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Managing Risk in Risky Business

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The ins and outs of payday lenders

– August 29, 2014 –

Payday lending is an industry with global presence and growing numbers. In the UK, it is estimated that 8.2 million loans were taken out from 2011-2012, amounting to about £2.2 billion. In the US, payday loans have an annualized percentage rate between 360% – 780%, for a two-week loan (yes you read those numbers correctly, they aren’t typos).

With these shocking numbers in mind, government and card networks are being more diligent when it comes to payday lenders. As a repercussion, acquirers are hesitant to keep or board these ‘high-risk’ merchants. Let’s take a closer look at the payday loan industry and ways to help you remain compliant and profitable when dealing with these risky businesses.

What’s a Payday Loan? 

Payday loans are short-term, high interest loans, which are secured against an upcoming paycheck instead of a credit line, with proof of employment being the only form of verification required. With this seemingly easy access to money, it is no shocker that payday lenders are a thriving industry; however it’s what’s in the fine print that causes problems to arise.

What’s the Problem?

Studies have found that payday loans are ordinarily used to pay for living expenses, not unexpected emergencies. Someone who may have trouble securing a traditional line of credit can turn to payday lenders when monthly bills start racking up. By the time the next paycheck approaches, they are once again unable to pay for living expenses, let alone pay back the payday loans acquired. This soon becomes a cyclical routine, where a new loan is taken out in order to pay for the previous…all while obscenely high interest rates start adding up… some interest rates can be as high as four digits.

Payday lenders have often been accused of false advertising because the ARP rates tend to be hidden or not displayed. In a 2012 survey, 30% of people asked didn’t know the actual cost of their loans.

Payday lenders have also come under fire due to unethical collecting practices. In one case in Washington State, a company threatened debtors with losing custody of their children if they did not repay them on time.

What’s being done?

Due to their high interest rates, 13 U.S. states have made payday lending illegal, while the remaining 37 have imposed strict regulations to try and keep the interest rates from reaching shocking amounts. Australia has a 48% ARP maximum loan rate, limiting the annual percentage rate that any lender can charge.

The credit card networks are also keeping a close eye on payday lenders. Depending on the location of the consumer that is seeking a payday loan and the location of the payday lender, the transactions processed may be illegal or brand damaging. In order to comply with card networks, an acquirer needs to ensure that there are no illegal transactions being processed, and they need to monitor any merchant site for activity that could be illegal or brand damaging.

Due diligence and the monitoring of these merchants is key. Recently, the New York State Department of Financial Services compiled a database of payday lenders that have been involved with originating or collecting payday loans, which are now illegal in New York. By using such resources, you can check whether the merchant has caused any issues prior to boarding. Then, once you board, you will want to persistently monitor their merchant site for violations including location as well as for any other changes.


While payday lending is a billion dollar industry, it’s important to conduct proper due diligence as well as to monitor interest rates and customer practices. This will help ensure compliance with laws and regulations, as well as keeping up with card network compliance checks. These checks can help payday lenders have a more direct and honest relationship with clients, improving their reputation and client satisfaction. While, regular due diligence and compliance checks will help your merchant portfolio remain versatile and profitable.

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