Google recently waded into the vibrant policy debate surrounding consumer credit regulation. Specifically, David Graff, its director of global product policy, shared an update “that will go into effect on July 13, 2016: We’re banning ads for payday loans.” Graff also expressed hope that this policy means “fewer people will be exposed to misleading or harmful products.”
Google managers certainly should strive to make decisions that maximize shareholder wealth, though we’re not qualified to comment on whether this advertising decision helps maximize the value of Google shares. The workings of search engine dynamics, the sale of search terms, and the associated economics are complex. We are, however, qualified to comment on whether payday loans are misleading and harmful to consumers.
We urge every reader to reflect on the following sentence: Current users of payday loans quite possibly will be harmed by a reduction in access to these credit products. As our colleague Todd Zywicki notes, reducing the supply of consumer credit products does not eliminate the demand for credit. Consumers have long found ways to bridge financial shortfalls.
Professor Zywicki shows that people who are unable to access a payday loan still seek credit. They do so, however, by using more expensive options like overdraft protection — or even bouncing personal checks. For a consumer already struggling financially, these substitutes for payday loans can leave them even worse off.
In May 2015, the Federal Reserve released its 2014 report on the economic well-being of U.S. households. Strikingly, 47 percent of 6,000 respondents said that they could not cover a $400 emergency expense, or they would cover it by selling something or borrowing money. A recent Atlantic magazine article presents a firsthand account of someone in this situation. In the event of a small-dollar emergency, these individuals still have to find a way to pay their bills. Where can they go to get credit?
Robert Sherill, a fellow witness at a congressional hearing on short-term, small-dollar lending earlier this year, demonstrated why access to credit is important. In his testimony, he described his efforts to rebuild his life — he wanted to start a business. Sherill described the payday loan funding he received as “a lifeline.”
Rep. Andy Barr, R-Ky., asked Sherill what he would do if he did not have access to a payday loan. Sherill said that he would do whatever it would take to get money for his business: “I mean, if you ain’t got it, then you got to go get it some type of way.”
Sherill isn’t alone. A 2013 Pew Charitable Trusts survey found that more than 60 percent of payday loan users would have to delay paying other bills without access to these loans. The alternative to short-term loan debt is being indebted to existing creditors — where failure to pay might mean losing access to utilities, like water and electricity.
The words and actions of many consumer advocates imply that people without money are incapable of making basic financial decisions for themselves. These advocates also imply that this consumer group is easily, and repeatedly, fooled, mislead or lured into making financial decisions judged as suboptimal. Such words and actions are demeaning, degrading and discriminating toward people without money.
Payday lenders stand ready to risk losing their own money by lending it to high-risk consumers. These consumers have few other sources of emergency funds. How can people with few borrowing choices be made better off by removing options ?
The payday lending industry is extremely competitive. Competition means that these high-risk consumers are receiving financing at the lowest possible cost. State legislatures in the 50 states have long been, and continue to be, effective watchdogs for the citizens of their states. The states highly regulate payday lenders and punish lenders who misbehave.
We are not aware of detailed cost-benefit analyses that show payday loan products harming society as a whole. If there were an overall societal harm, consumers, as a group, would avoid the product. When consumers avoid using a product, it disappears from the marketplace and is replaced by another one. Hasty decisions by regulators are poor substitutes for the decisions that millions of individuals collectively make in a dynamic marketplace.
We remain puzzled by Google’s decision. Protecting and helping consumers is a noble goal. Limiting access to credit, however, isn’t the way to do it.