Traditional finance environments within which Micro Credit is subsumed. In only two cases out of 16 identified Credit flows has it been possible for the CAV research to isolate a Micro Credit component estimate. In a collective sense, the environment in which Micro Credit might forms a subset is noted in the Report of the Consumer Credit Review as $55 billion, with acknowledgement that additional flows beyond this include various amounts adding to some $4 billion (this assumes in some cases that national measures have a 25% Victorian component: see views expressed in The report of the Consumer Credit Review). The total flow estimate then is between $50 and $54 billion. In the absence of any preliminarily market size scoping (the subject of this Module) this remains the only benchmark against which true Mucro Credit size measure be established. MISC Consumer Credit Report 48 CAV Estimation to Date of Likely Credit Flow Traditional and Micro Credit Lending Credit Measures Housing Related Low Document Lending Owner Occupied Non Conforming Lending Owner Occupied Broker Lending Other exec Low Doc Owner O i d Reverse Mortgages Owner Occupied Equity Finance Owner Occupied Total Owner Occupied Mortgages less unsecured Low Document Lending Investment Non Conforming Lending Owner Broker Lending Other excluding Low-doc Investments Equity Lending ABS measured Other Investment Lending Subsidiary Subsidiary Subsidiary Micro Credit Traditional MISC to Source# CAV p.37 MISC MISC MISC CAV / ABS 5609 Table 8 (June 2005) MISC 22,028 2,100## Traditional / Micro Credit Source Data Victorian Data (if not available, estimated at 25% national) Micro Credit Micro Credit y MISC Micro Credit Traditional Traditional MISC CAV p.37 MISC MISC CAV/ABS 5609 Table 8 (June 2005) - Housing Refinance Lending Owner Occupied Refinance Investment Lending Refinance Total Refinance Lending Securitized revolving credit Cards based Securitized Mortgage Based Total Securitized Unsecured Revolving Credit Total Revolving Credit Housing and Credit Card Additional Housing Related Lending Renovation Alterations and Additions Residential Land Purchase Unsecured Loan for Owner Occupied Loans for Purchase Non Housing New Motor vehicles Bank Used Motor Vehicles Bank Non Bank Motor Vehicle Finance Total Motor Vehicle Finance Boats and Caravans Household Goods including Store card Finance Travel and Holidays Personal Loans Bank Travel and Holidays Personal Loans Non Bank Traditional Micro Credit Traditional Micro Credit Traditional Micro Credit Micro Credit Traditional Traditional Traditional Traditional Traditional Traditional Micro Credit Traditional Traditional 8,146 CAV p.44 MISC ABS 5671 Table P3 (June 2005) - Victoria ABS 5671 Table P3 (June 2005) - Victoria 3,200(Aust) 7,148## 4,439## 11,587 ABS 5609 Table 8 (June 2005) - Victoria ABS 5671 Table P3 (June 2005) - Victoria ABS 5671 Table P3 (June 2005) - Victoria MISC MISC MISC ABS 5671 Table P3 (June 2005) - Victoria ABS 5671 Table P3 (June 2005) - Victoria ABS 5671 Table P3 (June 2005) - Victoria MISC MISC 1,070 1,142 80 2,418 82 287 MISC Consumer Credit Report 49 CAV Estimation to Date of Likely Credit Flow Mainstream and Subsidiary Lending (cont’d) Mainstream/ Subsidiary Victorian Data (if not available, estimated at 25% national) 124 701 1,382 Credit Measures Source Data ABS 5671 Table P3 (June 2005) - Victoria ABS 5671 Table P3 (June 2005) - Victoria ABS 5671 Table P3 (June 2005) - Victoria MISC MISC MISC MISC CAV p.47 ABS 5671 Table P3 (June 2005) - Victoria MISC Total Travel and Holidays Debt Consolidation Finance excluding Mortgage based equity Loans Refinancing of Personal Loans Other Selected Micro Credit Centre Links Advances Centre Link Retail Lending Rent To Buy Home schemes Rent to Buy Household appliance schemes Credit Card Lending Flows Other Other Micro Credit to be defined eg Community inc Not for Profit TOTAL Published in CAV Table 2.1 ADDITIONAL SITED EVIDENCE (in report of Consumer Credit Review - Selected Text refs) Micro Credit Micro Credit Micro Credit Micro Credit Traditional Traditional Micro Credit Traditional Traditional 3,300@ 1,269 50,293 4,152 NB: Secured revolving credit for 2004-05 appeared in The Report of the Consumer Credit Review as $7162.29 and ABS 5671 Table P3 (June 2005) - Victoria as $7147.99. Unsecured revolving credit for 2004-05 appeared in The Report of the Consumer Credit Review as $4404.21 and ABS 5671 Table P3 (June 2005) - Victoria as $4438.68. ## Estaimated from Aust total by CAV as 25% @ Estimated at 25% of $13.2 billion . ABS 5671 Table P3 (June 2005) – Victoria ABS 5609 Table 8 (June 2005) – Victoria MISC Research Sources: Consumer Affairs Victoria (2006). Report of the Consumer Credit Review. The overview was not able to measure non-official sources, and thus much of the Micro Credit market was missing. The same works isolated still further credit for which no estimates of Victorian commitments were isolated. The table is an expansion of table 2.1 of the Consumer Credit Review. The revised CAV table repeats coverage that was isolated previously and defines additional credit measures that can be ultimately calculated and reported to permit the true measure of Traditional and Micro Credit flows in Victoria. (Subject to Stage 1.2 further works see Module 5) As the revised composite picture now shows, in many respects only part of the aggregate commitment measurements will encompass Micro Credit aggregates. For example, dwelling finance by nature includes non-conforming Lo Doc and even reverse mortgages as well as line of credit. Motor vehicle will include new vehicle finance including leasing, as well as the component that may represent micro (i.e. used vehicle finance below a certain level). In Stage 1.2 of the primary research MISC will be completing and enhancing this picture. MISC Consumer Credit Report 50 As is the case official sources are unable to provide any additional Micro Credit offerings and resultant commitments, but the authors of the Report of Consumer Credit Review gave some limited examples such as Solicitor lending which is only stated at $80 million for selected lenders. This is in fact a fraction of solicitor activity in Australia especially in domestic home lending. Credit Card lending is also flagged as a potential additional micro lending context but is yet to be estimated for Victorian flows (subject to Stage 1.2). Depending on the ultimate Victorian measure, credit card lending could add some $3-5billion. More telling are the other categories of micro and micro lending that are at this stage unmeasured. For those identified by the report, some 22 lending classifications are yet to be quantified for Victoria in 2005. Domestic Australian Size Scoping - An Available Research Review Putting aside the works just described in the Consumer Credit Review Report of CAV there are infact considerable more reporting’s of market size flows. In the context of 84 separate reports of aspects of Traditional and Micro Credit activity in Australia or Victoria isolated by MISC, less than 12 however address any aspect of size such as flows or debt or turnover. These aspects of market size might assist in defining the economic importance of this hidden sector in a preliminary sense. The data that does exist is in either of two forms: 1) Based on consumer research estimates of average levels of borrowing or commitments or transaction size; or 2) measures based on lender data of outlet activity, e.g. revenues etc. Out of the 16 potential micro credit classes just 3 of these have been variously estimated by this existing research and submissions to the inquiry. These estimates include Nils’s schemes, payday lending, and non-conforming home loans. With the later excluded a tiny $47m is counted and clearly monumentally understates the Micro credit flows of Australia or Victoria. (A further $8b estimate of Non Conforming loans quoted) This is across just three or four of the possible 10 additional classes of MISC defined Micro Credit Lending. For instance no measures have even been attempted within existing or historical research for CentreLink advances or rental payments. In many cases as the table that follows attests, inconsistency exposes the absurdity of some of these estimates. In the absence of any alternative research only two estimates at first glance might appear to have any credibility. These include the payday lending measure, which suggests a lending market at the time of $38 million for 82 lenders with nearly 1,900 transactions per point of presence. NILS or low interest loans data is the next but estimations provide very limited aggregates suggesting that just 5,000 loans might occur in Australia with loan value of $4 million. This suggests the average loan is $800, which on the basis of research to date completed by MISC appears plausible but not the total. The measure is very dated but the later measure of 5,000 loans appears to be a copy of that produced some six years earlier. It is improbable given that MISC has traced some 50 schemes currently in Victoria. It also excludes Step Up type loans. NILS estimates are clearly understated as well as more than 50 points of presence are known to have been available in 2005 (see MISC site distribution audit). MISC Consumer Credit Report 51 But Payday lending data provides the worst example of inconsistency with national estimates varying from $38 million to $200 million. These same estimates suggest a customer base of 125000 persons .The extreme estimate is in fact the same in two periods - 2001 and 2003. With transaction estimates allocated on a customer basis, an average of $1,600 would need to have applied or $1,300 on a transaction average. No measure at that time was reported of points of payday lender presence, nor is it clear with this optional estimate of $200 million whether it includes pawnbroking. Curiously, two other estimates of $38 and $48 million are quoted by the Consumer Law Centre for 2001 in the paper “Inadequacy of the current response to payday lending… in 2004”. If correct, this might suggest that the payday lender flows in three years fell by $10 million. The larger measure of these is accompanied by estimates of points of presence, and it is that which may be used to highlight the palpable overstatement. In 2001, for the estimate to be valid, each lender would have generated $1.2 million of lending per outlet. In 2005, the annual report of Cash Converters show those outlets three years later could only average half that level. Estimates for Payday lending in Victoria are few and far between but are frequently quoted at $10 million. Estimates for the 2001 period suggest lending by payday lenders of $600,000 and 2,500 transactions per year per site for 16 sites. It appears that most research, regardless of the time frame, adopts the same source estimate in the absence of anything better, and no sensible assessments has been made. Both solicitors lending for mortgages and expanding non-conforming provides access for less traditional borrowers. Only two sources have been used by previous researchers to isolate this category of small and large lending. While the MISC housing loan database suggests billions of lending each year is generated in housing mortgages alone by solicitors, just $80 million is referenced to 34 members of the Managed Mortgage Section of LIV. This appears misleading and must necessarily exclude mortgage lending, and as such has no value as an estimate. That nonconforming mortgage lending 2003 should approach $8.5 billion as suggested by one research group is a gross overstatement. The entire Lo Doc market two years later reached only $7.9 billion (MISC official broker pool). MISC Consumer Credit Report 52 Evidence of Domestic Aust Micro Credit Lender Size Operator Performance Measures Raw Data as reported Operator Performance Measures Raw Data as Reported with Ratios Source NIL LOANS 1 1 2 3 3 4 5 5 PAYDAY 6 7 7 8 9 10 7 11 11 12 13 13 4 4 2000 2001 2001 2001 AUS AUS AUS AUS AUS VIC VIC AUS SA AUS AUS AUS AUS VIC Payday Payday Payday Payday Payday Payday Payday Payday Payday Payday Payday/ Pawn broking Payday/ Pawn broking Payday - Cash Converters Payday - Cash Converters 96,000 84 20 153,600 137,737 280,900 280,000 38,400 29,458 63,496 61,600 220 3,344 250 16 16 41,600 40,300 153,600 10,000 10,422 200,000 82 39 153,600 48,000 192,000 125,000 350 259 1,302 2,600 2,519 82 24,000 200,000 125,000 1,600 250 250 1,873 293 1999 1999 2004 2004 2004 2005 2005 2005 NSW & VIC AUS AUS VIC AUS AUS AUS AUS NIL NIL NIL NIL NIL NIL NIL Step up Loan 240 5 75 5,000 5,500 6 60 3 0.5 4,000 4,000 3,000 1,900 850 5,000 61 5,400 800 800 800 800 10 90 Year of Data Area Coverage Lending Type Point of Presence Transactions Volume Lending $000s Customer Number Average Loan Ratio transaction per site MISC Consumer Credit Report 53 Operator Performance Measures Raw Data as Reported with Ratios (cont’d) Source OTHER 4 14 15 2003 2003 2005 AUS AUS AUS Law Firm Lending Non confirming Mortgage Low Doc Loans in AUS 7,917,615 34 80,000 8,400,000 Year of Data Area Coverage Lender Type Outlets Coverage Transactions Volume Lending $000 Customer Number Average Loan Ratio transaction Sources: 1. Australia Street Company (1999). Review of No Interest Loan Schemes. 2. Good Shephard (2004). Shepherds Voice: Quarterly Newsletter of Good Shephard Family and Youth Service. Issue 13. 3. Consumer Affairs Victoria (2005). The small amount credit market. Consumer Credit Review: Preliminary Report. 4. Consumer Affairs Victoria (2006). Report of the Consumer Credit Review 5. Consumer Affairs Victoria (2006). Report of the Consumer Credit Review: Supplementary Information 6. Queensland Office of Fair Trading (2002). Payday Lending: A Report to the Minister of Fair Trading, QOFT 7. Wilson, D. (2002). Payday lending in Victoria: A research report. 8. Consumer Law Centre 9. Chant Link & Associates (2004). A report on financial exclusion in Australia. 10. Consumer Credit Legal Centre (NSW), Consumer Credit Legal Centre (Vic), Consumer Law Centre of the ACT, Consumer Law Centre Victoria (2003, October). Joint consumer commission regarding the Ministerial Council on Consumer Affairs’ Discussion Paper on Long-term Regulation of Micro Credit Providers. 11. Ministerial Council on Consumer Affairs (2003). Micro Credit providers: Discussion paper 12. Wilson, T. (2004). The inadequacy of the current regulatory response to payday lending 13. Cash Converters (2005) Cash Converters Annual Report 2005. 14. Datamonitor (2005). Non-standard credit card lending in the UK 2005. 15. MISC Broker Research MISC Consumer Credit Report 54 Sanity/Reliability Testing The test of reliability can be done without subjective evaluation as before. The new table represents a reconstruction of the evidence summarised in the first table. In this analysis, wherever possible the data sets have been expanded to permit a more objective view of the likely robustness and the feasibility of the anecdotal evidence The process augments partial data for some observations with complete estimates using “likely” substitutes. Measures or ratios can be extracted by associated evidence permitting adjusted estimates to ride on the back of supporting evidence, e.g. a count of likely points of presence or an assumption about the likely transaction size. This process expands and completes the number of researched measures. It immediately highlights the absurdity of the $200 million estimate for payday lending if 82 outlets were used to derive that measure. Under this circumstance as the table shows, each outlet at the time (2001) would have enjoyed lending aggregates of $2.5 million clearly this is excessive. Some five years later the annual report measures for Cash Converters suggest a per site measure of a third of that level. The same analysis with the input of the often quoted $250 transaction average, against transaction volumes, permits a view of likely lending per outlet of $468,000 in 2001. This would seem more possible and hence the resulting $38 million estimate for the year might seems more logical than others. A similar test of the Victoria $10 million affords a more feasible mean level per outlet measure with 16 sites This would permit a new view of lending flows with estimated allowance for 40 points of presence of just $25 million. MISC Consumer Credit Report 55 Evidence of Domestic Australian Micro Credit Lender Size Operator Performance Measure with Estimates Operator Performance Measures Raw Data as Reported with Ratios Source NIL LOANS 1 1 3 4 5 5 PAYDAY 6 7 7 8 9 10 Optimal Measure 7 11 12 13 13 4 4 VIC AUS AUS AUS AUS AUS VIC Payday Payday Payday Payday/ Pawn broking Payday and Pawn broking Payday Cash Converters Payday Cash Converters 84 84 27 16 61 40,300 153,600 153,600 137,737 280,900 280,000 96,000 10,422 200,000 38,400 29,458 63,496 61,600 21,120 226 220 220 3,344 3,333 3,556 2000 2001 2001 2001 AUS AUS AUS AUS AUS VIC Payday Payday Payday Payday Payday Payday 82 82 82 39 39 16 24,000 800,000 153,600 73,054 73,054 41,600 200,000 38,400 48,000 18,263 10,000 125,000 24,000 192,000 125,000 1,600 250 250 250 350 240 259 1,302 250 2,519 2,519 2,600 293 9756 1,873 891 1999 1999 2004 2005 2005 2005 NSW & VIC AUS AUS AUS AUS AUS NIL NIL NIL NIL NIL Step up Loan 6 60 75 83 240 5 61 5,400 5,000 5,500 3,750 2,700 4,000 4,000 3,000 5,130 2,700 5,000 800 800 800 1,900 10 90 67 67 16 540 Year of data Area Coverage Lender Type Points of Presence Transactions Volume Lending $000 Customer Number Average Loan Ratio transaction per point of presence MISC Consumer Credit Report 56 Operator Performance Measures Raw Data as Reported with Ratios (cont’d) Source OTHER 4 14 2003 2003 AUS AUS Law Firm Lending Non confirming Mortgage 34 80,000 8,400,000 Year of data Area Coverage Lender Type Outlets Coverage Transactions Volume Lending $000 Customer Number Average Loan Ratio transaction Sources: 1. Australia Street Company (1999). Review of No Interest Loan Schemes. 2. Good Shephard (2004). Shepherds Voice: Quarterly Newsletter of Good Shephard Family and Youth Service. Issue 13. 3. Consumer Affairs Victoria (2005). The small amount credit market. Consumer Credit Review: Preliminary Report. 4. Consumer Affairs Victoria (2006). Report of the Consumer Credit Review 5. Consumer Affairs Victoria (2006). Report of the Consumer Credit Review: Supplementary Information 6. Queensland Office of Fair Trading (2002). Payday Lending: A Report to the Minister of Fair Trading, QOFT 7. Wilson, D. (2002). Payday lending in Victoria: A research report. 8. Consumer Law Centre 9. Chant Link & Associates (2004). A report on financial exclusion in Australia. 10. Consumer Credit Legal Centre (NSW), Consumer Credit Legal Centre (Vic), Consumer Law Centre of the ACT, Consumer Law Centre Victoria (2003, October). Joint consumer commission regarding the Ministerial Council on Consumer Affairs’ Discussion Paper on Long-term Regulation of Micro Credit Providers. 11. Ministerial Council on Consumer Affairs (2003). Micro Credit providers: Discussion paper 12. Wilson, T. (2004). The inadequacy of the current regulatory response to payday lending 13. Cash Converters (2005) Cash Converters Annual Report 2005. 14. Datamonitor (2005). Non-standard credit card lending in the UK 2005. MISC Consumer Credit Report 57 Global Market Estimates and Future benchmarks Some 52 research papers and submissions in the context of the Consumer Credit Review have concerned themselves with some discussion of Micro Credit Lender use in the UK, USA, or Canada. As in the Australian research experience to date, in these markets the results seem similarly inconsistent and isolated. No attempt appears to have been made (unless undertaken in the private arena) to collectively take a holistic view of the likely financial flows that might be directed to these markets. As in Australia, it is more common for researchers to examine some consumer evidence of uptake and profile research to deduce which groups might be attracted more to this form of alternate lending. Unlike the domestic experience, attempts have been made to at least find quantification of cheque cashing outlets, payday lenders, pawnbrokers, rent to own stores, car title lending, money transfer and Internet payday lending in the US. Evidence from other countries is more restricted. In the UK, research works used by the review to date are concerned only with the home credit market (payday lending is measured in both Canada and the US). In an aggregate sense across micro lending market segments of pawnbroker, car title lender, payday and online as well as cheque cashing (but excluding money transfer), the best estimate of the US market suggests that these lenders might provide flows of $US113 billion, and process more than 387 million transactions annually. If one projects to the Australian population (which is tempting in the absence of real Flow measures) this would equate to a potential domestic market flow of $10 billion. The largest of the potential, analogous market sectors in the US is the cheque cashing industry. A cheque culture in that country ensures that dedicated outlets can survive with this activity as their primary Micro Credit exposure. The most probable measures of this suggest that in 2001 the industry might have attracted $US55 billion in transaction values, with some 10,000 sites. However, later measures show that these sites might have reached 24,000 by 2003. At this time a revenue estimate was provided, which if applied to the same revenue to turnover standard that appears to exist, suggests a lesser market of $US48 billion. While MISC reviews in the table the various (sometimes conflicting measures) of flows, the most probable measure applies to the 2002 year. In 2001 it was suggested that more than 22,000 payday lender served the US with some $US13 billion in lending flows, or $US590,000 per point of presence. Significantly more than evidence previously examined where Australian outlet averages appear more likely to have been half that level. Interestingly the average transaction size in the US at the time was $US200. It appears that this average has been used in the absence of real data to ‘guess’ the domestic penetration ($US 200 = $AUD 391). Of further significance is the latest 2005 ‘evidence’ from the paper “Predators Payday Lending Traps” that determining points of presence four years are still 22,000. However, these same sources show the average transaction size has grown to $US325 from $US200. Revenues were reported but not turnover. If the ratio of revenue to turnover deduced from these figures were to apply in this year, (2005) flows might have reached $US19 billion. To this must be added online payday lending, which forecast estimates in 2004 suggested might have captured some additional $US260 million in lending flows. This is the likely recorded flow from the 140 sites said to be in existence at the time. A further benchmark of this lending exposure is derived from Canadian experience where some 250 sites are estimated to provide $US2 billion in payday lending for one million customers. The sense of this estimate is gauged from US ratio comparisons that suggest an unrealistic throughput per outlet of $US8 million and a customer average. Despite at least two specific studies completed in the US, micro lender details on size are sparse and constrained to basic estimates of 14,000 points of presence five years ago with no further current estimate available. Title lending is a further form of pawnbroking in the US, and the more common vehicle title loan may, if projected from the California evidence, add a further $US155 million to these hypothetical estimates. MISC Consumer Credit Report 58 Anecdotal Evidence of US Micro Credit Lender Activity Measures of Transactions and Turnover Financial Institution Cheque Cashing stores Ace Cash Express example - US Cheque Cashing stores - US Cheque Cashing stores - US Cheque Cashing stores projection Cheque Cashing stores - US Selected Cheque Cashing Complete estimate Short-term loans Wisconsin Short-term loans - US Selected Short-term Complete estimate Payday lenders - Canada Payday lenders - US Payday lenders - North Carolina Payday lenders - US Payday lenders - US Payday lenders - US Payday lenders - Money Mart example - Canada Payday lenders - forecast US Payday lenders - US Payday lender - US Selected Payday Complete estimate Pawnbrokers - US Pawnbrokers - US Pawnbrokers - US Pawnbrokers - UK Selected Pawnbrokers Complete estimate Rent to Own Stores - US Selected Rent to own Complete estimate Car Title Loans Mississippi US Car Title Loans Montana US Car Title Loans - a county in Tennessee Selected Car Title Complete estimate Internet payday lending store example Internet payday lending - US Selected Internet Payday Complete estimate Sources: (refer next page) Year of Data 2000 2001 2002 2002 2003 2001 1999 2000 2000 1999 2000 2000 2000 2001 2001 2002 2002 2004 2005 2001 1997 2000 2001 2005 2000 2001 2001 2003 2004 2004 2003 2003 2004 2004 Source 1 2 3 4 18 na 5 5 na 1 6/17 7 8 9 2 10 11 12 13 Points of presence 150 10,000 13,000 25,000 24,000 10,000 195 9,000 9,000 8,000 14,000 na 10,000 22,000 10,000 250 25,000 22,000 22,000 22,000 Transactions Turnover ('000,000) 134 60,000 9,533 45,000 48,758 Revenue Fees ($'000,000) 16 1,500 1,170 6,750 6,000 6,750 na na na na 6,000 124 2,000 2,400 1,900 na 6,750 6,000 3,400 2,359 557,000 180,000,000 234,000,000 180,000,000 180,000,000 850,000 na 39,230,769 na 82,727,273 3,492,833 65,000,000 65,000,000 59,500,000 na 180,000,000 123,076,923 65,522,267 65,522,267 1,207,160 na 47,142,857 3,200,000 5,633,413 na na 54,016 8,937 23,036 2,804,096 na 520,000 520,000 55,000 200 na 9,231 na 19,855 840 10,000 13,000 11,900 2 45,000 40,000 21,295 15,725 85 na 3,300 na 396 4,700 4,700 25 3 na 981 na 260 260 14 6 2 15 na 2 3,000 14,000 13,000 800 14,000 3,000 3,000 16 16 16 na 12 12 na 272 45 116 14,120 50 140 140 MISC Consumer Credit Report 59 Sources: 1. Lott, S. & Grant, M. (2002). Micro lending and “alternative” banking: The consumer experience. 