The payday loan industry is thriving in Canada, and borrowers are paying the cost through extraordinary interest rates and fees. There is a simple solution: postal banking.

La Poste is a postal service company in Normandy, France.
(Artur Widak / NurPhoto via Getty Images)

There are few industries more predatory and indicative of the nature of capitalist markets than the payday loan industry. By charging exorbitant interest rates and fees to working people trying to bridge the gap between their paychecks and their living costs, the industry functions as a private tax collector for state failure. These “taxes” fund individuals and entities who have an interest in keeping people desperate and oppressed.

Payday and installment loans are cash sources of last resort for many, but they are common — used by millions of Canadians — especially during times of economic stress and downturn, such as the one we’re living in now. The cost of such loans are astronomical. As Tom Yun reports for CTV News, “Instalment loans are generally offered to borrowers with interest rates between 30 to 60 per cent and meant to be paid back within a fixed period of time. Payday loans are typically $1,500 or less for a period of 62 days or fewer and can have interest rates has high as 548 per cent, depending on the province.” Such rates can leave borrowers far worse off than before, many of whom get stuck in a cycle of interest accumulation they cannot keep up with.

The pandemic has driven more people into the extortionate arms of payday and installment loans. While emergency measures did help some workers, they were time-limited and have expired. Meanwhile, struggles continue. A survey by ACORN Canada of its members found a rise in the number of people taking out a payday loan during the pandemic, many of whom were driven to the high-interest, high-fee lenders because they were rejected by a bank or credit union.

In March, Toronto Star columnist Heather Mallick wrote about the scourge of payday loans. “Loan sharks are pulling Canadians under,” ran the headline. That’s a great way to put it. In Canada, the Criminal Code sets a limit of 60 percent annually, but payday loan outlets, if they are regulated by the province in which they operate, are exempt from the provision. Hence the rise in loan shark attacks.

Each province sets their own limits. Most are above the federal criminal barrier. Yun runs down the numbers, with Ontario, British Columbia, and Prince Edward Island setting an effective limit of 391 percent annually. Manitoba and Saskatchewan sit at 495 percent and Newfoundland and Labrador soars to 548 percent. Quebec, Yun notes, has “effectively banned payday loans,” with a limit of 35 percent, well under the federal limit and close to the 30 percent that advocates call for. In June, Nova Scotia’s Utility and Review Board elected to reduce payday loan fees — which will be allowed to climb to $17 this autumn — to align with Ontario, British Columbia, and Prince Edward Island by January 2024 at $15 in interest for every $100 loaned, compounded every two weeks.

In their report on the pandemic and high-cost loans, ACORN highlights just how vulnerable people are right now. Debt-to-income ratios are high in Canada, with folks spending much more than they earn and wages failing to keep up with rising costs. The situation as it stands is a recipe for disaster. Citing research from Michalos & Associates and the Office of the Superintendent of Bankruptcy Canada, ACORN notes, “At $793.5 billion as of October 2020, non-mortgage debt has rebound and is now just 1 percent below pre-pandemic levels of $802.2 billion in February 2020. The insolvency statistics also show that there has been a 21.6 percent jump in the volume of insolvencies filed between Q2 of 2020 and Q2 of 2021.” With inflation and rising interest rates, things will no doubt continue to get worse.

The loan shark industry will say that they’re providing a necessary service. Without them, so goes this reasoning, people would have nowhere to go to get the money they need when they need it — or nowhere legal and regulated, at least. This argument doesn’t hold water. Folks might end up with nowhere to go if payday loan outlets were banned, or rates were regulated so low that they could not afford to operate. But this presupposes that no alternative measures can be adopted.

The Canadian fintech company Koho is making its way into the loan space with a different model. As Clare O’Hara reports for the Globe and Mail, the company has raised over $200 million in investment capital and “is shifting into lending products that will offer users free advance access to a portion of their next paycheques several days before their payday.” That portion could be up to half of their paycheck without interest.

Koho’s model does seem better than the status quo but there are ways to sidestep the predatory loan market entirely. One possibility in particular is staring us right in the face: postal banking. A 2013 report from the Canadian Centre for Policy Alternatives written by John Anderson makes a compelling case for postal banking’s return. A public bank, run through postal outlets, could charge lower and fewer fees, and could drastically cut interest rates for small loans.

Postal banking could ensure that every Canadian is served, including those turned away by banks and credit unions. As Anderson points out, postal bank models already exist around the world, including in Italy, France, Switzerland, and New Zealand. Canada, too, used postal banking from 1868 to 1969.

The Canadian Union of Postal Workers supports postal banking. They note that such a service could reach the “nearly two million Canadians in urban and rural areas” who “desperately need an alternative to predatory payday lenders.” They also point out that, despite charging low fees and rates, postal banks around the world return profit to public coffers — profits that can be reinvested into the postal banking system while offsetting loses from the postal service’s other operations.

The long-term solution to predatory loan practices is socialism: an overhaul of the economic system and an end to cycles of exploitation. This work is ongoing but, as we know, it is not an easy or quick fix.

Canadians need a nearer-term solution to exploitative loans that crush desperate people already marginalized by the economic system. That solution starts with capping interest rates on loans at 30 percent, as advocates have called for across the country. It also requires Canada to adopt postal banking to ensure that the long-term interests of low-income individuals are better protected from predators who seek to keep them in cycles of desperation and debt. It’s well past time to blow the sharks out of the water.

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