Cringely suggests Google could offer payday loans at 20% interest, and further would make that same rate as a profit. That seems far-fetched; these loans are costly to offer and collect upon, with high default rates.
Various sources peg the profit margins of existing payday lenders, with their "400%" effective interest rates, at only 3-10% -- less than Google's margins in their existing lines of business, I suspect.
Except that Google would probably do "algorithmic" collections. They already roam the streets with a fleet of cars equipped with cameras and face recognition software. Equipping them with robotic drive by shooting attachments should be simple enough.
Why would Google do that? Payday loans are despised by consumer advocacy groups, governments, and my Mom, alike. Nobody likes payday loans, except of course the companies that make billions providing and servicing them.
Those companies and the people that actually make use of their services, of course. This author might not have noticed, but generally markets for things no one wants don't exist.
It's tempting to view loans that are typically paid back quickly in terms of an APR, but it's extremely deceptive. The reason the annual rate is so high is that, surprise, people who can't plan their budget out more than a few days in advance are also not generally the best at paying loans back on time (or at all.) And viewed in raw amounts, paying an extra few dollars a week from now for milk today isn't the worst deal in the world, if it keeps the kids fed.
Everybody knows payday loan providers are predatory sharks preying on the poor and helpless. The problem is, how do you distinguish them from the saintly providers of short-term emergency loans? Short-term emergency loans can make dramatic differences in the lives of the poor and helpless. They can help people "get over the hump", so to speak, and prevent utter disaster.
Unfortunately, people who need such loans often default, resulting in high interest rates. Also unfortunate is that many people live their lives in a state of near-constant emergency. But what can you do? The constancy of their emergencies doesn't make them any less bad.
Also, "400% APR" is misleading because it implies somebody might potentially take out the loan and pay it back five-fold a year later, when in reality these loans are almost always paid back either quickly or not at all.
By extension, any time you pay 50% more on the price of something in order to have it one day sooner (cough medicine at a convenience store, food at an amusement park, etc.) you're getting it at an APR in excess of 10 to the 60th power.
I don't agree the APR is misleading. An APR is a normalised, comparable rate. That's exactly why you should look at the APR. Just because the loan is for a short time is irrelevant. It's like staying in a hostel and being charged a 5* rate just because you'll only be staying there for a short time.
Edit: the company you are borrowing from will be borrowing the money they lend to you at probably 10 - 15% APR (in the UK). That's quite a spread.
There are even worse APR's. Suppose you place a bet at 2:1 odds, 7 minutes before a 3 minute horse race. The racetrack is essentially borrowing money from you at at an APR of 3.6 million %!
The right way to look at loans is to break them down into APR and default risk multiplier. The total amount which needs to be paid back is DRM x exp(APR x duration). Payday loans, much like the racetrack, have reasonable APR's but high DRM's.
Dividing ln(DRM) by small numbers is as ridiculous as dividing a $1 investment by 1/1 billion % of a company and claiming that 37 signals has a $100 billion valuation. Yeah, they are using a standard formula, but in a ridiculous way. Models are pointless when you use them beyond their range of validity.
Let's say that 1 in 10 payday loans are written off, and one in 10 payday loans companies fail. What rate of return to you need to make it worthwhile investing in this industry (the capital has to come from somewhere). What if it's 1 in 5?
I don't think this business is a licence to print money, the various providers must be competing with each other...
A monthly rate is no less normalized or comparable than an annual one, and it's more representative of the timescales the loans are actually used for. If you required hotels to report their nightly rates in terms of how much it would cost to stay there for a year, they would look about as ridiculous as a 400% APR. I don't know how hostel pricing works, but at least in the US staying in a hotel for a year is fantastically more expensive than renting a comparable furnished apartment for a year.
Unfortunately, I don't think it's uncommon to take out a new payday loan to pay off an old one, in which case the raw dollar amounts become more significant quite quickly.
> generally markets for things no one wants don't exist.
This is not an excuse for predatory practice. By this metric, there is a market for crack, why would you despise honest crack dealers, they're simply satisfying their customers after all.
I'm a libertarian with agorist tendencies, so I believe that anything that doesn't harm another person or another person's property against his will should be legal.