2. Temkin, K. & Sawyer N. (2004). Analysis of Alternative Financial Service Providers. 3. MarketData Enterprises (2002). Check cashers and payday loan services fill void left by “mainstream” banks, $ transfers booming. 4. Stegman, M.A. (2001). Banking the unbanked: Untapped market opportunities for North Carolina’s financial institutions. North Carolina Banking Institute Journal, vol.5. 5. Tomaka, L.A. (2000). Short-term lending falls under scrutiny of lawmakers and regulators. Firstline Midwest: The Midwestern Office for the Council of State Governments, vol.7,no.10. 6. Melhunek, M. (2004). Payday lenders. The Realities of Poverty in Delaware. 7. Ernst, K. Farris, J. & King, U. (2003). Quantifying the economic cost of predatory payday lending. 8. Barr, M.S. (2004). Banking the poor. Yale Journal on Regulation, vol.21, no.121. 9. Miller, A. (n.d.). Payday loans. 10. Wilson, D. (2002). Payday lending in Victoria: A research report. 11. Consumer Federation of America and the State PIRGs (2000). Show me the money: A survey of payday lenders and Review of the payday lender lobbying in state legislatures. 12. Fox, J.A. & Petrini, A. (2004). Internet payday lending: How high-priced lenders use the internet to mire borrowers in debt and evade state consumer protection. 13. Predatory payday lending traps borrowers 14. Johnson, R.W. (1998). Pawnbroking in the US: A profile of customers. 15. Collar, J. & Kempson, E. (2005). Affordable Credit - The Way Forward. 16. Quester, A. Fox, J.A. (2005). Car title lending: Driving borrowers to financial ruin. 17. Ministerial Council on Consumer Affairs (2003). Micro Credit providers: Discussion paper 18. Hoopes, E. (2001). Small loans – Big money: A survey of payday lenders in Colorado and Review of the Colorado Deferred Deposit Loan Act of 2000. Best-fit Profile of Lenders From the most probable analysis of a global database it is possible to paint two statistical pictures of various micro lenders. This can be undertaken in a descriptive and evaluative benchmarking sense. This would provide ultimate benchmarking capability, with domestic market size scoping, as well as providing a basis on which some analogous “what if” projection might be facilitated for the Victorian environment. (Subject to completion of the further Stage 1.2 research) Cheque Cashing This segment may be regarded as outside the scope of the CAV Micro credit definition. However, in the US market, these lenders perform other Micro Credit Lending activities, specifically payday and some unsecured lending. As the best-fit profile depicted below illustrates, at a given point when some 10,000 establishments were identified with a transaction size of $US305 was the norm, and the sector saw some $US55 billion in output. Transaction levels were at 18 million with some evidence that by 2004 the number of cheque cashing outlets had swelled to 24,000. Anecdotal evidence from some of the chains suggested that the payday lending contribution was small, comprising only 12% of activity. However in some instances the ratio of payday lending was much higher. Best Fit US Cheque Cashing Site Profile Profile Dimension Selected Cheque Cashing Complete Estimate Year of best fit Total Market Outlets Total Market Transactions Imputed or Actual Customers dealt with Total Market Average Loan $US Total Market Turnover $USM Revenue Fees 2001 10,000 180,000,000 NA 306 55,000 6,750 Source: MISC composite US market anecdotal database – CAV submission – MISC global literature search MISC Consumer Credit Report 60 Performance Measures With some 18,000 transactions per outlet and each outlet serving 25,000 persons the level of penetration at the time (2001) was limited. Transactions saw on average some $US5 million moving through each outlet, although conflicting evidence based on reported revenue (converted by MISC to turnover), suggests that this might be well overstated. What is more confidently assessed is the revenue share or return average of 12%. Best Fit US Cheque Cashing Site Profile Performance Profile Selected Cheque Cashing Complete Estimate Turnover per Outlet $US Turnover per Customer / Transaction $US Revenue % of Turnover Store Distribution pop served per store Transaction per Outlet Deals per Customer / Frequency of activity PA Turnover per Outlet / $AUS converted 5,500,000 306 12 28,511 18000 10,771,641 Source: MISC composite US market anecdotal database – CAV submission – MISC global literature search Payday Lending Although equally dated, the assessment of payday lender profiles is less sparse, but equally problematic. A given distribution of 22,000 payday lenders will see some 65 million transactions in a year. Conflicting evidence suggests certain efficiency measures but MISC concludes that in the context of variations from $150 to $300 that an average of $US200 is likely to be the most feasible level. These transaction levels will be handled by some eight million customers that must transact each year. With these outlets likely to write $US13 billion in flows, the best revenue estimate suggests some $2 billion in receipts might be won. These would represent a higher level of gross revenue return than for cheque cashing (at 15%). In some cases return of as high as 20% may be imputed from the anecdotal references while in others as low as 14% Best Fit US Payday Lending Site Profile Profile Dimension Selected Payday Complete Estimate Year of best est. Total Market Outlets Total Market Transactions Imputed or Actual / Customers dealt with Total Market Average Loan $us Total Market Turnover $US M Revenue Fees $USM Selected Internet Complete Estimate Year of best est. Total Market Outlets Total Market Transactions Imputed or Actual Average Loan / Customers dealt with Total Market Average Loan $US Total Market Turnover $US M Revenue Fees $US M 2001 22,000 65,522,267 8,089,169 240 15,725 2,359 2004 140 520,000 7,000,000 500 260 n.a. Source: MISC composite US market anecdotal database – CAV submission – site profile MISC Consumer Credit Report 61 Performance Measures These outlets appear to service smaller populations of 12,000 per point of presence and average turnover of $US600,000. Some clearly contradictory and flawed evidence sources suggest averages of three times that level. With a likely mean average of $US1.3m per outlet as being more probable. From a more realistic Australian benchmark, the two driving ratios of performance are: turnover per outlet, and turnover per customer. The rate of repeat business expressed by a mean of eight rollovers, and using that ratio in $Aust terms, would translate to Australian $3807. This appears considerable based on the preceding analysis and $Aust 1.4 million per outlet. This is considerably more than levels claimed by one of the larger operators Cash Converters. Best Fit US Payday Lending Site Profile Profile Dimension Selected Payday Complete Estimate Turnover per Outlet $US Turnover per Customer / Transaction $US Revenue % of Turnover Store Distribution pop served per store Transaction per Outlet Deals per Customer / Frequency of activity PA Turnover per Outlet / $AUS converted Turnover per Customer / Transaction $AUS converted 714,788 1,944 15 12,960 2,978 8 1,399,899 3,807 Source: MISC composite US market anecdotal database – CAV submission – site profile Pawn Broking Lenders The collected evidence to date of pawnbroking activity and size in the US is equally dated but suggests that national coverage is certainly as widespread as other micro lending options. The evidence of transaction volume suggests that even with similar distribution it is a comparatively small market. This is further evidenced by its turnover of less than $US400 million. The transaction size average for pawnbrokers appears to be a third of that for other lender options. Best Fit US Pawn Broking Lenders Site Profile Profile Dimension Selected Pawnbrokers Complete Estimate Year of best est. Total Market Outlets Total Market Transactions Imputed or Actual / Customers dealt with Total Market Average Loan $US M Total Market Turnover $USM Revenue Fees $US M 2000 14,000 5,633,413 70 396 Source: MISC composite US market anecdotal database – CAV submission – site profile Performance Measures With a transaction size of around $US70 as the outlet turnover attests, these are the smaller of the Micro Credit Lenders in the US. They attain this dubious honour not only from the transaction values, but the low volume of transactions, i.e. 400 per annum. This might suggest that in the absence of any other source of revenue, they might indeed be a marginal provider. However, the figures may ignore their second hand goods revenue which is the case of the Australian experience. MISC Consumer Credit Report 62 Best Fit US Pawn Broking Lenders Site Profile Profile Dimension Selected Pawnbrokers Complete Estimate Turnover per Outlet $US Turnover per Customer / Transaction $US Revenue % of Turnover Store Distribution pop served per store Transaction per Outlet Deals per Customer / Frequency of activity PA 28,292 70 21,172 402 Source: MISC composite US market anecdotal database – CAV submission – site profile Car Title Lending This lending represents the analogous category to small loan finance in Australia and is physically a better distributed Micro Credit option recordings turnover of nearly $US1 billion on the back of loans of the largest average size – some $US350. As these are semi-secured on the strength of the vehicle values, this is understandable. With only three million transactions as a small loan provider it still has limited presence. Best Fit US Car Title Lending Site Profile Profile Dimension Selected Car Title Complete Estimate Year Total Market Outlets Total Market Transactions Imputed or Actual / Customers dealt with Total Market Average Loan $US Total Market Turnover 4USM 2003 14120 2,804,096 350 981 Source: MISC composite US market anecdotal database – CAV submission – site profile Performance Measures While the population served by these providers is more limited with nearly 200 transactions per outlet of a higher loan amount, site turnover averages of nearly $US70 million are high even among the highest. This suggests that these truly are the domestic finance company equivalents. Best Fit US Pawn Broking Lenders Site Profile Profile Dimension Selected Car Title Complete Estimate Turnover per Outlet $US Turnover per Customer / Transaction $US Store Distribution pop served per store Transaction per Outlet Deals per Customer / Frequency of activity PA Turnover per Outlet / $AUS converted 69,506 20,598 199 92,675 Source: MISC composite US market anecdotal database – CAV submission – site profile MISC Consumer Credit Report 63 Short-term Lender Allied to car title lenders are those short-term lenders who operate in a different way in the US to those in Australia. While attracting slightly smaller loans than car title, i.e. similar to payday, they attract (with fewer outlets) significant volume of transactions reaching nearly 40 million in an isolated year, with 9,000 sites enjoying an aggregate turnover of $US9 billion. Best Fit US Short-term Lender Site Profile Profile Dimension Selected Short-term Complete Estimate Year Total Market Outlets Total Market Transactions Imputed or Actual / Customers dealt with Total Market Average Loan $US Total Market Turnover $USM 2,000 9,000 39,230,769 235 9,231 Source: MISC composite US market anecdotal database – CAV submission – site profile Performance Measures With limited numbers they are among the financiers that less adequately service the country, but with more than $US1million in turnover per outlet, they have a fair volume of transactions each. This is derived from the 4,300 most outlets will transact in a given year of trade. The outlets appear to service smaller populations of 31,000 per point of presence. Best Fit US Short-term Lender Site Profile Performance Profile Selected Short-term Complete Estimate Turnover per Outlet $US Turnover per Customer / Transaction $US Revenue % of Turnover Store Distribution per served per store Transaction per Outlet 1,025,641 31,355 4,359 Source: MISC composite US market anecdotal database – CAV submission – site profile MISC - Consumer Credit Report 64 PRODUCT ATTRIBUTES This module is concerned with reporting on the results of the Micro Credit product research completed by MISC and the resulting Micro Credit product data base which reports on product available to consumers in the present lender environment .In all 277 products have been traced and assessed across all attributes. While the following results clearly show some choice, but limited for regional consumers the undeniable fact is that lenders collectively do seem to provide choice .The data base also facilitates detailed attribute assessments and the isolation of product gaps while permitting the calibration of theoretical debt traps and reports on the potentially onerous nature of them. Assumptions of the Scope of the Database – Database Description The combined database is derived from the MISC points of presence e-based lender audit, and includes detailed product records of nearly 60 Micro Credit Lending products. The lending products are derived from both mainstream and subsidiary lenders. Included within the combined database are details of products that fall under the umbrella of Mainstream Lending, as well as those that fall within the definition of Subsidiary Lending. Due to the non-uniform product range offered to borrowers in the Micro Credit market, ‘normal’ loan terms may range greatly between and within product types. These terms are set at the discretion of individual lenders with little bargaining power attributed to borrowers. This variability has impeded any direct comparison between products. Comparing annual effective rates is less meaningful due to the essentially simple interest structure of payday and chattel loans. The cost of a two-week payday loan and the cost of a 12-month personal loan will vary markedly if compared using effective annual rates. However, if customers acquire the habit of borrowing in contiguous periods, e.g. borrowing in each pay period, there is value in making such a comparison. In any case, an effective annual measure allows a comparison within product groups where the loan term varies. A further comparison between lending products considers the inability of a borrower to repay a loan, and the consequences of failure to do so. None of the products analysed in this product segment were assumed to offer a rollover facility at the end of the loan term. Instead, it has been assumed that the lender is only able to repay from earlier borrowings (no external source of income), and is forced to re-borrow the same amount under the same terms in order to meet any remaining payments. While this is an oversimplification, it does allow for a straight comparison between different loan products. The analysis also allows the exclusion of the particular circumstances of any borrower, such as their capacity to pay as determined by their individual income. Certain other assumptions were made. These are as follow: • • • • • A month consists of 31 days. Loan products that do not fall under the Micro Credit definition, such as home loans, reverse mortgages and business loans, have been excluded. The analysis produced obvious outliers that were excluded from aggregate comparisons. The loans analysed within the dataset do not incur rollover fees, but are renewed. It should also be noted that at the time of publication, both product characteristics and availability might have altered. MISC - Consumer Credit Report 65 Preamble For the purpose of this study, attainment of data occurred through numerous sources, differing in terms of accuracy and reliability. Acquisition of stakeholder contracts, obtained through a list presented by CAV, included Cash Converters, The Money Centre, Money 3 (formerly Money Plus), The Cash Store, and Action Cash Loans. General Electric, National Bank, and ANZ represented a further group of stakeholders. Further data was obtained through website checks and ‘mystery shopping’. Website checks of micro lenders totalled approximately 21 different lenders, while ‘mystery shopping’ provided further coverage not accounted for through Cannex®, and the identified Stakeholders. One hundred lenders were surveyed by simulating a loan enquiry over the phone. Data from Cannex was used to identify personal and car loan products. In the case of the data obtained by Mystery Shopping, a number of reservations about the validity of the data need to be noted. Firstly, most dealers were very helpful with questions. However, a few were unwilling to explain their products in detail. Secondly, a lack of explanation tended to be caused by those trying to sign on customers without them fully understanding the costs involved. Lastly, some lenders thought it was unusual that so many questions were being asked of their products, and many showed a tendency towards face-to-face negotiations, rather than over the phone dealings. Despite these reservations, mystery shopping can allow comparisons of the reality with the concept. Products included in a subsidiary micro lender market include: • • • • • • Payday loans Chattel loans Personal loans Short-term loans Small consumer loans Title loans The table provides a summary of the lender type and product observations made during the current research. Product Observation Count per Loan Type 2005/06 Lender Type Mainstream and Subsidiary Secured Personal Lending Unsecured Personal Lending Pawn Broking Transactions Secured Car Loans Unsecured Car Loan Payday Loan Property Personal Lending Total Product Representation Number of Lender Product Observations 37 59 76 39 4 52 10 277 Period 2005 2005 2006 2005 2006 2006 2006 Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 MISC - Consumer Credit Report 66 Common Features of Micro Credit Market This database describes the nature of product choice available to a financially stressed consumer from the entire micro lender market across all lender representations. Over more than 12 products, and across categories ranging from the No Interest Loan Schemes (NILS) to seceded lending for a range of purposes, collectively they provide a full spectrum of features and fees. Products vary via fee structure, interest changes, administrative fees, term, and security requirements. Early termination can attract penalties. The list below describes the range of features applicable to one or more of the various product variations in Victoria on offer to a financially stressed consumer: Features of Products • • • • • • • • Loans ranged from as little as $50 to $30,000. Loans could be either secured or unsecured Loans were secured by anything of value, including jewellery, cars, furniture and electrical goods. Fixed fees applied to most loans. For example, $30 for every $100 advanced. Charging interest was common, but not universal. Loan terms ranged from one week up to a year. Storage fees may apply for larger items held as security. Loan default charges included forfeiting goods, or monetary charges ranging from fixed amounts of $20 to $55. Some monetary charges included daily charges of $1.57 per day, or even a fixed 48% annualised rate. This fixed rate did not include bank fees. Some lenders offered discounts on fees if loan were repaid early. A minority of lenders offered rollover facilities costing between a fixed $15 rate and 25% of the amount advanced. Direct Debit was often used to repay loans. Annual membership fees often applied, ranging from $5 to $50. Loan establishment fees ranged from $15 to $450, or even a percentage of the loan value, for each loan. Termination fees included charges of up to $2,000, depending on loan amount, or 90 days interest on the original amount. Weekly account keeping charges ranged from $2 to $25. • • • • • • • A Product Perspective of Subsidiary Micro Credit Product Attributes of Mainstream and Subsidiary Lenders The MISC database measured a large variety of these loans across regional and metropolitan providers by both mainstream and subsidiary lenders. The products have their own distinction between the more generic lender types (mainstream versus subsidiary) as well between each lender segments (i.e. chattel versus payday loans providers). However, lenders tend to cross sell products, which increasingly dilutes the ability to differentiate between each lender group. For example, payday lenders may offer chattel type loans products and vice versa. More commonly, these product features are distinguished by the substitution of fees for interest. As the tables in the following section will show, the types of fees attached to any particular loan may range considerably. In an effort to provide insight into a common transaction experienced by Micro Credit customers, MISC has reviewed the more prevalent charges encountered within the industry. MISC - Consumer Credit Report 67 The examples within the following section reflect the more common loan features of products provided by subsidiary lenders. Readers should note that this is not a calculation of the average transaction per loan type, but one of recurring loan characteristics across lenders. This first summary chart, by way of introduction, graphically illustrates how the onerous terms built into micro credit loan products of subsidiary lenders can quickly lead a customer, under certain assumptions [see cost of borrower explanation in glossary], into a spiralling level of debt repayment. Within 12 to 15 weeks the customer