case study: payday loan industry ethics

Payday loans are small (up to $1,500), unsecured, short-term loans with high fees and interest rates. The loan is made against the next paycheque, at which time it must be paid back. This type of lending began in the mid-1990s and today has about two million customers in Canada. There are more than 1.000 storefront locations in Canada and numerous online lenders. Some locations are open seven days a week. 24 hours a day. It is estimated that the industry does about $2 billion a year in business. The operation of these stores and online lenders has become an informal banking system for a segment of the population. The loans are made and covered by postdated cheques cashed on the next payday. The average loan is about $300 and made for 10 days. The service offered is convenient, but expensive. The Financial Consumer Agency of Canada compared the cost of a $300 loan for 14 days. Borrowing from a line of credit cost $5.81; an overdraft on a bank account. $7.19: a cash advance on a credit card, $7.42: and a payday loan. $63. It is even alleged by some consumer advocates that the payday loan business is illegal and a form of loansharking. The industry responds that their lending practices are better than the alternatives available to some in society who would have to resort to using pawnshops or unscrupulous lenders. The payday-loan industry says that it is responding to a consumer need for short-term, unsecured loans. The chartered banks and credit unions are unwilling and/or unable to provide the service. In fact, it is argued that the banks have encouraged the industry by closing so many branches. The banks say they have overdraft and credit-card loans available. Some critics have determined that the payday-loan stores are increasingly being set up near banks. Some consider the industry to be a scam against poor and financially illiterate consumers that traps many into a never ending spiral of debt. Industry observers counter that there is a business case for the payday loans. First of all, there is a huge demand, suggesting a need. Flexibility is provided to consumers in managing their financial affairs, and other services are provided, such as cheque cashing and money transfer. The loans may be used to pay off other loans with even higher interest rates, such as those on some credit cards. The high interest rates and fees are justified as there is a high default rate, and there are high administrative costs involved with small loans. The industry has been mostly unregulated, as there are jurisdictional complications, with the federal government being responsible for interest rates and the provinces for consumer protection. In recent years, several provincial governments have introduced legislation over various aspects of the business and municipalities have limited locations. An industry association, the Canadian Consumer Finance Association (CCFA), is attempting to clean up the industry's reputation and supports regulation by government. Its mandate is "to work with federal and provincial governments to achieve a regulatory framework that protects consumers while allowing for a viable industry to continue. " COFA represents $70 licensed stores and online businesses who must adhere to a "Code of Best Business Practices. Questions 1. Analyze the ethics of the industry using utilitarian ethics. Which stakeholders benefit and which are harmed? 2. Do the benefits outweigh the harms or vice versa? 3. Is the payday-loan industry ethical? 4. Would you accept employment in the industry as a manager? Why or why not?