Google recently announced that it will ban payday loan-sponsored ads come July 13. On the surface, this is a fantastic idea and one I’ve been advocating for years. But below the surface there’s an opportunity for Google to make a big, positive impact for vulnerable consumers and good actors in the short-term lending industry. But to do so, Google needs to refine elements of its anti-ad stance.
Payday loans are the only product I know that are more expensive online than offline. There are a couple of reasons for this and Google is an important one.
Not long ago when you searched for “payday loan,” as much as half of the sponsored results were either not lenders at all or they were lawless offshore lenders. Consequently, the customer acquisition costs for regulated, licensed payday lenders, or their more progressive brethren like LendUp or Zest, went through the roof. Think about it. How can you not charge three-digit APRs if it costs $100 to $150 just to acquire the customer?
Google’s move is both important and in line with its promise to “do no harm,” and the tech giant should be applauded for taking this step. Given its effective monopoly on Internet search, bidding up payday-related keywords is making a bad product worse. And indeed, while payday loans clearly fill a need for the millions who consume them, they are typically poorly structured and wildly expensive. The negative impacts of payday loans have been documented at length.
But the devil is in the details. Read beyond the headline and you’ll see Google intends to ban sponsored ads for loans that are due within 60 days and that cost more than 36%. That threshold will include many responsible lenders in the ban. This choice will likely harm a lot of customers who need access to regulated, well-structured loans that will very likely cost more than 36% APR.
Placing downward pricing pressure is important and one Google can contribute to. But the reality is I have yet to see a subprime lender make short-term loans at any scale for less than 36% in the 10 years I’ve looked at financial services for the underbanked. The exceptions are firms that primarily lend to high-quality, thin-file consumers or come with subsidies and/or have a small scale just as a community development credit union.
I strongly endorse Google’s move. But I encourage the tech giant to consider the complexities inherent in subprime lending versus the political expediency of its recent decision. Google should set up a process itself or partner with an independent party to vet buyers of payday-related ads to separate the good lenders from the bad. Such a process should verify that would-be ad buyers are registered, licensed and in good standing — that their loans are clear and transparent and that they structure the loans responsibly.
Watch the Future of Fintech panel discussion about The Underbanked featuring Arjan Schütte, Dr. Alex Lin (Infocomm Investments), Matt Harris (Bain Capital Ventures), and Jon Marino (CNBC):