may have reached the position of financing an untenable repayment commitment leading to default and further financial hardship. At this point in \15 weeks a $200 loan can balloon out to as much as $1680 in the most extreme of these cases. In these cases the consumer has knowingly or unknowingly utilized a debt trap several loans are depicted and while most consumers may be initially oblivious to the implication of the transaction for a grace period [the longer result can quickly become insidious. While the assumptions made require some modification to allow for the depiction of a real life example, this graph allows the terms implicit to common micro credit products offered by subsidiary lenders to be compared over time as well as illustrating the speed of indebtedness these products are capable of engendering when controlled by less sophisticated borrowers. Source: MISC Product Attribute Database This second graphic provides a further products view [under the same scenario] to the first. The contrast is not only the loan i.e. a $1000 unsecured loan, but is measured among subsidiary lenders in the Micro Credit space. Several loans are depicted. Some of these loans carry quite large establishment fess of $450. It presumes that additional borrowing is maintained at optimum allowable periods and that the debit also is permitted to accumulate, as is the case in the first. In half the cases depicted a 22 week and 32 week time span appear to be the initiation of a debt trap of sorts. MISC - Consumer Credit Report 68 At this point the regular payment requirement is exceeding the original borrowing. This time frame is more restricted than in the earlier examples. Given the nature of personal loan products contrasts with payday and chattel loans in important ways, i.e. the size of loan and the purpose of borrowing, it should be expected that the acceleration graphically illustrated here is more restrained than in the first over a twelve-month period. This reasoning suggests a longer time frame over which to analyse this product type. The eventual level of indebtedness permitted by the lender may far exceed that achieved under a payday or chattel loan example. Given these products are also offered by finance companies, more research may have been undertaken into the ability and desire of the customer to meet their loan commitments. Therefore, it would be expected that this scenario may affect fewer customers of these lenders than micro finance operators offering payday and chattel loans with a minimum of ‘customer care’. Source: MISC Product Attribute Database MISC - Consumer Credit Report 69 Product Profiles of Subsidiary Micro Credit Lenders The Debt Trap Among the following product profiles the micro credit product, with the most onerous repayment terms, is the ‘Small $ 200 Consumer Loan’. For 1 week after 10 weeks the current level of debt the customer must re-borrow to pay it off, i.e. the current cost to the borrower, reaches $3,360 from an initial amount borrowed of $200. This equates to 1680% of initial loan. The customer re-borrows when payment for the initial loan falls due, in this case end of one week, by taking out one or more new loans. This process is repeated each time payment(s) fall due so that the customer continues to borrower larger amounts in order to meet current repayment obligations. For instance, at the end of the first week the borrower must repay the $200 in principle, plus $80 in fixed fees, to the lender. In order to repay this $280 in debt the borrower must take out an additional loan of $200, since the simulation assumes that only $200 loans can be taken out. This is required as the borrower can only pay off this loan with either an additional loan, or the borrowed money initially taken out, or both. In this case, the borrower already has $200 in cash, derived from the loan but the remaining $80 in fees must be paid by money derived from an additional loan of $200. The initial debt is repaid, but the borrower now has an additional $200 loan to pay off, attracting a further $80 of fixed fees that need to be paid off within the week. To repay this new debt of $280 the borrower now has $120 left over from their 2nd loan used to repay the initial $80 in fees, leaving $160 still owing. This remaining $160 in debt is repaid by an additional $200 loan, and so on and so forth. Since additional loans are used to pay off existing debts the borrower runs into a debt trap, and after 10 weeks this particular Small Consumer Loan will cost the borrower $3,360. This equates to 1680% of initial loan. Loan Against Goods - Chattel Loan: In Victoria, over 132 pawnbrokers, payday lenders and short-term lenders provide pawnbroker type chattel loans. Amounts advanced are normally small, roughly about $200. Fixed fees apply. For example, $30 for every $100 advanced. Goods loaned against are generally anything of value, particularly jewellery. Storage fees may apply for larger items. Some lenders offer discounts on fees if loan is repaid early. If loan defaults, goods are then forfeited. Loan terms range from one week, to a month. Chattel Loan snap shot: Monthly loan against goods $35 per $100 advanced repaid at end of loan term Amount advanced restricted by value of good offered as security against loan $35 per $100 loan After 10 weeks: $540 Time to accumulate $2,000 in repayments: 20 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $200 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 MISC - Consumer Credit Report 70 Payday loan At least 139 payday lenders, cash advancers, short-term lenders, online lenders and other micro lenders provide payday loans. Amounts advanced are small, roughly about $200 with loan terms ranging from one week, 62 days, next payday, or three months. Payday lenders have the distinction of requiring full direct debit on the customer’s salary bank accounts. If the direct debit transactions fail, lenders normally charge a dishonour fee between $15 and $55, excluding bank fees. In addition, other fixed fees apply to this loan. For instance, a fixed up front fee of $25 for every $100 advanced with other possible ongoing fees such as annual membership fees often apply, ranging from $5 to $30. Some lenders also charge default fees that include fixed charges of up to 48% per annum while others charge $1.57 per day. Several lenders provide rollover facilities, with some charging fixed rates of $15 per loan while others charge 25% of the amount advanced. Payday loan snap shot: Monthly payday loan $35 per $100 advanced repaid at end of loan term with $11 membership fee Minimum loan amount is $20 Maximum loan amount it $1,000 $16.50 dishonour fee $46 per $100 loan After 10 weeks: $270 Time to accumulate $2,000 in repayments: 44 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $200 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 Hire purchase loans Such loans are offered at point of purchase across a range of industry and range of product types, from car finance to electrical and household goods, typically obtainable as a line of credit over and above the cost of the initial purchase determined by the consumers credit history. Usually valued at over $2,000 with establishment fees of approximately $155 and interest charges of 34% per annum. Hire purchase loan snap shot: Hire purchase loan 34% p.a. with $155 application fee Loan term between six months and seven years $340 per $1000 loan for six month loan After 10 weeks: $46 Time to accumulate $2,000 in repayments: >52 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $200 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 MISC - Consumer Credit Report 71 Secured Personal Loans Secured personal loans were provided by at least 37 lenders. The amounts advanced could range between $200 to anything up to $10,000 with loan terms starting from four to 12 months depending on size of the loan. Establishment fees are charged between $15 and $450 for each loan while effective interest charged is based either on a monthly or annual basis. Normally for this type of loan, interest remains fixed. Weekly account keeping charges range from $2 to $25 with direct debit often used to repay loans. There are also dishonour fee charges of between $20 and $33 if the direct debit facility fails to operate, which do not include bank fees. Some lenders also charge an arrears fee of $1 per day, which penalises borrowers for every day their loan is overdue. Termination fees include charges of 90 days interest on the original amount. Security items may include cars, furniture or electrical goods. Secured personal loan snap shot: Secured personal loan 2.5% p.m. with $450 application fee and $25 p.w. fee Loan term between four months and two years Minimum loan amount is $2,000 Maximum loan amount is $10,000 $1,424 per $2000 of six month loan After 10 weeks: $114 Time to accumulate $2,000 in repayments: >52 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $1,000 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 Unsecured Personal Loans A total count of 59 micro lenders provides unsecured personal credit. The amounts advanced range between $500 to anything up to $5,000, with loan terms that are at least four months onwards depending on loan size. An establishment fee of anything up to $385 applies for each loan while fixed interest is charged either on a monthly or annual basis. Weekly account keeping charges of up to $7.50 also apply with direct debit is often used to repay loans. Dishonour fees of up to $33 apply if direct debit fails. Default fees of up to 48% per annum are sometimes charged. Some lenders also charge arrears fee of $1 per day. Depending on the loan amount, termination fees can include charges of up to $2,000. Unsecured personal loan snap shot: Unsecured personal loan 4% p.m. with $385 application fee and $7.50 p.w fee Loan term of between four months and nine months Minimum loan amount is $1,000 Maximum loan amount is $2,000 $851 per $1,000 for six month loan After 10 weeks: $56 Time to accumulate $2,000 in repayments: 43 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $1,000 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 MISC - Consumer Credit Report 72 Short-term Loan There are at least 58 short-term lenders in Victoria’s Micro market. Short-term loan providers are a unique group in the sense that these providers have the flexibility to provide differentiated loan products apart from short-term loans. (Note that short-term loan providers may provide loans such as payday or chattel loans). Short-term loans are a separate product by itself, with amounts advanced of roughly $200 and a loan term of one month. Loans are repaid by direct debit facility at end of the term and borrowers are charge fixed upfront fees. For example, $5 upfront fee for every $100 advanced together with an annual membership fee of up to $28. Loan security is required for loans greater than $500. Short-term loan snap shot: Short-term loan $5 per $100 advanced repaid at end of term with $27.50 membership fee Monthly loan term Minimum loan amount is $100 $32.50 per $100 loan After 10 weeks: $210 Time to accumulate $2,000 in repayments: >52 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $200 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 Small Consumer Loan There is only one micro lender providing small consumer loan. The amount advanced can range from $300 to $30,000 with establishment fees of 5% of the amount advanced applied on each loan. Loan terms normally range from one week an upward, depending on loan size. Borrowers may also have to pay fixed upfront fees. For example, $40 for every $100 advanced. Small consumer loan snap shot: Small consumer loan $40 per $100 advanced repaid at end of loan term Weekly loan term Minimum loan amount is $200 $80 per $100 loan After 10 weeks: $3,360 Time to accumulate $2,000 in repayments: 9 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $200 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 MISC - Consumer Credit Report 73 Title Loan Car title loans are popular among micro lenders but can often be confused with secured personal loans. While secured personal would provide the option of using car title or other assets as security, this loan explicitly uses car titles only. There were only a handful of car title lenders in Victoria. Amounts advanced are range from $500 to $15,000 with fixed upfront fees apply (For example, $25 for every $100 advanced). Loan terms normally range from one week and up to a month. Title loan snap shot: Title loan $25 per $100 advanced repaid at end of loan term Monthly loan term Minimum loan amount is $500 $50 per $100 loan After 10 weeks: $250 Time to accumulate $2,000 in repayments: >52 weeks Modal Product Product Description Features/Conditions Total Cost Loan value $200 Cost to Borrower – Debt Accumulation Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 - Mystery Shopper Survey 2006 MISC - Consumer Credit Report 74 Evidence of Defining Features for Subsidiary Micro Credit Lenders The table presents a summary of the products offered by payday lenders and pawnbrokers in Victoria, separated into Regional Centres. Metropolitan Melbourne excludes the Mornington Peninsula, while Regional Centres encompasses major Regional Centres like Geelong, Ballarat, Mildura, Wangaratta and the Mornington Peninsula. Outer Regional includes minor and rural Regional Centres like Moe, Morwell, Traralgon and Gippsland. Micro Credit Database Coverage - Subsidiary Lenders Only Product Representing Selected Micro Only Lenders State wide Payday loans Chattel loans Total Metropolitan Payday loans Chattel loans Total Regional Centres Payday loans Chattel loans Total Outer Regional Payday loans Chattel loans Total Product Count 27 18 45 26 15 41 8 3 11 8 6 14 Lender Count 43 76 104 37 60 80 10 7 16 10 12 20 Store Count 113 105 218 85 80 165 18 12 30 10 13 23 Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 Overall, there are 104 separate lenders within the MISC database, with the majority situated in Metropolitan Melbourne. The larger the population concentration, the more stores per lender, with 2, 2 and 1 stores per lender in Metropolitan, Regional Centres and Outer Regional locations respectively. Observing the spread of products across lenders suggests there are many lenders who offer the same product. This is most apparent with chattel loans in Melbourne, with 60 separate operators providing a range of only 15 products, while there are 37 payday lenders providing 26 different products. This occurrence is less frequent in Regional areas, suggesting that competitive forces are driving the Metropolitan lending industry into providing a more homogenised product in order to prevent customers from absconding to competitors. Such competitive forces are less prevalent in both Inner and Outer Regional areas where 10 payday lenders provide eight separate products respectively. In Metropolitan Melbourne, there were 37 separate lenders providing payday loans, and 60 providing chattel loans, suggesting there are 17 lenders who offer both types of products. In Regional Centres there are a total of 10 payday loan and seven chattel loan providers, with a total of 16 lenders, suggesting that at least one lender offers both types of loans. In Outer Regional areas, there are 10 payday loan providers and 12 chattel loan providers, consisting of 20 lenders. This suggests that two lenders provide both products. Examining the product count within the MISC database we see 45 individual products within Victoria, with 41 of them being offered in Metropolitan Melbourne. This suggests that only four individual products are offered in Regional areas without also being offered in Melbourne. MISC - Consumer Credit Report 75 On a statewide basis, the average cost of borrowing $200 through a payday loan or chattel loan product is $54, for any single loan term, falling relatively close to amounts recorded in previous literature (see Ernst, K., Farris, J., & King, U. 2003). In Metropolitan Melbourne, this figure equates to $52 for any single loan term, while it is $61 and $69 in Inner and Outer regions respectively. A typical fee averages roughly $46 per $200 advanced on a statewide basis. In Metropolitan Melbourne, this fee averages $44 per $200 loan, while it is $54 and $56 in Inner and Outer regions respectively. Micro Credit Database Product Analysis Regional Comparisons Avg fee per $200 State wide Metropolitan Regional Centres Outer Regional Payday lenders Chattel lenders Payday lenders Chattel lenders Payday lenders Chattel lenders Payday lenders Chattel lenders $48 $43 $47 $39 $54 $53 $55 $57 Avg Single Loan Rate 31% 22% 30% 19% 33% 26% 38% 29% Avg Effective Rate p.a. 544% 464% 605% 429% 406% 455% 524% 402% Avg Cost to Borrower p.a.# 14,988% 75,514% 14,114% 75,381% 16,957% 4,004% 29,680% 2,421% # The aggregate value of total debt accumulated to repay initial borrowing without any customer contribution where the customer seeks to re-borrow in each period in order to satisfy the current debt. The figure here is the growth in current debt over the initial amount borrowed at the end of a 12-month period. Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 Simulating a typical $200 loan through the Micro Credit market produces results that suggest payday loans are more expensive than chattel loan products, across the board. The only exception is the chattel loan market in Metropolitan Melbourne, where the cost to borrower per loan far exceeds the cost of any other comparable product. This average cost to borrower figure of over 75,000% per annum had arisen through a high number of chattel loan providers in Melbourne offering fortnightly loans, compared to longer termed loans, such as monthly termed loans. With Melbourne enjoying a higher count of lenders, the market offers cheaper loans, by both types of lenders, than their regional counterparts. The average amount paid per $200 advanced shows that regional centres pay more for micro loan services than Metropolitan borrowers. Micro Credit Database Loan Simulation Analysis Regional Comparisons Loan simulation per $200 loan State wide Metropolitan Regional Centres Outer Regional Payday lenders Chattel lenders Payday lenders Chattel lenders Payday lenders Chattel lenders Payday lenders Chattel lenders Avg paid on single loan 262 243 260 239 266 253 276 257 Avg paid p.a. Effective 1288 1129 1411 1058 1012 1110 1247 1004 Avg paid p.a. – Cost to Borrower# 30177 151228 28427 150963 34114 8208 59559 5042 #The aggregate value of total debt accumulated to repay initial borrowing without any customer contribution where the customer seeks to re-borrow in each period in order to satisfy the current debt. The figure here is the growth in current debt over the initial amount borrowed at the end of a 12-month period. Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 MISC - Consumer Credit Report 76 In Victoria, the majority of both payday loans and chattel loan products fall within the definitions of Micro Credit explained earlier. Both types of loans usually consist of a single fee, charged at a fixed rate per $100 advanced. More often than not, this is the only charge required from the borrowers, but certain exceptions do exist. Exceptions include those who charge fixed membership fees of anything between $5 and $50, while some charge membership as a percentage of the initial loan amount of between 5% and 25%. A minority of lenders also charge interest payments of up to 48% per annum on top of their fixed rate charges. Micro Credit Database Term Length Analysis Regional Comparisons Term One week Payday loans – Average cost of single $200 loan Fortnight Three weeks Four weeks Monthly Three months Term One week Chattel loans – Average cost of single $200 loan Fortnight Three weeks Four weeks Monthly Three months Metropolitan $264 $269 $260 $267 $241 Metropolitan $230 $238 $240 $240 $245 Regional Centres $269 $269 $280 $246 Regional Centres $240 $265 Outer Regional $270 $269 $290 Outer Regional $255 $260 $257 - Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 Breaking the analysis into term periods shows that Metropolitan Melbourne is again better off than regional customers are across all term lengths. Melbourne customers of payday lenders show that single loans are available for as little as $241, while Regional Centres will pay $246 for a comparable product. Outer Regional areas are only able to offer payday lending from $269. A similar story exists with chattel loan products with Melbourne receiving the cheapest loans, while Regional Centres receive higher prices. Micro Credit Database Product Min/Max Analysis Regional Comparisons Minimum Metropolitan Regional Centres Outer Regional Maximum Metropolitan Regional Centres Outer Regional Payday lenders Chattel lender Payday lenders Chattel lender Payday lenders Chattel lender 51% 35% 50% 35% 50% 35% 12476% 1040% 866% 520% 902% 520% 160160% 55170% 116888% 6160% 148713% 5680% Payday lenders Chattel lenders Payday lenders Chattel lender Payday lenders Chattel lender Single loan rate 18% 10% 23% 20% 25% 20% Effective rate 63% 120% 92% 360% 325% 240% Cost to borrower# 16% 130% 23% 1350% 950% 440% #The aggregate value of total debt accumulated to repay initial borrowing without any customer contribution where the customer seeks to re-borrow in each period in order to satisfy the current debt. The figure here is the growth in current debt over the initial amount borrowed at the end of a 12-month period. Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 MISC - Consumer Credit Report 77 Stark contrasts exist between interest rates offered by individual lenders. Despite the preconception that all lenders are exorbitantly priced, there are exceptions, especially in Melbourne and Regional Centres. In Outer Regional Victoria, even the lowest priced lenders are highly priced in annualised terms, compared to the other regions. This occurrence is possibly due to the higher number of products offered in Metropolitan regions compared to Regional Centres, negating any extreme observations. The range of observed single loan rates in Metropolitan areas is 33%, while Regional Centres has a range of 27%, and Outer Regional with 25%. This suggests that minimum and maximum interest rate observations in Metropolitan Melbourne are more pronounced than those in regional areas are. In terms of the higher priced products, all three regions suffer from lenders that charge extremely high interest rates. Note that a single payday lender is excluded from the analyses, as their figures were obvious outliers far exceeding those of the nearest product. However, the figures did not suggest that the lender adopts exploitative lending practices, but would appear to be setting a deterrent to potential lenders for pursuing such small loans with their company. In fact, upon request for information on a $200 loan, the lender recommended a cheaper alternative from one of their competitors. Micro lenders also happen to provide personal loan products. Analysis of the data assumes that each loan is valued at $1,000 and has a term of six months. MISC - Consumer Credit Report 78 Evidence of Defining Features for Mainstream Micro Credit Lenders In addition to pawnbrokers and payday lenders a variety of Mainstream Lenders, provide personal loans or Chattel Loans either on an unsecured or secured basis. These will include special car lenders (not new car), e.g. Aussie Car Loans. This section reviews the availability of unsecured smaller loans. Scope of Coverage: The following table shows that customers have limited choice of products, as opposed to the options available with payday and chattel loans. Compared to the more common Micro Credit products the Regional Centres have a more balanced representation of such products. Micro Credit Database Coverage Subsidiary Lenders Personal Loans Only Product Representing Selected Micro Credit Only Lenders State wide Metropolitan Regional Centres Outer Regional Product Count 6 5 6 5 Lender Count 5 4 5 4 Store Count 74 46 21 7 Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 The number of providers of such products is significantly lower than with providers of other micro products. Although the number of lenders and products are relatively low, the store count is well represented with the likes of Cash Converters and GE Money having a significant presence. This table shows there are more products than there are lenders, suggesting that there are lenders who offered more than one product. Analysis of the data assumes that each loan is valued at $1,000 and has a term of six months. The difference between regional and Metropolitan interest rates is marginal, with figures closely resembling each other. With Regional Centres being serviced by the most lenders, their corresponding figures are slightly more affordable, while still much cheaper than most other micro products. The effective interest rate of borrowing $1,000 through a personal loan is significantly less than borrowing money through other micro products. The average effective rate of personal loans provided by micro companies does not exceed 79% per annum, while the average effective rate for other micro lenders does not drop below 400%. Micro Credit Database Product Analysis Personal Loans Regional Comparisons Avg application fee State wide Metropolitan Regional Centres Outer Regional $264 $326 $264 $326 Avg ongoing fee per week $8 $9 $8 $9 Avg Single loan rate 51% 58% 51% 58% Avg Effective rate p.a. 71% 79% 71% 79% Avg Cost to Borrower p.a.