I believe the role of government should be to protect me from other people, not from myself.
If I want to buy crack, and someone wants to sell me crack, you shouldn't be able to stand in my way. If I want to take out a short term loan a a high percentage rate, Cringely shouldn't be able to stand in my way.
I don't want a third party eliminating choice from my life just because a hypothetical victim may exist. I'm an adult of sound mind, and will make my own decisions.
Personally, I agree that if you can find someone willing to sell you crack, and you want to buy it, you should be able to do so without facing jailtime.
However, this doesn't mean that I would feel okay about selling you crack myself, or that I think highly of people who are willing to sell you crack.
One can agree that something is undesirable or even evil without thinking it should be illegal, and yeah, personally, I think that both encouraging another person to use a highly addictive substance and profiting from usurious loans are "evil" acts, even though I don't think either one should be illegal.
This author is confused about the meaning of "don't be evil". He seems to think it means to conform to a particular morality (i.e., the one to which the author subscribes) in all aspects of business. He probably thinks this is supported by the fact that Google embraces various left-leaning causes (investing in geothermal energy, etc.) when it's not clear that this could be justified in a business sense by the good publicity it generates.
But I think the original meaning of "don't be evil" is much more modest. It means: don't betray the trust of the user. For example, don't sell SEO favors, don't sell the user's info to advertisers, don't trick the user into downloading anything, don't abuse a monopoly position, etc. (This isn't to say that Google hasn't bent/broken these rules.) The fact that Google also supports various left-leaning causes is just a reflection of the fact that an unusually small number of left-leaning people influence the company's decisions.
I think the wikipedia article supports this interpretation.
I really don't think "don't be evil" has anything to do with a particular ideology which might disapprove of pay-day loans or whatever.
There aren't many ideologies that accept pay-day loans as anything other than evil frankly, so it's not one particular ideology that disapproves of pay-day loans, it's all of them. See http://en.wikipedia.org/wiki/Usury and note that a pay-day loan is exactly the kind of loan that is usurious — anyone who takes one hasn't got the money they need to make it to the end of the month, i.e. their outgoings are more than their incomings. They will never be able to pay such a debt off.
This is not a business I would have thought Google wants to get into, not because of the evil nature of it, but simply because making money from it legally is logically impossible.
I don't think we'll settle an argument here, but I'll say this: The large majority of payday loans are repaid. So long as (1) the borrowers are well informed and (2) there is healthy competition between the loaners, payday loans are good for society. They allow people who otherwise wouldn't get credit to float over rough patches.
Let me ask you this. If you are poor and living month-to-month, and your uninsured car--which you need to get to work to continue earning money--is wrecked, what do you do? Not everyone has families to help them in this situation.
Based on the quote in the article, I'm not sure why Cringely would leap to the conclusion that Google is planning on entering the loan business. It would make much more sense for them to set up some kind of competitive marketplace to connect lenders and borrowers, which would meet their stated objectives of "[righting] inefficiencies, [providing] better transparency, and [allying] with consumer protection agencies."
Ah, sense! This is similar to Google's move into credit card and mortgage comparison shopping (read: lead generation).
Arguably Google is a beacon of transparency in the latter industry, and I say that as someone who a) has spent time researching the business and b) don't hold with the majority geek/HN view of Google as being the Universe's Love Child.
There's nothing wrong with being a pay day loan company. Their interest rates (500% or more) are through the roof for making high risk loans that no other bank will touch.
I'm not sure how much risk these outfits really run. They're not unsecured loans. You don't repay it, they'll call in the debt collectors and take away your TV and anything else they can get their hands on.
Not surprising that they're there - the industry throws off a boatload of money, but only a portion currently goes to Google, since there's an established lead gen industry acting as intermediaries between Google and the actual payday loan providers.
Same situation as with mortgage leads - and in fact Google's used the same 'bringing transparency to a shady and inefficient industry' rhetoric when they've talked about mortgage lead generation.
Like with mortgage leads, this initiative is probably doomed, since the big advertisers in the space have absolutely no desire to efficiently compete for consumers via directly-comparable financial terms. When an industry's confusing and opaque, it's usually for a reason.