# 868% 1069% 868% 1069% #The aggregate value of total debt accumulated to repay initial borrowing without any customer contribution where the customer seeks to re-borrow in each period in order to satisfy the current debt. The figure here is the growth in current debt over the initial amount borrowed at the end of a 12-month period. Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 There is a noticeable difference between average application fees with Regional Centres paying an average of $264 while Metropolitan and Outer Regional borrowers pay roughly $326. Applications fees are higher for personal loans than those observed with payday and chattel loans, but as a proportion of the loan amount, these fees are comparable to those charged with payday and chattel loans. Ongoing weekly charges are a common across most products while a minority of lenders charge a membership fee, of about $100, over application and ongoing fees. MISC - Consumer Credit Report 79 Micro Credit Database Loan Simulation Analysis Personal Loans Regional Comparisons Avg paid on single Avg paid p.a. Avg paid p.a. - Cost to Loan simulation per $1000 loan loan Effective Borrower# State wide 1,510 1,711 9,678 Metropolitan 1,581 1,794 11,688 Regional Centres 1,510 1,711 9,678 Outer Regional 1,581 1,794 11,688 #The aggregate value of total debt accumulated to repay initial borrowing without any customer contribution where the customer seeks to re-borrow in each period in order to satisfy the current debt. The figure here is the growth in current debt over the initial amount borrowed at the end of a 12-month period. Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 Simulating a $1,000 loan through the average interest rates per region shows exactly how much a loan through these lenders would cost. It is clear that any single $1,000 loan will cost between $509 and $580 in interest and charges. On annualised basis, the cost per loan only increases to between $710 and $794. Again, the difference between regions is marginal with Regional Centres seemingly enjoying the cheapest rates. On comparison with other micro products, it is clear that although in absolute terms it seems that such personal loans are more expensive, yet proportionately such loans are far cheaper. Micro Credit Database Product Min/Max Analysis Personal Loans Regional Comparisons Minimum Metropolitan Regional Centres Outer Regional Maximum Metropolitan Regional Centres Outer Regional Single loan rate 34% 23% 34% 85% 85% 85% Effective rate 52% 38% 52% 120% 120% 120% Cost to borrower# 105% 64% 105% 3202% 3202% 3202% #The aggregate value of total debt accumulated to repay initial borrowing without any customer contribution where the customer seeks to re-borrow in each period in order to satisfy the current debt. The figure here is the growth in current debt over the initial amount borrowed at the end of a 12-month period. Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Database 2006 / Mystery Shopper Survey 2006 As with other micro products there are stark contrasts between individual products offered in the personal loans market. The range between minimum and maximum rates is greatest when looking at the cost to borrower figures, with observed rates ranging over 3,000%, yet the minimum single loan rate in the state are 23% and went up to 85%. The annualised effective interest rate also shows that differences between product charges can be prevalent with the observed rates ranging 82%. MISC - Consumer Credit Report 80 EVIDENCE OF DEFINING FEATURES FOR MAINSTREAM LENDERS Product Profile A Product Perspective Although not part of the micro lending market the major banks, along with credit unions and building societies, offer a diverse range of personal and car loan products that rival those provided by micro lenders. Such loans are widely available, but tend to have stricter lending requirements. As a result, riskier borrowers are often excluded from such products allowing such lenders to offer rates that are more competitive. As with the personal loans provided by micro lenders, such products are cheaper than the standard payday loan or chattel loan product. Mainstream Lender Product Representation Scope of Product offerings The most popular Mainstream Lender product category offered within the Metropolitan area is a variable unsecured personal loan. There are at least 20 lenders offering 30 different products types that fall under this category. However, in terms of distribution space, this product is not maximised at available points of presence. Variable unsecured loan is only available in 22% of total points of presence compared to 29% fixed secured personal loans and fixed unsecured personal loans in Metropolitan Melbourne. Fixed unsecured car loans by far are the most unpopular product, transcending all areas in Victoria. Only two credit unions offer this product in Metropolitan Melbourne. Unlike micro lenders, there are more products available than lenders suggesting there are lenders offering multiple products, rather than specialising in single products. Mainstream Lender Database Coverage Personal Loans Only Product Representing Mainstream Lenders Metropolitan Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Total Regional Centres Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Total Outer Regional Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Total Product Count 9 30 12 21 6 20 2 100 5 11 12 16 3 1 0 48 6 16 14 15 2 7 0 60 Lender Count 8 20 9 14 6 10 2 169 4 7 8 9 3 1 0 32 6 9 8 8 2 3 0 36 Store Count 138 422 561 559 220 30 5 1935 23 55 77 77 26 1 0 259 78 172 312 312 95 13 0 982 Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 MISC - Consumer Credit Report 81 Mainstream Lenders are highly represented across all regions, with Metropolitan Melbourne having more than double the amount of stores than either Inner or Outer Regional areas. Unlike with Micro Credit products Outer Regional areas are well represented with Mainstream Lenders. The store count in Outer Regional areas is more than three times that of Regional Centres, with the lender and product count also being greater than Regional Centres. Such bias towards Outer Regional areas were due to a high count of major and regional banks, which was not a trend apparent with Micro Credit Lenders. Common Loan Features of Mainstream Market Products of Mainstream Lenders (excluding new car loans) included in this market are variable secured personal loans, variable unsecured personal loans, variable secured car loans, fixed secured personal loans, fixed unsecured personal loans, fixed secured car loans and fixed unsecured car loans. All Mainstream Lenders charge an annualised interest rate on loans with application and establishment fees range from $35 to $595 per loan. Ongoing fees include those payable by month or by quarter ranging from $2.50 to $10 per month, with some charging up to $25 per quarter. However, not all lenders charge ongoing fees, with some opting to stick with application fees and interest charges alone. The minimum loan sizes range from $1,000 to $10,000 and normally the loan will command term lengths between six months to seven years. Product Profiles The Debt Trap Mainstream micro credit lenders providing personal loan product generally have characteristics that are less likely to impose a debt trap but such traps are still possible in the current environment. The key differential is the time frame that these products will encompass and the formal requirement of all of these products for regular payments regardless of the source i.e. even if it is made from the borrowing. This analysis is accordingly different from the preceding Debt trap discussions. Here the measure is not so much the balance but first, the time frame in which the initial borrowings are subsumed as payments and a new loan must be taken in order to satisfy the first. The second dimension of analysis is the new level of regular commitment the additional borrowing imposes. MISC takes the view that a regular new commitment which is five times that of the original i.e. 500% may place the consumer in a trap. Across the periods and offering reviewed in this profile section the product with the most onerous repayment terms on offer to Victorian consumers is the ‘Fixed Secured Personal Loan’ and the ‘Variable unsecured Loan’. The Fixed secured loan of $2000 in the profiles that follows will need to be re borrowed after just 42 weeks i.e. after 81% of the loan life. The weekly commitment of $42 reaches the 500% threshold in just a further 45 weeks. I.e. week 87 .At this point the consumer will need to commit to a fifth loan of $2000 before the then current loan expires in order to meet continuing payment obligations. MISC - Consumer Credit Report 82 Variable Secured Personal Loan This product is provided by at least 14 Mainstream Lenders. Application and establishment fees range from $50 to $595 per loan with ongoing fees that may include those payable monthly. Ongoing charges range from $2.50 to $7 per month. Normally, the minimum loan sizes range from $1,000 to $10,000 and term lengths range from six months to seven years. Variable secured personal loan snap shot: Variable secured personal loan 10.3% p.a. plus $100 application fee Minium loan amount is $5,000 Maximum loan amount is $80,000 Loan term between one year and seven years $642 per $5,000 loan Commencing weekly payment Time frame for Second Loan to pay first New Weekly payment after five re borrowings Time frame elapsed before fifth re borrowing $107 46th Week $535 96th week (1yr 44 wks) Modal Product Product Description Features/Conditions Total Cost Loan value/term: ($5,000/1years) Cost to Borrower Debt Accumulation Variable Unsecured Personal Loans Variable unsecured personal are quite common and is available with at least 33 Mainstream Lenders including the major banks and the credit unions. An application and establishment fees applies which range from $35 to $150 per loan. Other ongoing fees include those payable by month, costing from $5 to $10 per month. The loan sizes range from $1,000 to $10,000, similar to most secured personal loans by Mainstream Lenders. However, this product has a much shorter lifespan of six months to two years. Variable unsecured personal loan snap shot: Variable unsecured personal loan 11.95% p.a. plus $150 application fee Minium loan amount is $3,000 Maximum loan amount is $40,000 Loan term between one years and two years $591 per $3,000 loan Modal Product Product Description Features/Conditions Total Cost Loan value/term: ($3,000/1year) Cost to Borrower – Debt Accumulation Commencing weekly payment Time frame for Second Loan to pay first New Weekly payment after five re borrowings Time frame elapsed before Fifth re borrowing - $66 44th Week $330 91th week (1yr 39 wks) MISC - Consumer Credit Report 83 Variable Secured Car Loans This product is provided by at least 20 lenders. This loan has an application and establishment fees range from $35 to $175 per loan while ongoing fees include those payable by month include a $5 per month fee. The minimum loan sizes range from $1,000 to $10,000 and have term lengths of one to two years. Variable secured car loan snap shot: Variable secured car loan 9.7% p.a. plus $150 application fee and $5 per month ongoing fee Minium loan amount is $5,000 Maximum loan amount is unlimited Loan term of between one years and two years $719 per $5,000 loan Modal Product Product Description Features/Conditions Total Cost Loan value/term: ($5,000/1year) Cost to Borrower – Debt Accumulation Commencing weekly payment Time frame for Second Loan to pay first – New Weekly payment after five re borrowings Time frame elapsed before fifth re borrowing - $107 46th Week $535 96th week (1year 44 wks) Fixed Secured Personal Loans There are 17 Mainstream Lenders, which provide fixed secured personal loans. Its application and establishment fees range from $100 to $250 per loan with ongoing fees include those payable by month and range from $5 to $7 per month, or $25 per quarter. Minimum loan sizes range from $1,000 to $10,000 and has a term lengths between one year and four years. Fixed secured personal loan snap shot: Fixed secured personal loan 9.5% p.a. plus $250 application fee Minium loan amount is $2,000 Maximum loan amount is $50,000 Loan term between one years and four years $449 per $2,000 loan Modal Product Product Description Features/Conditions Total Cost Loan value/term: ($2,000/1year) Cost to Borrower – Debt Accumulation Commencing weekly payment Time frame for Second Loan to pay first New Weekly payment after five re borrowings Time frame elapsed before fifth re borrowing - $42 42nd Week $210 87th week (1year 35 wks) MISC - Consumer Credit Report 84 Fixed Unsecured Personal Loan There are roughly 24 Mainstream Lenders providing fixed unsecured personal loans. This product has an application and establishment fee, ranging from $99 to $205 per loan. Ongoing fees include those payable by month and range from $5 to $10 per month. The minimum loan sizes range from $1,000 to $5,000 and the lifespan of the loan range between six months to four years. Fixed unsecured personal loan snap shot: Fixed unsecured personal loan 11.95% p.a. plus $205 application fee and $5 per month ongoing fee Minium loan amount is $4,000 Maximum loan amount is $50,000 Loan term of between one year and four years $773 per $4,000 loan Modal Product Product Description Features/Conditions Total Cost Loan value/term: ($4,000/1year) Cost to Borrower – Debt Accumulation Commencing weekly payment Time frame for Second Loan to pay first New Weekly payment after five re borrowings Time frame elapsed before Fifth re borrowing - $88 44th Week $440 91st week (1yr 39 wks) Fixed Secured Car Loans The number of lenders providing fixed secured car loans is much less that those providing variable secured car finance. In Victoria, there are only six known lenders providing this product. The application and establishment fees of this product range from $150 to $250 per loan. Ongoing fees include those payable by month include a $5 per month fee. The minimum loan sizes normally range from $3,000 to $10,000 with minimum term lengths ranging from one to two years. Fixed secured car loan snap shot: Fixed secured car loan 10.5% p.a. plus $150 application fee and $5 per month ongoing fee Minium loan amount is $3,000 Maximum loan amount is unlimited Loan term of between one year and seven years $542 per $3,000 loan Modal Product Product Description Features/Conditions Total Cost Loan value/term: ($3,000/1year) Cost to Borrower – Debt Accumulation Commencing weekly payment Time frame for Second Loan to pay first New Weekly payment after five re borrowings Time frame elapsed before Fifth re borrowing $65 44th Week $325 92nd week (1year 40 wks) MISC - Consumer Credit Report 85 Fixed Unsecured Car Loans Fixed unsecured car loans as a product is the least popular amongst lenders as it carries the highest risk on the loan. There are only two credit unions, which provide the product. Its fee structure includes application and establishment fees range from $99 to $110 per loan and ongoing fees $5 per month. The minimum loan sizes range from $1,000 to $4,000 and the minimum term of the loan range from one to two years. Fixed unsecured car loan snap shot: Fixed unsecured car loan 13.00% p.a. plus $99 application fee Minium loan amount is $4,000 Maximum loan amount is unlimited Loan term of between one year and ten years $1,286 per $4,000 loan Modal Product Product Description Features/Conditions Total Cost Loan value/term: ($4,000/1year) Cost to Borrower – Debt Accumulation Commencing weekly payment Time frame for Second Loan to pay first New Weekly payment after five re borrowings Time frame elapsed before Fifth re borrowing $50 79th Week $250 151st week (2 yrs 47 wks) In Regional Centres Victoria, fixed unsecured personal loans are more popular than variable unsecured personal loans. There are 16 product types on offer, which fall under this category and which are provided by nearly a third of total Mainstream Lenders in Regional Centres Victoria. In terms of distribution strength, this product commands 30% of all Regional Centres points of presence compared to 21% of variable unsecured personal loans. Fixed unsecured personal loans share similar distribution strength with the fixed secured personal loans category. The latter however has less product type availability. Fixed secured and unsecured personal loans share similar distribution strength in Outer Regional Victoria with both product categories offered by eight lenders in a third of the points of presence available in the Outer region. While this product category is strongest in the distribution space, its number of product is less that the variable unsecured personal loan segment. The variable unsecured personal loan segment commands more product but penetration remains half of those in the fixed secured and unsecured loan category. MISC - Consumer Credit Report 86 Mainstream Loan Cost Structure Within the realms of the mainstream loan cost structure, MISC has established four scenarios of loans rates. The average single loan rate is the average rate weighted over the full term of the loan. The average cost to borrower assumes that the minimal amount of loan payment has been repaid with the balance of the loan, which is repaid by additional loans. The effective interest rate is the combination of nominal interest rate charged together with all other fee charges annualised as a percentage cost of the loan. In Metropolitan Melbourne, fixed secured car loans have the highest average application fee while variable secured car loan product has the lowest application fee of all loan product categories. Application fees of fixed secured car loans are just as expensive in Inner and Outer Regional Victoria. Over the term of the loan, fixed unsecured car loan has the most expensive average interest rate while variable secured car loans is the cheapest. The average effective interest rate is highest amongst fixed unsecured car loan loans despite having the third lowest application fee charges. In Regional Centres Victoria, the highest cost to borrower observation is for variable unsecured personal loans while the average effective interest rate ranks highest for variable unsecured personal loans. Over the term of the loan, the most expensive personal loan is fixed secured personal loan. On the other hand, fixed unsecured personal loan is the most expensive product both over the term of the loan and on an annualised basis. Mainstream Lender Database Product Analysis Personal Loans Regional Comparisons Avg. single loan rate Metro Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Regional Centres Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Outer Regional Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car 30% 22% 27% 25% 21% 17% 33% 21% 28% 29% 28% 21% 14% 26% 28% 27% 29% 22% 15% Avg. cost to borrower 23% 20% 26% 28% 18% 19% 34% 29% 29% 25% 28% 21% 15% 20% 22% 23% 29% 19% 16% Avg. effective Avg. application interest rate fee 18% 16% 19% 19% 15% 14% 25% 19% 21% 19% 20% 16% 14% 18% 18% 18% 21% 15% 13% $124 $66 $176 $128 $202 $46 $105 $123 $128 $172 $137 $202 $150 $203 $70 $157 $133 $228 $25 - Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 MISC - Consumer Credit Report 87 Simulating a $1,000 loan through the average interest rates per region shows exactly how much a loan through these lenders would cost. These figures show products that are cheaper than micro lender personal loans, and much cheaper than other micro products such as payday loans and chattel loan products. In absolute terms, the average paid per single $1,000 loan seems to be significant yet as a proportion of the loan is up to a third of the cost associated with comparable personal loan products provided by micro lenders. The range of observations for the average paid per single loans is between the minimum of $1,143 and a maximum of $1,326. These figures show that even the most expensive personal loan provided by a Mainstream Lender is still cheaper than any personal loan product offered by a micro lender, and for that matter proportionately cheaper than the average payday or chattel loan on the market. Mainstream Lender Database Loan Simulation Analysis Personal Loans Regional Comparisons Loan simulation per $1,000 loan Metropolitan Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Regional Centres Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Outer Regional Variable Secured Variable Unsecured Fixed Secured Fixed Unsecured Fixed Secured Car Variable Secured Car Fixed. Unsecured Car Avg paid on single loan $1,303 $1,223 $1,267 $1,250 $1,211 $1,168 $1,326 $1,212 $1,277 $1,289 $1,281 $1,209 $1,144 $1,256 $1,281 $1,266 $1,292 $1,222 $1,147 Avg paid p.a. Effective $1,176 $1,164 $1,188 $1,190 $1,148 $1,144 $1,247 $1,192 $1,215 $1,185 $1,205 $1,162 $1,144 $1,177 $1,180 $1,177 $1,210 $1,152 $1,128 Avg paid p.a. Cost to Borrower# $1,232 $1,203 $1,259 $1,280 $1,182 $1,194 $1,338 $1,287 $1,287 $1,247 $1,278 $1,210 $1,153 $1,201 $1,216 $1,234 $1,289 $1,189 $1,164 - Source: MISC Mainstream and Subsidiary Micro Credit Product Attribute Data base 2006 / Cannex Mainstream Product Attribute 2005 #The aggregate value of total debt accumulated to repay initial borrowing without any customer contribution where the customer seeks to re-borrow in each period in order to satisfy the current debt. The figure here is the growth in current debt over the initial amount borrowed at the end of a 12-month period. MISC Consumer Credit Report 88 MICRO CREDIT PROVIDER ACCESSIBILITY - A DISTRIBUTION AUDIT AND TRACE Introduction Given that a plethora of products variants are available, the final question remaining is how accessible are those options .To an extent the previous Module provides some inkling to this as the product data base is built from representation of Micro Lenders. This trace of Micro Lenders, be they Subsidiary, Mainstream or Community, show that in aggregate the consumer might be well served by the distribution of such providers in Victoria, but this ignores the inconsistencies inherent in site availability and physically accessibility. Methodology and Classification This section attempts to segregate in greater depth the varying Micro lenders by type as well as in accordance to their respective location within Victoria. MISC’s research coverage of Micro Credit Lenders was extensive with the collection of subsidiary and Mainstream Lender outlets made through various sources: APRA source checks with Integrated Register, phone interviews, yellow pages checks, stakeholder interviews, anecdotal evidence and suburban paper listings. The classification that entails in this section segregates the more Mainstream Lenders (i.e. the banks, credit unions, mortgage brokers and building societies) as the ‘Mainstream Micro Credit Lenders’, particularly on personal and car loan products that are equivalent to micro credit. The lenders that exist outside the definition of a Mainstream Lender are defined as ‘Subsidiary Micro Credit Lenders’. The more common Subsidiary Micro Credit Lenders include pawnbrokers, payday lenders and short-term cash advancers. While these lenders seem to have attracted considerable interest, particularly as a segment of “non-conforming” lenders, their presence seems not to have been widely reflected and compared among the other larger Mainstream Lenders. In essence, the analysis blends together the following types of lenders: Micro Credit Lending Site Scope Trace Coverage Mainstream Lenders • • • • • • Major banks Regional banks Credit Unions Building Societies MISC derived mortgage broker representation (intermediaries) Solicitor Lending (intermediaries) Subsidiary Lenders • • • • • • • • • Pawnbrokers Cash advancers Short-term loan providers /Finance Companies Payday loan providers Small Consumer Credit loan providers CentreLink branches Community based Micro Credit schemes Online Subsidiary Micro Credit Lenders Other Subsidiary Micro Credit Lenders Community Lenders • No Interest Loan schemes, Subsidized Loans MISC Consumer Credit Report 89 Under the Subsidiary Micro Credit space, MISC has also classified specialist car loan providers such as Aussie Car Loans as ‘other’ Subsidiary Micro Credit Lenders due to the limited nature of its demographic as a category. Of all ‘other’ Subsidiary Micro Credit Lenders there was only one specialist car loan provider. While car title lending is prevalent among Subsidiary Micro Credit Lenders, lending from a specialist automotive lender is not common. Micro Credit Mainstream Lenders except for mortgage brokers and solicitor lending is derived from APRA’s points of presence database in accordance to the minimum branch standards set. MISC derived mortgage brokers was obtained from MISC mortgage pooling facility, which measures the mortgage broking market in Australia. The MISC broker pooling facility in its essence is a collection of data sets from both lenders (banks), and mortgage brokers. The MISC pooling facility is used to measure the mortgage broker market in Australia. The brokers counted are brokers who have written at least one loan in Victoria as of June 2005. Three levels of distribution analysis are defined to understand the relative dispersion of the Micro Credit Lenders – Metropolitan Melbourne, Regional Centres (e.g. Bendigo, Ballarat, Geelong, etc) and Rural Victoria. A further level of detail covers the specific location by Regional Centres and Metropolitan Melbourne of Micro Credit Lenders in terms of their branch points of presence. MISC is unable to segregate out the geographic presence in accordance to the Metropolitan, Regional Centres and Outer Regional, as the methodology applied differs from data extracted from the consumer profile section. Despite these differences in consistency, MISC believes that reflecting distribution by Metropolitan Melbourne, Regional Centres and Rural Victoria would provide a more specific and accurate guide towards the points of presence dispersion and count of the Micro Credit Lenders. As an added dimension to this trace a Service Population Ratio reflects branch concentration in terms of the number of people serviced. This ratio however does not take into account “transaction active” population who by age definition (>18) is able to borrow from a certified lender. The service population measure is then applied in order to benchmark Victoria’s subsidiary lender concentration as opposed to credit concentration in California, USA. MISC Consumer Credit Report 90 Points of Presence Distribution in Victoria - Alternate measures After initiating further review on financial points of presence coverage for Mainstream Lenders, MISC has identified that APRA’s points of presence database excludes other commercial finance companies. The point of presence coverage extends only to all banks, authorised deposit institutions, credit unions and building societies. When compared to size (i.e. interest income, cash and assets, loans and advances), APRA derived data provides no state breakdowns. Below are the sources that have been used for this study, its data reference and state breakdown description both by points of presence and market size. Points of Presence Source APRA Points of Presence Database 2005 ABS 1369.0.55.001Business Register as at June 2001 ABS 1369.0.55.001Business Register as at June 2004 (new format) Taxation statistics 200203, Table 4: Company tax Australia only Data Description Branch and non branch (electronic) location descriptions Business registration numbers for financial institutions and insurance firms by estimated annual turnover Business registration numbers for financial institutions and insurance firms by estimated employment Number of companies by bank, financial asset investors, services to finance and investment, life insurance and super funds, other insurance and services to insurance MISC Research By state for Victoria Victoria and National State Breakdown Yes Yes Victoria Yes National No state breakdown. National Figures only. MISC Consumer Credit Report 91 Site Coverage Source APRA Quarterly Bank Performance Statistics June 2005 APRA Credit Union Statistics June 2005 APRA Building Society Statistics June 2005 RBA Bulletin Table B10 – Finance Companies and General Financiers Data Description Financial position and financial performance of banks/other domestic banks Financial position and financial performance for credit union Financial position and financial performance for building societies Selected assets and liabilities MISC Research National State Breakdown No state breakdown National National No state breakdown No state breakdown National No state breakdown Test of Coverage/Sanity Test In all, MISC has traced some 2,091 points of presence for lenders and programs serving specifically or additionally for this market sector. The points of presence MISC undertook for this study in essence combined the APRA points of presence by institutions (i.e. predominantly banks, credit unions and building societies) for Victoria, together with eight subsidiary lender category types. In addition to these points of presence, some 383 intermediaries have also been traced in the MISC survey. The research conducted was in various forms – desk research, phone interviews, community weekly papers, face-to-face interviews with Micro Credit Lenders, etc. This is the first time that a complete review has been conducted in Victoria. The results show that there is one point of presence for every 2,400 persons in Victoria. Statistical data derived from the ABS business register reflect an inconsistent format used to estimate the number of finance companies available in Victoria. In 2004, ABS published a combined total of Finance and Insurance number of companies estimated by persons employed. In 2001, both of these categories were separated and detailed according to the number of companies by estimated annual turnover. In order to determine whether the MISC derived number were roughly in-line with published figures MISC applied two estimated models. As the following analysis shows, MISC has successfully isolated a significant proportion of what might be (but is not precisely known) as the universe of all financial organisations in Victoria excluding insurance and advisors. MISC Consumer Credit Report 92 Model 1 Model 1 applies the ratio of finance companies in 2001 as a component of total Finance and Insurance firm numbers and used the ratio as a fraction of the aggregated 2004 total finance and insurance figure. The following reflects the estimates: Source Estimate Based on 2001 Ratio ABS 1369.0.55.001- Business Register as at June 2001 ABS 1369.0.55.001- Business Register as at June 2001 Total number of finance companies, Australia, 2001 Total finance and insurance, Australia % Finance companies to total ABS 1369.0.55.001- Business Register as at June 2004 Total number of finance and insurance companies with employed personnel, Victoria Estimated number of finance companies in June 2004 MISC Derived Lender Aggregate Variance 7,633 31,620 24% 14,260 3,442 2,091 65% Model 2 Model 2 derives Victoria’s state population share as a representation of customer base and applies the ratio as a component of total Finance firm numbers. Here the closest estimate is 2001. Source Estimate Based on Victoria’s Population Share Cat. No. 3218.0.55.001 Regional Population Growth, Australia - companion data, 2004 Cat. No. 3218.0.55.001 Regional Population Growth, Australia - companion data, 2004 ABS 1369.0.55.001- Business Register as at June 2001 Preliminary population estimates for Victoria, 2004 Preliminary population estimates for Australia, 2004 State Ratio Total number of finance companies with employed personnel, Australia, 2001 Estimated number of finance companies in Victoria MISC Derived Lender Aggregate Variance 4,972,779 20,111,297 25% 7,633 1,887 2,091 10% Model 3 to come - Integrated Register While the interacted register has been deployed in a total State sense, to test the validity of site coverage, it is yet to be deployed at a SLA and thus regional level. MISC intends to utilize this unique record in the subsequent Stage1.2 Market Flow measurements. MISC Consumer Credit Report 93 Scope of Distribution Trace - Real extent of Distribution The total of 2,091 identified Micro Credit Lenders services a population of over five million in Victoria. These include 1,394 Mainstream Lenders, 417 intermediary lenders (mortgage brokers and solicitor lending) and 280 Subsidiary Micro Credit Lenders. Victorian Micro Credit Lender Distribution Research and Site trace Micro Credit Lender Group Subsidiary Lenders Intermediaries* Mainstream Lender exposure Total Point of VIC Presence 280 417 1,394 2,091 Populations Served per Points of Presence 17,397 12,044 3,303 2,401 Sources of Trace MISC Trace MISC Trace APRA Source: MISC Micro Credit Site Trace 2006, MISC Mortgage pooling Facility 2005/2006 Note: * Intermediaries include mortgage brokers and solicitor lending Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, and payday loan providers, CentreLink, Community Micro Credit schemes, online Micro Credit Lenders creditors, other Subsidiary Micro Credit Lenders. Mortgage brokers act as originators of credit as well as distributors of credit. There were 228 MISC derived brokers listed in Victoria. However, the aggregated broker total also includes branch-identified brokers such as Mortgage Choice (40 branches in Victoria), Smartline (39 branches), Wizard (46 branches), RAMS (15 branches), Aussie (three branches), and Mortgage House (nine branches). Broker listings also took into account the non-conforming lenders operating in Victoria as well as non-MISC pool listed brokers partially broking non-conforming loan products. MISC’s Micro Credit trace as in the later part of 2005, reveals that the 280 Subsidiary Micro Credit Lenders in Victoria are made up of 58 short-term lenders, 59 governments initiated Micro Credit finance through CentreLink, 10 cash advancers, 78 pawnbrokers, 40 payday lenders, three online Subsidiary Micro Credit Lenders, seven Community Micro Credit schemes as well as other lenders. The majority of these Micro Credit Lenders with wide points of presence network in Victoria comprise of companies such as Cash Converters, GE Money, Money Plus, City Finance Loans and Cash Solutions, Cash Loan Money Centre, Aussie Car Loans and Great Trader Pawnbrokers. Product Segmentation by Institution Type Mainstream and Subsidiary Micro Credit Lenders clearly operate in two distinct consumer loan markets, although there can be some overlaps in the characteristics of the loans. Consumer loan products provided by the more Mainstream Lenders are mainly limited to personal and car loans whether these loans are secured or unsecured. There is also a choice between fixed or variable rates on the loan. Subsidiary Micro Credit Lenders on the other hand have a different loan range with most loans effectively drawing higher costs and shorter loan terms. Subsidiary Micro Credit Lenders draw considerable attention given that there is product overlaps between these lenders groups. MISC Consumer Credit Report 94 Product Segmentation By Mainstream Lenders The Mainstream Lender product matrix indicates that most Mainstream Lenders offer both variable secured and unsecured personal loans. There is only one building society business in Victoria hence, its loan products are limited to fixed secured loans. Most of the car loans on offer are fixed secured car loans with only a limited number of credit unions offering fixed unsecured car loans. Victorian Micro Credit Lender Distribution Research and Site trace- product coverage Products Variable Secured Personal Loan Variable Unsecured Persona Loan Fixed Secured Personal Loan Fixed Unsecured Personal Loan Variable Secured Car Loan Variable Unsecured Car Loan Fixed Secured Car Loan Fixed Unsecured Car Loan Source: MISC Micro Credit Site Trace 2006, CANNEX database 2005/2006, APRA points of presence database 2005 Regional Other Credit Building Major Banks Regional Banks Credit Unions Building Societies Major Banks Banks Banks Unions Societies Products Coverage By Micro Credit Lenders Subsidiary Micro Credit Lenders as opposed to Mainstream Lenders, offer a wider and varying list of consumer loan products. Among the more common products are payday loans, loan against goods provided, and short-term and personal loans. These products have a tendency to vary between subsidiary lender categories. For instance, pawnbrokers are known to have loan products against goods, but there are occasional instances where pawnbrokers offer payday loans (as in the case of Aladdin’s Cash and Trade). Similarly for the payday lender group, there are lenders that may also offer pawnbroker type loans in addition to its payday loan product. Evidently from this product matrix, payday loans dominate the cross group classification of most commercial subsidiary lender types. Short-term loan providers are the most flexible of the subsidiary lender group, offering a depth of subsidiary loan products from credit impairment finance, pawnbroker loan against goods, personal loans, payday loans and even small consumer loans. Cash Converters for instance offer secured and unsecured personal loans; payday advances as well as pawnbroking type loans. AMX Financial Services is another hybrid lender classified as short-term loan provider. Its financial services range from cheque cashing, credit impaired finance, personal loans to larger asset finance such as car or boat financing. MISC Consumer Credit Report 95 Table – Subsidiary Lender Product Types: Lenders with product overlap Victorian Micro Credit Lender Distribution Research and Site Trace - Product Coverage Micro Credit Lenders Loan Types Community Schemes Pawnbroke rs CentreLink Other Subsidiary Micro Credit Lenders Short-term Lenders Small Consumer Loans Cash Advances Payday Lenders Online Lenders Cheque Cashing Credit impaired finance Debt consolidation Pawnbroker Loan against goods Nil Interest Loan Scheme Payday Loan Personal Loan Short-term Loan Small Consumer Loan Car Title Loan Other Subsidiary Loans Source MISC Micro Credit Site Trace 2006, CANNEX database 2005/2006, APRA points of presence database 2005 Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, and payday loan providers, CentreLink, Community Micro Credit schemes, online subsidiary creditors, other Subsidiary Micro Credit Lenders. Note: Other loans include business loans, Government Micro Credit loans and boat finance Personal loans are usually cash advances, consumer loans are asset based advance Most cash advancers offer payday loans however, as its classification suggest, the distinction from payday lenders is that there is no direct debit facility requirement from this lender group to its customers. Other Subsidiary Micro Credit Lenders provide a range of subsidiary loans products such as payday, personal loans or car title loans. These lenders are isolated instances, for example: specialist car loan providers who offer payday and personal loans (in the case of Aussie Car Loans), or lenders that provide loans exceeding six months and who also offer payday loans. Institutional Presence Victoria seems to be best represented by the major banks, mortgage brokers (including non conforming brokers), regional banks and Micro Credit Lenders. These lenders among themselves control at least 85% of the aggregate points of presence. Subsidiary Micro Credit Lenders have gained a foothold in Victoria, capturing at least 13% of lender aggregated total or 280 outlets in the state. Subsidiary Micro Credit Lenders in Victoria also includes community credit programs such as no interest or low interest loan schemes provided by the major banks such as ANZ, Bendigo Bank and NAB via charitable organisations including Brotherhood of St Laurence, Good Sheppard Family Service, Unicare (Uniting Care) and Berry Street. MISC Consumer Credit Report 96 Major bank’s branch points of presence are over 900, while the total distribution of MISC derived mortgage brokers has a fair share of the lender demographic, with a physical branch network of at least 381 (two non MISC derived non conforming brokers) in the State, or 18% of the branch lender population. Regional banks have the third highest branch points of presence with over 12% of the distribution total. Distribution By Lenders: Total Distribution by Lender Share - Victoria Credit Unions 6.6% Building Soc 0.2% Types of Fringe Lenders Victoria Community Micro Credit Schemes 2.5% Other Micro credit Lenders 8.6% On-line Fringe Lenders 1.1% Small Consumer Loans 0.4% Centre Link 21.1% Cash Advancers 3.6% Pawnbroking 27.9% Other Banks 4.2% Total Fringe Lenders 13.4% Total Mortgage Brokers 18.3% Regional Banks 12.6% Major Banks 43.1% Payday Loans 14.3% Short Term Loans Providers 20.7% Solicitor Lending 1.6% MISC Micro Credit Trace 2006, APRA Points of Presence 2005 Note: Other lenders include Car Title Loan Providers Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, and payday loan providers, CentreLink, Community Micro Credit schemes, online subsidiary creditors, other Subsidiary Micro Credit Lenders. Mortgage brokers act as originators of credit as well as distributors of credit. Within the subsidiary lenders, pawnbrokers have the highest branch channel distribution in Victoria, followed by Government initiated CentreLink outlets, short-term loan providers, and payday lenders. The nature of subsidiary lender also differs amongst each lender type. Short-term loan providers, payday loan providers or cash advancers normally consist of either franchise or multinational branch operating models such as Cash Converters, Cash Stop, City Finance and GE Money, while pawnbrokers are mainly sole proprietors. Other Subsidiary Micro Credit Lenders such as specialist car loan provider, Aussie Car Loans, use car or vehicle titles as security for micro and personal lending. MISC Consumer Credit Report 97 Total Points of Presence by Institutions and Location, Victoria Excludes Solicitors And Mortgage Brokers: Total Metropolitan Melbourne Points of % Total Presences Mainstream Lenders Major Banks Regional Banks Other Banks Credit Unions Building Societies Total Mainstream Lenders Subsidiary Lenders Cash Advances Pawnbroking Payday Lending Short-term Loans/Finance Company Small Consumer Loans Other/ Car Loan Community Micro Credit Schemes Online Sub Micro Credit Lenders 542 113 27 79 0 761 9 65 31 46 1 13 6 3 56% 12% 3% 8% 0% 78% 1% 7% 3% 5% 0% 1% 1% 0% Regional Centres and Rural Victoria Points of % Total Presences 359 150 60 60 4 633 1 13 9 12 0 11 1 1 51% 21% 9% 9% 1% 90% 0% 2% 1% 2% 0% 2% 0% 0% Total Points of Presence by Institutions and Location, Victoria Excludes Solicitors And Mortgage Brokers: (cont’d) Total Metropolitan Melbourne Points of % Total Presences 37 4% 211 22% 972 100% Regional Centres and Rural Victoria Points of % Total Presences 22 3% 69 10% 702 100% CentreLink Total Subsidiary Lenders Total Micro Credit Lenders Source: MISC Micro Credit Site Trace 2006 Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. MISC Consumer Credit Report 98 Regional Versus Metropolitan Presence In Metropolitan Melbourne and regional Victoria, the major banks have a commanding branch points of presence of 56% and 51% of the total lender coverage, followed by regional banks with points of presence coverage of 12% and 21% respectively. The presence of Mainstream Lenders is significantly higher in regional and rural Victoria compared to the subsidiary lenders, which have a clearly stronger presence in Metropolitan Melbourne. Pawnbrokers, payday loan providers and short-term subsidiary creditors have stronger points of presence in Melbourne, compared to regional and rural Victoria, while CentreLink’s points of presence distribution is more evenly spread in terms of share between regional and Metropolitan Victoria. While the major banks have commanding points of presence strength, the mix between institutions seems to be overtly different. 