Amazing. And is that legal? In my country there is limit on how high interest rates can get. Maximum credit interest rate is ... 20%. Of course loan sharks are circumventing this rule in every way they can by requiring from you to buy additional services and insurances.
I'd rather, for their own sake and for the good of society that they couldn't get credit at all. It's too easy and tempting and it doesn't help for more than a few days.
Also I think you may misunderstand who these people are. Take wonga.com for example, they're on ads on TV with their iPhone app. How many truly poor people have iPhones?? Their customers are people who need (want) cash for the weekend before payday to go drinking/clubbing/partying. It's a luxury (of sorts) and people always pay a premium for luxury.
I don't know, but most jurisdictions have a view on that and most ethicists would to. I can tell you it's less than 400%.
I think "these people" are not a homogeneous group, so defining them as truly poor is tricky. I would argue though that it is still a social negative to lend to anyone who has an iPhone but doesn't have the money to go on a night out before pay-day. I can't think of a better example of socially-useless lending. I think that is bad for the state to allow that, but I can see not everyone would agree. There are however definitely much worse off people using such services, and they should be prevented from doing so [1].
The other issue thing I want to mention is that the state schooling system is woefully inadequate in the area of personal finance. Maybe it's the parent's job, but budgeting and managing your finances is too important a skill to be left to them, and schools waste plenty of time teaching "personal, social and health education" — it'd be easy to shove money management in there.
[1] With the possible proviso of a proper social emergency loan or payment system for people living below the poverty line with unexpected non-discretionary spending [2], e.g. car breakdown which prevents them getting to work.
[2] Don't even get me started on medical bills here. Pay-day loans are a third-level kludge on a totally broken system there.
The headline interest rate is misleading remember. Let's say it costs s fixed amount to do the paperwork to set up any loan. Obviously that is going to be a greater or lesser part of the overall interest charge if the loan is for 1 week or 100 weeks.
How would you ensure your "social emergency loans" were ever repaid?
I think no credit at all might be better alternative in many cases.
Taking credit with interest rate 2500% is rarely thought trough, free, conscientious market decision. If you don't have money this month how can you be sure that you will have such money, plus insane interest rate, next month?
I used to rage at these rates. But but - they are often cheaper than incurring an overdraft penalty at your high street bank. Barclays charge £22 a day for going up to £150 over your overdraft limit. God knows what it is if you exceed £150 over.
I get a £400 authorised overdraft limit on which I only pay interest (at a pretty fair rate) and no annual fee and in the UK that's not a deal that's too hard to find (First Direct in my case but I'm sure similar deals are available through others). Seriously, there's no reason to put up with that sort of thing and if you can get an account with Barclays you're unlikely to be turned away by too many others.
I used to be with Barclays too but this sort of thing is one of the reasons that I'm not any more - that and their general air of not giving a <expletive deleted> about my custom.
Oh sure. I have an authorised overdraft, with some fairly standard rate of interest. It's when you exceed that you get hit with exhorbitant fees. Most high street banks charge ~ £30 pounds for exceeding this as far as I am aware. And it's when you're gonna exceed your overdraft that suddenly 2000% apr doesn't look so bad.
I'm not sure what to make of this. So far Google has largely succeeded at not being evil - as much as any large corporation can, really. Google's stated reason and the posters logic holds up to the test of possibility. And it would seem to fit into Google's general way of doing things and its ADHD tendencies. I guess we'll all have to just watch and see what happens.
Right, I know all that. What we're waiting to see is whether or not that's really what Google is up to. I strongly suspect that the poster has it right in thinking that this is what Google is doing. Like I've said, they've done a pretty awesome job of not being evil so far.
On his point about Google placing the news for "payday loans" at the bottom of the screen instead of the top - I really do think that's algorithmic, rather than a concious decision by Google to hide bad press. In the UK, I'm seeing the news box appear at the bottom of the results for "car insurance".
Ugh, I can't stand Cringely. He relentlessly bashed Apple around the time I was starting to switch over from Windows and made some of the dumbest predictions and damnations about Apple at the time, all of which were totally off base. His reputation was ruined for me.
Various sources peg the profit margins of existing payday lenders, with their "400%" effective interest rates, at only 3-10% -- less than Google's margins in their existing lines of business, I suspect.