55% of Mainstream Lender points of presence are located in Melbourne, compared to 75% for Micro Credit Lenders. Credit unions and building societies both have only 55% of their points of presence in Melbourne, compared to 60% for major banks. Unlike the Micro Credit Lenders and credit unions, the regional banks have a strongest presence in rural Victoria, particularly Bendigo Bank. At least 37% of all regional bank points of presence in Victoria are located in areas beyond the Regional Centres. The spread differs for subsidiary lenders preferring areas of infrastructure activity with 20% of total branches located in Regional Centres and only a fraction or 5% in rural Victoria. Points of Presence Share – Mainstream Points of Presence Share Metropolitan Melbourne Regional Centres Rural Victoria Total Total Sub. Lenders 75% 20% 5% 100% Total Mainstream Lenders 55% 16% 29% 100% Major Banks 60% 13% 27% 100% Regional Banks 43% 21% 37% 100% CU/BS 55% 25% 20% 100% Source: ABS, APRA Points of Presence 2005, MISC Micro Credit Site Trace 2006 Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. MISC Consumer Credit Report 99 Subsidiary lender Regional Presence The presence of building societies although small, is fully reflected in Regional Centres. Credit unions have a more even spread of presence between rural and regional Victoria. Credit union points of presence reflect 22% of operations located in Regional Centres, compared to 21% in rural Victoria. The presence of other banks is predominant in rural Victoria, where 46% of its total points of presence aggregate. Elders Rural Bank largely contributes to this statistic, in which it effectively services the agricultural community. Points of Presence Distribution By Mainstream Lenders Types Victoria Building Soc Credit Unions Other Banks Regional Banks Major Banks 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Metropolitan Melbourne Regional Centres Rural Victoria Source: ABS, APRA Points of Presence 2005, MISC Micro Credit Site Trace 2006 Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. Note: Other Lenders include Car Title Loan Providers MISC Consumer Credit Report 100 Subsidiary Credit Regional / Metro Presence Metropolitan Melbourne is home to 90% of cash advancers, 83% of all pawnbrokers, and 78% of payday and short-term lenders. Short-term lenders and CentreLink have the highest branch points of presence in Regional Centres with 12 outlets each followed by other Subsidiary Micro Credit Lenders. Online subsidiary lenders are predominantly based in Metropolitan Melbourne, while Community Micro Credit schemes have some presence in Shepparton. Among all the subsidiary lenders only CentreLink, pawnbrokers and other lenders categories are likely to be reached in rural Victoria. Points of Presence Distribution By Fringe Lender Types Victoria Centrelink On-line Fringe Lenders Communit y M icro Credit Schemes Ot her Small Consumer Loans Short Term Loans Payday Loans Pawnbroking Cash Advances 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Metropolitan Melbourne Regional Centres Rural Victoria Source: ABS, APRA Points of Presence 2005, MISC Micro Credit Site Trace 2006 Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. Note: Other Lenders include Car Title Loan Providers The high concentration of subsidiary lenders in Melbourne and Victoria’s Regional Centres are depicted further in the map below (referred to as ‘fringe lenders’). Melbourne hosts the majority of subsidiary lenders with over 211 lenders within its Metropolitan boundaries. Of this figure, 36% of lenders are located within Inner Melbourne, while eastern and northern middle Melbourne are the areas with the next highest number of lenders. In Regional Centres, Shepparton, Ballarat and Geelong have among them 8-11 identified subsidiary lenders in each centre, while Bendigo and Morwell have five lenders each. The underlying findings in Shepparton seem notable given that Bendigo has almost double Shepparton’s population size, yet its subsidiary lender numbers are half that of Shepparton’s. Shepparton’s subsidiary lenders are well represented, and include among them pawnbrokers, Community Micro Credit schemes such as Berry Street, and short-term loan providers such as GE Money and Cash Converters. On the other hand, most of Bendigo’s subsidiary lenders are shortterm and payday loan providers. MISC Consumer Credit Report 101 Source: MISC Micro Credit Site Trace 2006 Micro Credit Lenders consist of short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. MISC Consumer Credit Report 102 Population Service of Lender Distribution - Victoria Despite the heavy branch concentration of subsidiary lenders in Metropolitan Melbourne, its service population (by definition of branch concentration in terms of the number of people serviced) remains lower in Regional Centres compared to Metropolitan Melbourne. Effectively, while subsidiary lenders have higher physical branch leverage in the Metropolitan areas, its true concentration levels are biased towards the Regional Centres. This is also where the community financial stress levels are higher. Subsidiary lenders service a population of 12,594 in Regional Centres compared to over 17,000 persons in Metropolitan Melbourne. In other words, relative to its own branch numbers, subsidiary lenders are more competitive in Regional Centres in its niche financial services segment. In rural Victoria however, subsidiary lenders are clearly underrepresented with each outlet servicing over 50,000 people. The more Mainstream Lenders in comparison service less than 2,000 persons. Service Population By Lender: Service Population of Total Subsidiary Lenders 60,000 50,000 40,000 30,000 20,000 10,000 0 Metropolitan Melbourne Regional Centres Rural Victoria Total Subsidiary Lenders have relatively higher serviced population concentration in Regional Centres compared to Melbourne Service Population of Total Mainstream Lenders 6,000 4,000 Total Banks concentration highest in Rural Victoria 2,000 0 Metropolitan Melbourne Regional Centres Rural Victoria Total Source: MISC Micro Credit Site Trace 2006 Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. MISC Consumer Credit Report 103 Service Population Distribution by Location Benchmark Service Population Metropolitan Melbourne Regional Centres Rural Victoria Total Total Sub & Mainstream Lenders 3,739 2,483 1,634 3,000 Population percentage 24% 4% 13% 12% 7% 7% 2% 4% 1% 7% 4% 6% 3% 3% 4% 100% Total Mainstream Total Sub Lenders Regional Banks CU/BS 46,003 20,150 23,546 35,121 Major Banks Total Banks 5,329 3,654 1,816 4,015 17,224 12,594 52,527 17,937 4,776 3,093 1,686 3,603 9,705 5,927 2,845 5,574 3,2161 13,060 7,113 19,096 Source: MISC Micro Credit Site Trace 2006 and ABS Cat. No. 3218.0.55.001 Regional Population Growth Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. Service Population by Regional Centres Service Population Geelong Warrnambool Ballarat Bendigo Shepparton Wodonga Wangaratta Bairnsdale Orbost Mildura Warragul Sale Moe Morwell Traralgon Total Total Mainstream Lenders 3,604 3,108 3,860 3,515 3,148 2,450 2,336 2,420 2,147 4,328 2,162 1,227 0 2,452 0 3,093 Total Sub Lenders 15,069 15,542 11,097 16,871 5,246 0 8,175 8,873 0 15,868 10,091 13,907 18,361 4,413 27,485 12,594 Population 16,5761 31,083 88,777 84,355 47,218 49,003 16,349 26,620 8,588 47,605 30,274 41,722 18,361 22,065 27,485 705,266 Source: MISC Micro Credit Site Trace 2006 and ABS Cat. No. 3218.0.55.001 Regional Population Growth Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. MISC Consumer Credit Report 104 Comparative Institutional Population Coverage – Measures of Efficiency Compared to other Mainstream Lender types, subsidiary lenders are relatively well distributed. They serve a population of 17,937 as of June 2005, placing them ahead of credit unions and regional banks, but trailing the major banks and mortgage brokers. Given its operational scale, the major banks are able to service 5,574 people in Victoria compared to 13,182 for the mortgage brokers and 19,096 for regional banks. Of the subsidiary lenders, pawnbrokers, short-term loan providers, and CentreLink have the highest concentration levels compared to other category types of subsidiary lenders. The lowest concentration of subsidiary lenders includes small consumer loans and online payday lenders. Lender Universe – Service Population Concentration Lender Universe Victoria Cash Advances Pawnbroking Payday Loans Short-term Loan Providers Small Consumer Loans/Finance Company Online Subsidiary Lenders Other Subsidiary Lenders Community Micro Credit Schemes CentreLink Total Subsidiary Lenders Mortgage Brokers Non conforming Mortgage Providers Total Mortgage Brokers Solicitor Lending Total Intermediaries Major Banks Regional Banks Other Banks Credit Unions Building Societies Total Tractional Lenders Total Lenders Points of Presence 10 78 40 58 1 3 24 27 59 280 381 2 383 34 417 901 263 87 139 4 1,394 2,091 % of Total 1% 4% 2% 3% 0% 0% 1% 0% 3% 13% 18% 0% 18% 2% 20% 43% 13% 4% 7% 0% 67% 100% Service Population 502,235 64,389 125,559 86,592 5,022,346 1,674,115 209,264 717,478 85,125 17,937 13,182 2,511,173 13,113 147,716 12,044 5,574 19,096 57,728 36,132 1,255,587 3,603 2,402 Source: MISC Micro Credit Site Trace 2006 and ABS Cat. No. 3218.0.55.001 Regional Population Growth, Australia companion data 2004, APRA Points of Presence Database Note 1) 2) 3) 4) Population based on abs data estimated for 2005 of 5,022,346. Actual population statistics In 2003 were 4,911,425 for Victoria Solicitor lending derived from anecdotal evidence (Solicitor Lending to Consumer, Nicola Howell). The loan amount is normally above $100,000 Mortgage Brokers derived from MISC Mortgage Broker Pooling Facility The inclusions of online lenders are those with offices and branches in Victoria. Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. Mortgage brokers act as originators of credit as well as distributors of credit. MISC Consumer Credit Report 105 Institutional Service Benchmarks – California USA In the US, the proliferation of subsidiary credit lenders remains high, and is more mature as evidenced by the concentration levels of these lenders. Compared to Victoria, California’s consumer credit companies service a population of 6,764 persons for every available outlet. Victoria’s subsidiary lender concentration, when compared to the US in general, and California in particular, reflects nearly three times less concentration. This is despite its population share of Australia of almost 25%, compared to California’s population demographic of 12%. Based on anecdotal evidence, between 2003/2004 and 2004/2005, California’s growth rate in terms of physical outlets was 16%. Points of presence concentration outstripped population growth with over 1,036 persons less serviced in this state. Benchmark Service Population Concentration – Australian and US Year 2004/2005 2003/2004 2004/2005 Location California, USA* California, USA* Victoria, Australia Total 5,342 4,608 280 Population 36,132,147 35,842,038 5,002,346 Population Share 12% 12% 25% Service Population 6,764 7,778 17,937 Source: MISC Micro Credit Site Trace 2006, ABS Cat. No. 3218.0.55.001 Regional Population Growth, 2004 Annual Report – Operation of Finance Companies Licensed under California Finance Lender Laws, 2005 Predatory Payday Lending (US) Fact Sheet Note: * California figures depict the number of licensed Commercial Finance Lenders. Micro Credit Lenders in Victoria consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. US National Benchmarks Review A deeper analysis of the three most popular subsidiary lenders in Victoria reflects its position compared to the US market. In the US, population service concentration outweighs Victoria at least 10 to one for payday lenders compared to only 3 times for pawnbrokers. Essentially, payday lenders may have further room to grow in terms of numbers coming to the industry when compared to a more mature subsidiary market like the US. Unlike its peers, online Subsidiary Lending concentration in Victoria outweighs its service levels in the US. In the US, Internet payday lending, as it is more commonly known, has a service population of 2.1 million persons for every outlet. In Victoria, online subsidiary lenders command 1.7 million persons for every outlet, while in Australia the ratio is two million persons. Online lenders, which have a presence in Victoria, include Golden Day Cash Solutions, City Finance and Someday Credit. Among the less significant but emerging Subsidiary Lending, segments stem from Subsidiary Lending by specialist vehicle creditors. For comparison purposes, MISC has undertaken steps to isolate this in reference to the specialised nature of this segment of the subsidiary credit industry. There are 13 outlets of these vendors in Victoria alone, which are predominantly located in Regional Centres. These creditors are represented in every 380,000 Victorians compared to 130,000 people in California, indicating further room for this segment to grow. MISC Consumer Credit Report 106 Benchmark Comparisons of Subsidiary Lenders Australia and US Year Sub Lender Type Location Source Total Points of Presence 2002 2001 2005 2005 2000 2005 2005 2001 2000 2001 2002 2004 2005 2005 2005 2003 Cheque Cashing stores Cheque Cashing stores Payday Lenders Payday Lenders Payday Lenders Pawnbrokers Pawnbrokers Pawnbrokers Pawnbrokers Rent to Own Store Money Transfer Stores Internet Payday Lending Online Subsidiary Lenders Online Subsidiary Lenders Specialist Auto Loan Providers Car Title Loans US US US VIC US US VIC US US US US US VIC AUS VIC Missouri, US Sources: Anecdotal Evidence from: 1. Market Data Enterprises (2002). Check cashers and payday loan services fill void left by “mainstream” banks, $ transfers booming. Press Release. 2. Stegman, M.A. (2001). Banking the unbanked: Untapped market opportunities for North Carolina’s financial institutions. North Carolina Banking Institute Journal, vol.5. 3. Oeltjen, J.C. (1996). Florida pawnbroking: An industry in transition. Florida State University Law Review, vol.23.no.995. 4. Centre for Responsible Lending (2005). Predatory payday lending traps borrowers. CRL Fact sheet. 5. MISC Micro Credit Site Trace 2006 6. Melhunek, M. (2004). Payday lenders. The Realities of Poverty in Delaware. 7. Caskey (2002) cited in Oeltjen, J.C. (1996). Florida pawnbroking: An industry in transition. Florida State University Law Review, vol.23.no.995. 8. National Pawnbrokers Association, USA, 2006 9. Johnson, R.W. (1998). Pawnbroking in the US: A profile of customers, p7. 10. Temkin, K. & Sawyer N. (2004). Analysis of Alternative Financial Service Providers. 11. Fox, J.A. & Petrini, A. (2004). Internet payday lending: How high-priced lenders use the internet to mire borrowers in debt and evade state consumer protection. 12. ABS 3101 Table 04 - Estimated Resident Population by State (September 2005) and ABS Cat. No. 3218.0.55.001 Regional Population Growth 13. US Population Estimates 2005 14. Quester, A. Fox, J.A. (2005). Car title lending: Driving borrowers to financial ruin. Notes: Comparisons made to reflect Victoria’s position as well as reflect other subsidiary product categories available Subsidiary Lenders consist of pawnbrokers, short-term loan providers, cash advancers, short-term consumer credit, payday loan providers, CentreLink, Community Micro Credit schemes, online Subsidiary Micro Creditors, other Subsidiary Micro Credit Lenders. 1 2 4 5 6 8 5 10 6 10 1 11 5 5 5 14 13,000 10,000 22,000 40 14,000 11,226 78 13,000 14,000 3,000 154,000 140 3 10 13 272 287,984,799 285,107,923 296,410,404 5,022,346 282,193,477 296,410,404 5,022,346 285,107,923 282,193,477 285,107,923 287,984,799 293,656,842 5,022,346 20,387,886 5,022,346 2,921,088 22,153 28,511 13,473 125,559 20,157 26,404 64,389 21,931 20,157 95,036 1,870 2,097,549 1,674,115 2,038,789 386,334 132,839 Population Service Population MISC Consumer Credit Report 107 PROPOSED STAGE 1.2 RESEARCH PROGRAMS This section is concerned with a description of two of the 4 research programs deployed for Consumer Affairs which were unable to be completed in this first Stage reporting. What follows is a description of both of these stages with detailed reporting of the findings of the initial parts of both the consumer research and attempered Micro Credit market flow measures and projections. MISC strongly recommends that these two research stages be completed in the context of the initial brief. Without their commissioning the inquiry is in danger of underestimating the scale on an electorate basis of the issues and the value and cost to the state of their solutions. MISC - Consumer Credit Report 108 A. Consumer Research Process - A 5-Stage Program for Stressed Consumer Behaviours 1. Background 1.1 Previous research methods yield poor representation It is intended in this section to outline the preferred consumer research process that may complete this first stage report. The discussion will show that sampling Victoria’s stressed consumers is highly problematic. In particular, sampling consumers who have accessed Micro Credit with even the largest starting samples has been unsuccessful in identifying sufficient Micro Credit user numbers. This research proposal reviews the steps undertaken so far and describes those additional steps MISC now considers as essential to properly and fully understand stressed consumer behaviours and credit demands. 1.2 Global and Domestic Evidence Domestic Australian attempts at research of stressed consumer group research, or identified product users have in the past proven to be very costly. In addition, small samples sizes that have little statistical validity have been yielded through often unacceptable strike rates. The resulting levels of respondent waste have proven intolerable. For example, in the Griffith University survey, some 7,800 contacts were made in order to define a useful sample of qualifying respondents. The process yielded a one in 20-strike rate and a final usable Micro Credit user sample for Victoria of 400 respondents. The table summarises the research examples both domestically and overseas. Surveys deployed in the past range from CATI based phone contacts, to in-depth interviews, to polling style personal interviews at home. These methods share one common failing due to the strict qualification criteria. Probability sampling procedures almost ensure that small product qualifying strike rates eventually will occur. By comparison, the only successful survey to have been assembled where the target audience could be contacted directly was undertaken in Canada where no privacy restrictions were imposed. Accordingly, a useable sample of 2,000 was secured with minimum wastage. It is apparent that only direct contact with known qualifying respondents can yield usable samples. The cooperation of stakeholders with customers using a variety of products is the only acceptable method. However, even this method is only effective if those customers are sourced from a sufficiently wide representation of product exposure and institutions. In the course of the current research, stakeholder commitment to the process has been unprecedented. Stakeholders will collectively provide MISC / CAV with potential access to 10,200 customers in Victoria alone. This is 20 times more than any survey has so far secured. MISC - Consumer Credit Report 109 Domestic and Global examples of Micro Credit and Micro Finance Consumer Research Date Sep-99 Research Title Source Country Australia Method Telephone survey Personal Loans National Excl WA 6 Focus Groups Telephone survey Personal Loans No. Of people Actual contacted Respondents 7,812 1,620, (including 418 Victorians) 60 597 Taking Credit: A Survey Justin Malbon, of Consumer Behaviour Law School, Griffith University in the Australian Consumer Credit Market Information and Consumer Credit Decisions Uniform Consumer Credit Card Code Research: Key Results Payday Lending in Victoria - A Research Report Solicitor Lending to Consumers 1997 Aug-97 Cathy Avram for Australia the Consumer Credit Legal Service Australian Bankers Australia Association Dean Wilson for Australia the Consumer Law Centre Victoria Nicola Howell for Consumer Credit Legal Service Inc. (Vic) Environics Research Group for CACFS Australia 6 Focus Groups 48 Jul-02 Sep-04 Street Survey 11 Localities 78 (One Respondent per Hour) In-depth Interviews 12 10 Surveys and 18 74 Borrowers 28 Interviews Contacted Jun-05 Understanding Consumers of Canada's Payday Loans Industry Canada 1999 To Bank or Not to Bank: Christopher Berry A Survey of Lowfor MetroEdge income Households US Telephone Interviews and Directed Subsidiary Market Customer Contacts . Approximately twothirds telephone interviews, onethird face-to-face Canadian Lender Customer List 2,000 Jul-04 Managing Multiple Debts: Experiences of County Court Administration Orders among debtors, creditors and advisors Mar 2006 Financial Capability Baseline Survey Elaine Kempson and Sharon Collard for the Department of Constitutional Affairs Financial Services Authority UK 1,532 (From 735 500 households in 3 cities: Chicago, Los Angeles and Washington D.C.) In-depth Interviews 30 UK Dec 2003 Affordable Credit: The Way Forward Collard, E. and Kempson, E. UK Face-to-face 5,328 Interviews. Offered £10 incentive for participants Face-to-face Interviews. 1,012 1,070 MISC - Consumer Credit Report 110 2. Stressed Consumer Sampling Mapping the Process of Efficient Research As the forgoing review attests, there is in fact little statistically significant consumer research works that can claim to truly describe the financially stressed consumer. The experience of the many researchers described in the above table provides MISC and the CAV with clear guidelines as to what methods should not be deployed. In that sense, MISC has been conscious not to expend valuable resources on methods that have shown to be inefficient, e.g. street sampling of micro lender customers. This section describes the process employed to determine the most efficient consumer research method. This approach to date has involved MISC ensuring some level of customer exposure, not in an artificial laboratory environment, e.g. phone contacts or group discussions, but rather in a less intrusive “in-situ” context. Through Delphi structured discussions with stakeholders who have accumulated first hand experience of personal interactions with consumers from this sector, a further understanding is gleaned. Through analysis of comparable work, and through practical first hand experience, MISC has gained an understanding and appreciation of the peculiar requirements of financial affairs focused research with stressed consumers. Flow of Works: The flow chart below maps both the research that has already been completed as part of Stage 1.1, and those steps that will be the subject of Stage 1.2 activity. All preparatory works in Stage 1.1 have encompassed in order: • Literature review of other consumer research • The isolation of questionnaire and research method guidance • The stakeholder surveys Delphi inputs • On site customer experience process • Questionnaire design and field test • Incentive selection and incentive response test • Customer database assembly from stakeholders Stage 1.2: • HILDA survey ABS census match for final 2005 weightings • Questionnaire mail-out • Respondent qualification and stressed group representation tests • Further reminder mail-out • CATI phone survey of pre qualified respondents • Respondent weighting • 2003/2006 customer response results analysis • Reporting MISC - Consumer Credit Report 111 MISC - Consumer Credit Report 112 Completed Programs in Stage 1.1 Step 1: Consumer Research Literature Review – Methodology Design In addition to the role that this research plays, the literature review is used first to define the scope of consumer targeting (see earlier discussion of definition), and to avoid re-inventing the wheel. A further role of the literature review is to assist in formulating a practical and robust methodology based on real experience. Objectives: With the ultimate additional input from onsite questionnaire tests, and customer profile description obtained from Delphi research, this global and domestic literature search and review of existing consumer research is useful in isolating: 1. Methodologies with poor proven response; and 2. Questions that have yielded either poor response or “unusable” and “waste of time” data. Method: The studies previously outlined were specifically isolated from literature searches as having relevance to the current project. This was either because they attempted to isolate similar consumer groups, or adopted a methodology currently under consideration. It was also as they encountered specific problems in engaging financially stressed consumers, and the need or otherwise for incentives. The knowledge gained is used to inform the design and methodological approach, forecast response rates and avoid the pitfalls of the past. Finally, the identified studies yield benchmarks on which resultant domestic consumer research when completed can be compared and an evaluation extended. Results: This research has shown that consumer research of stressed consumers must be sensitive to the state of mind of the target respondent, and the approach needs to be accordingly sensitively tailored. The research shows that without direct pre-qualification, targeting strike rates will not yield useful responses. Further, incentives must be used and preferably those incentives with the ability to empower the participant. The research process must be an empowering process for this group of consumers and must acknowledge the value of their participation. Targeted consumers must be proactive not reactive to research approach. MISC - Consumer Credit Report 113 Step 2: Stakeholder Survey / Expert Interviews and Research Commitment This process with its constituent parts has application for this consumer research program and also at later stages in the Holistic study. It will also support the construction of the Econometric Flow Model. The expert interviews also resulted in Stakeholder support being pledged to allow survey of 10,200 Micro Credit customers directly. Objectives: • To assess the nature of financially stressed customer interaction across as wide cross section of program operators and lenders as possible through a series of Delphi styled indepth interviews conducted with stakeholders and potential stakeholders. • To assess the operational structure of lender and program operations so as to isolate operational measures and assess data capabilities, e.g. consumer records. Method: • Delphi styled in-depth interview discussions in an open-ended format with stakeholder opinion leaders either individually or in groups to explore operational structures, customer profiles, data management processes and capability, research access and potential financial data co-operation. The Delphi method is selected in certain circumstances when the researcher seeks, in a qualitative sense, to explore the views of sector experts and the wealth of their experience in describing market or operational conditions. In the case of operational descriptions these are taken as “indicative” of other similar organisations such as charities. With respect to consumers, the feedback provided by stakeholders offers first hand customer experience through personal interaction. Unique insights may be gained into the state of mind of customers and customer behaviours. These results are taken as “informed guidance” to assist in research and customer contact method planning. Stakeholder Performance Results not Consumer research related: Statistical stakeholder performance data was sought from all parties of program or product provision and operational success together with pledges for future provision. In the case of lenders, this involved collection of confidential sales data for the period of survey 2005. Descriptive inputs have allowed MISC to describe charity program activity and penetration. Stakeholder participation in onsite research was negotiated and set up, as were on site work days for research staff. Consumer Research Results and Commitment: For a selection of these, i.e. those agreeing to be stakeholders, indirect access was pledged to 10,200 customer records for follow up survey access. Because privacy restrictions do not permit the disclosure of customer names and contact details to a third party, a method of voluntary customer engagement with MISC was developed. All stakeholders were subject to this restriction. MISC - Consumer Credit Report 114 Results reveal that in some cases additional circumstances impose a further restriction on contact. In the case of payday lending, borrowing might be undertaken by one partner without the knowledge of the other partner. Unsolicited contact with a party at the address may in these cases betray a position of trust. Product disclosure to a third party even by segmenting customer on the basis of product choice in multiple choice situations, e.g. credit unions impose a further restriction. In isolated cases, concerns of customer fatigue are flagged as an objection to further research. For example, ANZ bank customers have been subjected to several research contacts in the past. Note: Because MISC is unable to contact these customers directly, stakeholders have agreed to make direct contact on behalf of MISC requesting their customers to make direct contact with MISC. From the pilot research it was concluded that an incentive given in expectation would be well received. Step 3: In-Situ Research Program Objectives: • Through real life observation in-situ to gain an appreciation of the state of mind and loan behaviours of the potentially financially stressed consumer in addition to the normal profile determinants. Direct exposure to these groups at the time of their accessing credit is a fundamental for developing both a sympathetic and impassioned process of contact initiation and subsequent dialog. • Opportunity to test questions with real customers. Method: With the assistance of stakeholders, three in-situ experience days were undertaken with MISC research staff. Specific days on which customer traffic was forecast as high were selected. MISC staff were accompanied by onsite staff and introduced as observers. Site days were organised at Glenroy, Dandenong and Ballarat (see appendix for results summary). Written observations were made at the time and immediately following sales interview. No verbal exchange was made between MISC staff and customers. For a selection of customers observed onsite, subsequent external site interviews were conducted by MISC staff as the customer left after completion of the transaction. Results: In all as the table illustrates, some 54 new transactions were observed as completed or partially completed across the three venues. These transactions were well spread across the various types of lenders. A further 7 transactions were repeats of previously conducted transactions eg activating an existing line of credit. The table illustrates the spread of transactions, which were loan, and payday lending dominated. From significantly more approaches additionally some 54 personal face-to-face interviews were commenced with 48 completed in which questions were tested and re-tested. In the process, questions that yielded no substantial response were replaced with those that did. Questions that were misunderstood were reconstructed. Questions that revealed more deep-seated attitudes were designed and tested. MISC - Consumer Credit Report 115 In-Situ Customer Observations Sessions: In-Situ Site Day Customer Interaction Process Area Date of Trial Address of Site Lender Staff Attendance Number Site Shop Front Description Interior Layout Separated Services Dandenong 24-Feb-06 321 Lonsdale Street Dandenong Cash Converters 6 Double front, corner location, 2 entrances 3 areas Glenroy 3-Feb-06 Station Street Glenroy Money 3 3 Ballarat 2-Feb-06 Curtis Street Ballarat Action Cash Loans 2 Single front, single entrance Reception desk, 2 interview rooms None Adjacent Lender Visible from Site Number of Customer Interactions Observed Double front, single entrance Bank teller, glassed interior room Pawn broking shop and None separated finance section NAB, CBA, TAB TAB 27 15 ANZ, City Finance, Cash Converters, NAB 12 MISC - Consumer Credit Report 116 Combined In-Situ Customer Activity Exposures Observed: Payday Pawn Broking /Personal Loan Feb 2006 Number % Trans Spread 8 11 8 4 6 7 10 7 61 13 18 13 7 10 12 16 12 100 In-store Customer Observations Pawn Broking Payday Cheque Cash Secured Personal Chattel Secured Car Tittle Secured Fee Payment Repeat Payday TOTAL Combined In-Situ Customer Depth Interviews Experience: Cash Converters Money Tree and Action Cash - In-Situ Depth Interviews Questionnaire Test Approaches Refusals after approach Couples Interviews Single Interviews Total Depth Interviews # # 95 8 10 38 48 Most refusals occurred on rainy day in lunch hours Step 4: Questionnaire Design and Pilot Test Objectives: • To design a research process with consumer pre-qualification and personal customer proactive engagement in interviewing. • To ensure that incentives are sensitive to circumstances. • To ensure that research process is an empowering process for participants. • To ensure that research process reflects well on CAV and stakeholders. Method: Review of all preceding research programs and questionnaire designs together with inputs from stakeholders and further Delphi research, plus in-situ customer experience. Incentive selection was based on a review of past experiences in securing responses to at times intrusive personal survey of financial circumstances. In the UK, a $25 -$30 payment was recently made to those surveyed by the Financial Service Authority in the form of a purchase coupon to that value. Cash incentives of several hundred dollars are sometimes given in Australia for participation in focus groups. Mail surveys and online surveys have commonly used scratchy tickets or competition draws. Results: A test of the field-tested questionaries and qualification process, together with the proposed incentive was conducted with 300 households drawn from one stakeholder. This street hand out (not mail out) was totally unsuccessful and abandoned accordingly. A further mail out of 104 pre qualified stakeholder customers was completed with follow up reminder. With 18 defaulted addresses out of a remaining potential 86 customers a 71% voluntary response was achieved. All partially or fully completed response qualification forms returned, provided authorization for further research contacts. MISC - Consumer Credit Report 117 The results below show that the incentive used – a $2 charity donation wristband, was accepted as an incentive. To date, 43 of the consumers mailed have voluntarily made contact with MISC to offer their cooperation, and have completed the qualification questionnaire. The results of the trial mail-out are shown in the table. Customer Search Mail out and Incentive Test Single Stakeholders Experience Test Process Customer access mail-out pilot and incentive test Nature $2 Charity bracelet mail-out Qualification for co-operation request from stakeholder Complete Survey Customer Mail Out (Including Incentive Test) Customers identified from database Customer address default (i.e. Returned mail /Not at this address) Balance accessible Customer competed qualification questionnaire Incomplete qualification Follow up reminder and mail Back response set Response Rate 104 18 86 32 11 18 71% 4. To be completed programs in Stage 1.2: Field Research Implementation The table isolates the pledged customer lists from more than 10 Stakeholders with customers known to access a range of mainly short-term credit. These include payday loans, NILS, LILS, unsecured personal loans, secured personal loans for 12 months or less, secured pawnbroking loans. This spread ensures that no lender type or product type is over or under represented. Some 10,200 qualifying customers may be directly accessed via the Stage 1.2 Research Process outlined in the flow chart above. These consumers would all be sent a participation request from each stakeholder, with the $2 charity incentive, and a Qualification Form for return to MISC (see appendix for mail-out draft). A follow up reminder letter would be sent three weeks after the first mail out to optimise responses. Predicted Results: On the basis of test results, MISC predicts that some 7,140 voluntary participation pledges will be obtained for follow up CATI based depth interviewing. This prediction is based on the results of the pilot test described previously which provided a 71% success rate (i.e. 10200 @ 70%71% =7140-7242) The table provides the breakdown of stakeholder pledges by consumer number for the proposed stage 1.2 consumer research. MISC Consumer Credit Report 118 Multi Product Lender Customer Access for Stage 2 Victorian Consumer Survey Stakeholder Payday Lenders Cash Converters Points of Presence For consumer Database Dandenong Glenroy Parkdale Wantirna Frankston Croydon Epping Bendigo Geelong Morwell Shepparton The Cash Store Dandenong Ringwood Northcote Sunshine Payday loans Pawnbroking Unsecured personal loans Product Usage / Consumer Experience Coverage Potential Research Participants N = 2200 Payday loans Title loans (vehicle) N = 800 Action Cash Loans Money Centre Ballarat Croydon Unsecured personal loans Payday loans Unsecured personal loans Payday loans Secured personal loans (vehicle) N = 300 N = 150 Money 3 Dandenong Frankston Geelong Greensborough Moonee Ponds Northcote Ringwood Werribee Shepparton N = 1800 GE Money Unsecured Personal Loan Small Amount 12 Month Transactions Charities Fitzroy & Carlton Community Credit Co-Operative Fitzroy Carlton Unsecured loans (LILS) Secured loans (LILS) >$10k car loans Interest free loans Budget accounts N = 1238 Deer Park Brotherhood of St Lawrence Frankston Low Interest Loan Scheme N = 600 MISC Consumer Credit Report 119 Multi Product Lender Customer Access for Stage 2 Victorian Consumer Survey (cont’d) Stakeholder (Bendigo Bank) Points of Presence Fitzroy Moonee Ponds Heidelberg Collingwood St. Albans Hastings Step up loans (unsecured) (LILS) NILS N = 212 N = 200 Product Usage /Consumer Experience Coverage Potential Research Participants Good Shepherd (NAB) N = 2700 Total Pledged Access Potential in negotiation ANZ ANZ ANZ ANZ Esanda Brotherhood of St Lawrence Frankston Berry Street Victoria Shepparton 12mth or less Personal Loan Saver Plus N = 10,200 N = 700 Estimate unavailable MISC Consumer Credit Report 120 4.2 CATI Phone Survey Method: From pledged consumer qualification forms returned, MISC proposes to undertake via subcontracted field force, CATI depth interviews. Unlike most CATI surveys where seven contacts for each obtained interview is the industry standard, MISC expects an 85% conversion, as respondents would already be pre-qualified and pre-tested. A resulting useful sample of 6,069 responses (i.e. 7140 @ 85% = 6069) will yield a truly representative sample of consumers of micro finance in Victoria. It compares to almost the same level of interviewing conducted in the UK this year. However, in the UK the research collected samples across the total poor population, not a subset of that population. Some 1,012 Micro Credit respondents were identified from that research all of which had experienced Micro Credit product. The Proposed CATI survey is a 16 minute phone interview, and compares to the 42 minute personal interviews undertaken most recently by the Financial Services Authority in the UK. Questionnaire The resultant questionnaire (see appendix) is deliberately structured to explore several aspects of consumer credit experience, define and describe more closely how consumers are financially disadvantaged and vulnerable, and correlate these consumers with profiles of consumers identified as under financial stress. Accordingly readers will note that several questions are similar to questions raised by the HILDA survey to define financial stress. This will ensure that the same stratum of consumers can be cross-matched with those selected as having experienced Micro Credit product. The remaining parts of the survey are concerned with exploring the condition of financial stress in its many forms and the role that frustrated experience or knowledge of experience (via friends) has played in discouraging certain credit activity and promoting yet others. The survey is further structured to explore the attitudes to and awareness of all credit options and to define according to successful pilot works the real perceived value of costs of obtaining credit. Benefits of research approach: When completed the survey will have collected the largest known sample of consumers who have experienced some Micro Credit*. With a projected 6,000 qualifying Victorian respondents traced by geographic location and results weighted for the population the true role of regional versus Metropolitan credit supply can be determined at all levels from mainstream to micro. The cross collection of the results with the 2003 HILDA survey provides a further longitudinal perspective enabling a current evidence to be compared with that available for 2003 and thus a view of change is derived also. For the first time complete profiling of these financially vulnerable and disadvantaged consumers will be possible in such a way as to accurately pin point geographical areas which will house a greater concentration. The further understanding of the role that all forms of credit play in either aggravating or reducing the impact of disadvantage and vulnerability will finally be determined enabling regulators to target particular types of credit either for reform or partnered product development. With this research policy makers will benefit from knowing in advance the likely impact of initiatives and the size of consumer groups that will be influenced. If Mainstream Lenders are to be partnered in any development initiative to assist then the profile data and consumer potential measures are a vital ingredient in prompting and facilitating the evaluation of this process. MISC Consumer Credit Report 121 Finally the attitudinal insight that will be obtained from this research promises to assist in defining the true role of interest and charges and those factors that either encourage or dissuade consumer from credit or provider use. The value of normal assessment criteria (i.e. cost) is also measured as is the likelihood from these behaviours of the consumer being placed in a more vulnerable position that might other wise be the case. An element shown to be critical in contributing, to at times the destructive behaviours of consumer under stress, is risk perception. This attitude dimension is given specific attention in this research to facilitate a full view of the real process of credit evaluation that such consumers make under vulnerable or disadvantaged circumstances and together with the foregoing results will contribute to a better understanding as to why consumers might be more prone to readily and willingly embrace more predatory credit forms. *The largest previous trace of consumers known to have used Micro Credit was 400 (Taking Credit – Justine Malbon Law School Griffith University). MISC Consumer Credit Report 122 B. The True Measure of Mainstream and Subsidiary Finance Flows in Victoria Economic Modelling of Credit Flows in the Victorian Economy (County versus Capital City Estimates) We have already discussed at length both the domestic and global evidence of flows that might be generated from certain retail Micro Credit groups. This exercise highlights the substantial gaps that are present, especially the lack of real evidence in Australia with even less in Victoria. In this section we outline the whole process planned for ultimate financial flow measurements, including those steps already deployed, and those suggested for the stage two research extension (see diagram). Research Process Background In the first stage of the selected works commissioned by CAV only preliminary analysis of market scope was allowed for. This has been valuable in objectively assessing why the mythical status of some estimates should be at last debunked. The process as shown in the flow diagram essentially evolves from extensive literature searches and a review of all anecdotal evidence of various credit flows. A further outcome from this process, and one that will underpin later projective works, is the quantitative assessment of site performances and resulting ratios of performance efficiency. These are invaluable inputs for future benchmarking. In this part of our discussion we set out a proposed process and model overview# by which real data can be ultimately provided to truly scope the Micro Credit sectors, and to measure credit flow shares on a regional and Metropolitan Victorian basis. The approach is essentially one of data mining to isolate real evidence of Victorian aggregates, and a process of negotiated exclusive data access for a range of data sources not currently utilised (e.g. APRA). Finally, we propose the construction of a model of all lending including micro on an SLA basis to enable regional and Metropolitan revenue estimation. # A Full description of the modelling process will be produced as part of Concluding Final Stage reporting. 1: Mainstream Measures Data Mining Process In order for aggregate measures of flows to be undertaken, research must embrace those methodologies that will yield inputs of differing provider groups with their own peculiar measurement and data collection regimes. The research must thus acknowledge that the stressed consumer in Victoria may access financial support from: • Charitable and semi-charitable organisations though special financial products. Note: For the purposes of measurement we are not concerned with financial counselling, which carries no credit provision, or any of the management processes (some fee based) that assist financially stressed persons • Mainstream Lending to financially stressed Victorians 1.1. Charities and CentreLink: In the second stage, from an exhaustive tracing process of secondary research review, and Stakeholder data access and interviews, MISC will trace and audit financial assistance programs in operation throughout the state. In most cases MISC relies not only on primary source material to substantiate program size by reported references. MISC Consumer Credit Report 123 By securing special access provided to CentreLink databases, the remaining significant amount of advances currently made by CentreLink to those applying for an annual $500, will be included as will allowance for CentreLink rental payments such as Radio Rentals for “apparent household appliance rentals”. While the intention of CentreLink direct payments for appliance rentals is intended to provide assistance for those unable to purchase essential white goods such as refrigerators, anecdotal evidence suggests that a proportion of this money might in fact be directed to less essential appliances such as video games, televisions. Note: Together with CAV, MISC is currently negotiating to fund CentreLink research to provide database access to advance activity throughout Victoria. This is essentially no interest credit and could be a significant amount of hidden funding that if withdrawn might impose additional state burden. 1.2 Mainstream Lending Audits Data: The first stage of the MISC research was deliberately not concerned with the measurement of Mainstream Lending to the stressed groups, although clearly credit card lending, personal loans and Lo Doc lending or even reverse mortgages, might represent products used by stressed Victorians. The ultimate measure of the Mainstream Lender exposure in Victoria will result from essentially two methods: The first is credit source data mining by specific credit product, and the second is data mining that uncovers Victorian credit flows. The exclusive data sets available to MISC allow most of these product flows to be isolated accurately for Victoria. In many cases MISC is the conduit through which these official data collections flow. In all cases, MISC has completed agreements with all providers to enable exclusive access to be granted for this project. These data sets and potential financial product flow as specified will include: • Housing / Mortgage Related: • Low Documentation Loans provided though third party distribution) • Reverse Mortgages • Line of Credit Home loans • Selected other Banking Products • Personal Loans (Online procured only) • Credit Cards (Online procured only) • Used Motor Vehicle finance Note: Consumer research will assist in defining precisely what is Mainstream Lending product used by these groups and this will enable the process to be better directed. MISC Consumer Credit Report 124 MISC Consumer Credit Report 125 2.0 Exclusive Mainstream Data Augmentation The next step is a process of exclusive data access negotiations to augment the data sets described. Specifically, this process is directed at APRA Data access, and that of CUSCAL. In conjunction with the CAV, MISC has secured agreement from those official collection authorities for special disaggregation of existing collections. 2.1 Special Exclusive APRA Financier Database: MISC has negotiated a special access agreement with APRA to isolate lending flow and balances for selected financier products thus permitting their isolation from the primary collection documents, Forms 320 Domestic Book, and Form 394 Personal Finance series. These disaggregations have not been published separately before and will allow measure of new commitments for: • • • • • • Motor Cycles and Scooters Motor Vehicles Boat Cravens Unsecured Lending for Additions Revolving Credit Cards Personal Loans (fixed rate and variable rate 2,2 Special CUSCAL exclusive Database: Negotiations with the CUSCAL credit unions have been successful in isolating separated Victoria Union statistical collections for credit union lending, and credit union distribution by asset size. This data series represents an input in to the Econometric Model proposed by MISC (see description below - Stage 4). 3. Subsidiary Micro Credit Search - Credit Provider Database This database and the associated model permits the micro lending aggregates to flow into Step 3. It ultimately achieves this with the creation of a 2003 data subset derived from several complimentary sources (some exclusively accessed), together with a modelling process utilising Stakeholder Performance data for 2005, and taxation statistics to project 2006. 3.1 Primary Model Inputs: In attempting to map the flows of this Subsidiary Lending we start from a lender perspective. This is convenient as in most cases products are distinguished by institution, and with not many exceptions, all these lender products may be classed as Micro Credit products. The database on which ultimately modelling is built, begins with the MISC 2005 trace of all Micro Credit Lenders or institutions operating in Victoria. This trace by postcode and hence SLA group is matched with externally (at times exclusively accessed) “all Operation Universe data sources”. These data sources are built on an SLA or postcode basis from a modelling process, which relies on the following primary sources with inbuilt tests for common year estimation and concordance. We specifically include: • ATO Postcode Disaggregated Tax Return Special Statistical Series 2003 - Selected Items by Postcode Part B Victoria. • Company Taxation by Industry, State Territory and Region plus Selected Items by Fine Industry: Finance and Insurance. • ABS Count Of Business Data For 2001 and 2004 By Employment Size and Turnover (Inconsistent Series). • ABS integrated register Special Australia Post access. MISC Consumer Credit Report 126 The model adjusts for the differing periods to produce estimates at one compatible period 2003. Postcode 3000 and isolated regional centres known to be the head office (e.g. Bendigo) are excluded from this data source as it includes head office contribution from larger Mainstream Lenders that must be deliberately excluded. 4. 2005 Projection by SLA Regional Analysis Both MISC and CAV have successfully negotiated full stakeholder financial co-operation in securing financial access to lending activity for the year 2005. This is collected by outlet or in some cases outlet groups to match SLA coverage. The other databases reflect both customer transaction records and total facilities. This is analogous to the aggregate measure of turnover in Stage 1. Stakeholder Coverage negotiated at this time includes representation across: • Pawn Broking • Payday Lending • Independent Unsecured Lending • Finance Company Unsecured Lending • Credit Unions Unsecured Lending • NILS and LILS Lending The match of a sub-sample of stakeholder taxing activity by Region or SLA against imputed totals presents a test of likely small area accuracy. Modelling of the total flows permits balancing turnover for known non-stakeholder micro lenders to be estimated. Benefits of research approach: As in all mainstream financial feasibility processes i.e. to determine product opportunity, and in the CAV case, product substitution (which alleviates financial disadvantage and vulnerability) the opportunity size and distribution must always be quantified and projected forward. Similarly a competitive perspective must be also obtained to assist in the assessment of commercial risk. These are the basis rules than financial providers follow and that CAV should in our view also follow. The underlying foundation for these processes is the measurement of existing market penetration i.e. credit flows and the ability to project it forward. This market size scoping proposal facilitates this. Several additional benefits follow from this process: • At a very basic and macro level, the true measure of credit flows of the mainstream and Micro Credit environment in Victoria (including the measurement of hidden credit) is a basic requirement of any research, which will underpin policy decisions and in turn permit the evaluation of the economic cost and benefit of such decisions. Further with such a measure policy implementation success can be measured against a benchmark and accountable KPI’s for government policy established and measured. • In conjunction with the consumer research (which isolates the true representation of financially vulnerable and disadvantaged Victorians) such a market size scoping shows just how big the problem is and how much bigger or smaller the problem may be in the future. This ultimately allows government to measure the economic burden that is imposed on the community by a failure to either control preparatory lending practices or to encourage more equitable substitutes. • The ability to take this financial flow by regions isolates specifically the role of regional versus Metropolitan solutions and their likely impact and avoids deployment of wasted resources. MISC Consumer Credit Report 127 In conjunction with the MISC audit and trace of mainstream and Micro Credit provider distribution and indeed product access (again by region) the research can ultimately map the relative importance of credit access or lack of with associated consumer measures of credit demand Note: The test of the accuracy of universe allocation by postcode is undertaken only at a territory basis requiring the detection of the known universe of specifically defined financial enterprises to equal the total. As postcode disaggregation is only used to establish Metro and Country data, the report that might be apparent at a postcode is only of academic interest and has no practical impact. MISC Consumer Credit Report 128 APPENDICES Contents Appendix 1: Mystery Shopping Interviewees…………………………………………………………..129 Appendix 2: Stakeholders and In-depth Interviews……………………………………………………131 Appendix 3: MISC Stakeholder & Interviewee List…………………………………………………….132 Appendix 4: MISC Qualification Form…………………………………………………………………..133 Appendix 5: Consumer Mail-out Letter………………………………………………………………….134 Appendix 6: MISC Credit User Research Survey……………………………………………………...135 Appendix 7: Resources……………………………………………………………………………….…..145 MISC Consumer Credit Report 129 Appendix 1: Mystery Shopping Interviewees Mystery Shopping Interviewees A Aarons Cashloans A1 Cash Ace Treasury Territory Acland Electronic Aladdins Cash N Trade Aladdins Cash N Trade (Cash Stop Agent) AMX Financial Services Anything of Value Loan co. As Good as New Aussie Payday Loans Ballarat Cashworks Barkly Street Pawnbrokers Belmont Cash Traders Belmont Square Pawn Shop Better Bentleight Loan co Better Deal Pawnbrokers & Cash Traders Bill Rescue BJ's Ballarat (Cash Stop Agent) Bondcourt P/L (Cash Stop) Brunswick Loan Company Cash Australia Cash Centre Cash Convenience Cash Deal Chelsea Cash Deal Rosebud Cash Dealers Cash Express Loan co. Cash For Anything Cash In Cash in a Flash Brunswick (Cash Stop Agent) Cash loan Money Centres Cash Recyclers Cash Stop Cashies Cashnow Cashpoint CashStop Central Cash Chapel Street Pawnbrokers Cheque Exchange City Finance Loans and Cash Solution City Finance Loans and Cash Solutions Craig Bishop Croydon Cash Lender Dandy Buy and Sell Easy Traders Gippsland Traders Gippsland Traders (Cash Stop Agent) Glenroy Cash Exchange (Cash Stop Agent) Glenroy Goods Exchange Golden Bridge Cash Solutions Great Trader Pawnbroker HomeSec Financial Express Kim Lim Jewellers Local cash trader Melbourne Exchange Jewellers & Pawnbrokers Melbourne Jewellery & Pawnbrokers Moe Pawnbrokers Money Centre Money For Goods Money Traders Money Tree Oakleigh Mr Cashman Hampton East (Cash Stop Agent) Mr Cashman Richmond - Cash Stop Agent National Cash Needy Money Pty Ltd New Look Finance P/L Norms Pawnbrokers Northeast Pawnbrokers Oakleigh Loan Company Oriental Pearl Company PayDay Online Pelister Pawnbrokers Personal Loan Prahan Loan co. Ready Finance Reservior Loan co. Reservoir Loan Company RTO Payday Advance Shepparton Cash Recyclers (Cash Stop Agent) Sullivan Secondhand Sunshine Loan Company Pty Ltd Sydney Road Loan co. The Cash Store The Money Tree Tinson Jewellers Tradeorama Footscray (Cash Stop Agent) Tradeorame Oakleigh (Cash Stop Agent) Tradeorame Port Melbourne (Cash Stop Agent) Trading Spot Treasures of Prahan Loan Co. V & H Pawnbrokers MISC Consumer Credit Report 130 Mystery Shopping Interviewees (cont’d) Footscray Loan co. Freedom Money Lending Gacal Hasan (Brunswick Loans) Get Smart Loan Company Gippsland Pawnbrokers Wallan Small Loan & Giftware (Now called Pleasures and Treasures) Wellington Bargain Centre & Pawnbrokers Wellington Bargain Centre (Cash Stop Agent) Wellington Pawnbrokers MISC Consumer Credit Report 131 Appendix 2: Stakeholders and In-depth Interviews In-depth Interviews with Experts Contact Ray Cleary Nick Trewhella Salvation Army John Dalziel Acoss Andrew Johnson Money Centre David Chambers Action Cash Richard Moornan Esanda Justin Hilford Financial and Consumer Rights Council Livia Carusi Jackie Bramwell Group Anglicare Stakeholder Customer and Performance Data Pledged Contact Martin Anderson Calo Cataldo National Australia Bank Richard Petty Corinne Proske Brotherhood of St Lawrence Tracy Nicholson Good Shepherd Foundation Collet MacIntyre Marilyn Webster Fitzroy Carlton and Community Co Operative Greg Fisher Cash Converters John Brophy Safe Rock /Cash Converters Jan Clifton St Vincent De Paul Collet MacInerny Money Tree Money Plus Robert Bryant The Cash Store Mathew Callahan Group General Electric Separate Negotiated Exclusive Data sets for Stage 11 Flow Modelling Group Contact CUSCAL APPRA Taxation Departments Centre Link HILDA Melbourne Institute (University Of Melbourne) Australia Post MISC Consumer Credit Report 132 Appendix 3: MISC Stakeholder & Interviewee List Stakeholders: Interviewees: • • • • • • • • • • • • • The Cash Store Esanda ANZ National Australia Bank GE Money Anglicare St Vincent De Paul Good Shepherd Fitzroy and Carlton Community CoOperative Financial and Consumer Rights Council Consumer Credit Legal Service Victorian Council of Social Service (VCOSS) Brotherhood of St Laurence • • • • • APRA Australian Taxation Office Phillip Smiles Australian Bureau of Statistics (ABS) CUSCAL MISC Consumer Credit Report 133 Appendix 4: MISC Qualification Form MISC Consumer Credit Report 134 Appendix 5: Consumer Mail-out Letter *** SAMPLE LETTER *** “A special survey request of our valued customers” We appreciate your custom and are happy to have been able to service your needs either currently or in the past. We are writing to let you know that via a random selection process, you and some of our other customers have been selected as potential participants in a survey into credit usage in Victoria. An independent research group is conducting the survey on behalf of the Victorian Government. As you know, we have a responsibility to our customers to protect their privacy and we take this responsibility very seriously. This survey has been structured to protect your privacy absolutely. What is the survey about? The research group is investigating how different people use various types of credit, for example: when people use credit, where they get it from; how do they get it; why do they want credit? What if I agree to participate? From the customers who have been randomly selected and agree to participate, the researchers will randomly select a group of people who will be contacted in the near future so that further information can be collected. What happens to the information I provide? The information you provide to the research group will remain with the research group and will not be passed on to us or any other entity. The information will be treated with the strictest confidentiality by the researchers, and none of the information you provide will be used to identify you in any reports or publications arising from the research. What do I do if I want to participate? If you are happy to participate in the survey, please complete the attached form with some basic details about yourself, and return it to the research group in the addressed pre paid envelope provided within 14 days. Thank you for your time in reading this letter. It would be great if you choose to participate in the survey because the results of the survey will potentially help us to better meet your needs. We have enclosed a ‘Make Poverty History’ wristband as a token of our commitment to alleviating poverty worldwide, and as a way of expressing the sincerity with which the Government is undertaking this research. MISC Consumer Credit Report 135 Appendix 6: MISC Credit User Research Survey Note: MISC Credit User Research Survey to be conducted over the phone by CATI. CATI Questionnaire Instructions to be read by interviewer We received your invitation to contact you (read name of respondent). Thank you for agreeing to help us. You have been finally selected from those that replied and your response will guide this research and the advice that will flow from it. MISC (Australia) is a survey company engaged by the Government to undertake a research study of credit users to determine how different forms of credit are used. Ultimately, the results will be used to help design new forms of credit that should provide greater assistance to people like you. This is your opportunity to tell the powers that be what it is really like out there and how their services could be better customer-directed. All the information you provide is completely confidential. In our office only the survey team will have access to this interview. Everyone in the team has signed a deed of confidentiality and will observe your privacy in all instances. Your name and address will never be linked with any of the information you have provided. Are you happy for us to continue? Yes No Part A - Personal Details First of all, can I ask a few more personal details about yourself, which I can add to those you already supplied in your qualification form? I mean the details you gave us before when you sent the form back. 1. How many dependent children do you have? 2. How many Non dependant children do you have? 3. How many members are there in your household? 4. Please indicate which of the following best describes your current living arrangements: Own/currently paying off mortgage Rent (or pay board) Rent-buy scheme Live here rent-free Other (please specify) 5. Which of the following best describes your living circumstances: Legally married & living with spouse Defacto/Living with someone in a relationship Single Living at home with parents Other (please specify) MISC Consumer Credit Report 136 Part B - Financial Details Now I would like to ask you a few questions about your finances. 6. Do you have a credit card (e.g. Visa), charge card (e.g. American Express), or store account (e.g. David Jones) either in your own name or joint name? I don’t mean a debit card which lets you draw your own money? Yes No 7. Can you tell me what cards these are? Any Others? (List these and prompt for more) 8. Approximately how much is the balance owing on each of these cards? $ Specify this for each card mentioned 9. Do you have other credit that has been advanced to you? (e.g. car loan, unsecured personal loan) Yes No If yes, specify what these are (e.g. Car Loan) 10. Approximately how much is the balance owing on each of these debts? $ List each one volunteered by Respondent Prompt for more i.e. Any Others? 11. What options do you have to obtain $2000 if you needed it next week? Using savings By selling some assets Borrowing from a friend Borrowing from a relative living with you Borrowing from a relative living somewhere else Borrowing from a financial institution Other 12. Do you currently receive Family Tax Benefit A and/or Family Tax Benefit B? Yes No If so, what is the total fortnight payment? $ MISC Consumer Credit Report 137 Part C - Normal Living Now I would like to ask questions about financial ups and downs that most of us experience from time to time. Here are some common problems. Can I ask you now about these? (Read out list. quotations 13 to 16). 13. Have you ever been unable to pay your electricity/gas/telephone bill on time? Yes No 14. Have you ever been unable to pay for rent or repay your mortgage on time? Yes No 15. Have you ever been unable to heat your home? Yes No 16. How easily do you think you could raise $2000? Not possible Easily Something drastic Some sacrifice Part D - Access to Credit Now I would like to ask you about your knowledge of credit and other forms of financial assistance that can be provided in Victoria. 17. I will read you a list of several ways that you can get advances on money that you may or may not be aware of. Can you tell me which of these you know about either from personal experience or from friends/relatives? Any Others? Credit Source Bank Credit Card Bank Personal Loan Overdraft Centre Link advance of employment benefit pension Pawnbroker Payday Lender Pre Cheque Clearance cashing a cheque not at a bank Lay Bys Charity subsidised lending through a bank where the bank charges less for the loan No interest loans Borrow from friends or relatives Personal Experience Friends/Relatives MISC Consumer Credit Report 138 18. Now thinking about those same credit sources, which of these have personally used or have tried to use. That is, you may have applied for them but for some reason been declined. (Read them out again to prompt) Credit Source Have Used Have Tried To Use (applied for) Bank Credit Card Bank Personal Loan Overdraft Centre Link advance of employment benefit pension Pawnbroker Payday Lender Pre Cheque Clearance cashing a cheque not at a bank Lay Bys Charity subsidised lending through a bank where the bank charges less for the loan No interest loans Borrow from friends or relatives MISC Consumer Credit Report 139 19. Now referring to the same list again, this time please tell me which of those credit sources you wouldn’t want to use again even though you have used them in the past. (Prompt for reason if any selected.) Why is that, can you explain your reasons? Wouldn’t want to use again Bank Credit Card Bank Personal Loan Overdraft Centre Link advance of employment benefit pension Pawnbroker Payday Lender Pre Cheque Clearance cashing a cheque not at a bank Lay Bys Charity subsidised lending through a bank where the bank charges less for the loan No interest loans Borrow from friends or relatives Reason MISC Consumer Credit Report 140 20. Please tell us which of these same credit sources that you actually used and obtained money from in the last 12 months. Can you tell me first how much the loan was for? Prompt again for each one i.e. any others. Now for …… (select the ones they selected) tell me the period of the loan, Prompt for another if 2 selected Now for this one (name the one selected) or each of these can you recall (without referring to any documents) and tell me the current amount outstanding on the loan. Prompt for each one selected. Check you have each selected credit form, fully filled in. Number of Times used ($) Amount Period of last of loan Transactions (years) Outstanding amount ($) of last transaction Bank Credit Card Bank Personal Loan Overdraft Centre Link advance Pawnbroker Payday Lender Pre Cheque cashing Lay Bys Charity subsidised lending through a bank where the bank charges less for the loan No interest loans Borrow from friends or relatives MISC Consumer Credit Report 141 21. Thinking about those same credit sources can you tell me which of those you know friends or relatives have had a specific experience with, that they have told you about. Bank Credit Card Bank Personal Loan Overdraft Centre Link advance Pawnbroker Payday Lender Pre Cheque cashing Lay Bys Charity subsidised... No interest loans Borrow from friends or relatives 22. Can you tell me about “their experience” that you know they had? (Prompt and ask for each credit source experienced i.e. what about this one) MISC Consumer Credit Report 142 23. Now still with that same list in mind, can you rate each of the lenders on the basis of whom you think would be the quickest to approve your request for a loan (score of 1 for the quickest) to the slowest (score of 11 for the absolute slowest). (Make sure respondent scores each one with a ranking) Bank Credit Card Bank Personal Loan Overdraft Centre Link advance Pawnbroker Payday Lender Pre Cheque cashing Lay Bys Charity subsidised lending through a bank where the bank charges less for the loan No interest loans Borrow from friends or relatives 24. Why do you think the lender you selected, as the quickest to approve your loan, is able to be so quick? MISC Consumer Credit Report 143 25. Now can you please rate who you think takes the most risk or who stands to lose the most if you don’t pay back your loan on time (score of 1) to the lender that takes the least amount of risk (score of 11) to the one who would take the most risk? (Make sure respondent scores each one with a ranking) Bank Credit Card Bank Personal Loan Overdraft Centre Link advance Pawnbroker Payday Lender Pre Cheque cashing Lay Bys Charity subsidised lending through a bank where the bank charges less for the loan No interest loans Borrow from friends or relatives 26. Who do you think would be the most expensive to borrow money from based on the amount of interest and fees you think they charge? Rate them in order from most expensive (score of 1) to least expensive (score of 11). (Make sure respondent scores each one with a ranking) Bank Credit Card Bank Personal Loan Overdraft Centre Link advance Pawnbroker Payday Lender Pre Cheque cashing Lay Bys Charity subsidised lending through a bank where the bank charges less for the loan No interest loans Borrow from friends or relatives MISC Consumer Credit Report 144 27. Sometimes when you borrow money you have to give security, e.g. car for personal loan, or goods to a pawnbroker. Imagine you had borrowed $450 and you were being charged $140 in interest and fees, and you had given your Hi Fi Stereo worth $2000 as security. Please calculate the total cost you would expect to pay for this transaction? $ 28. Do you consider that when you put up goods as security on a loan that you are taking a risk? Yes No If no, why don’t you think there is a risk? 29. Is there anything else you would like to tell us about different types of credit, and your opinions on how they can be improved? There are no more questions. Once again thank you for your co-operation and your time. The team at MISC (Australia) Level 4, 14 Collins Street Melbourne 3000 Phone 9654 4266 MISC Consumer Credit Report 145 Appendix 7: Resources Australia Street Company (1999). Review of No Interest Loan Schemes. Commissioned by NSW Department of Fair Trading. Avery, R.B., Calem, P.S. & Canner, G.B. (2003, February). An Overview of Consumer Data and Credit Reporting. Federal Reserve Bulletin. Barr, M.S. 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