Apparently Ritchie’s always been like this

From his 2003 report on Provident Financial:

Provident Financial plc appears to have charged average APRs on its
loan of in excess of 200% over a period of 6 years and at present
charges about 185% APR on such loans.
2. Provident Financial plc appeared to charge an interest rate exclusive of
charges of in excess of 100% per annum during this period.
3. Despite a falling trend in its average APR over this period, caused
largely by lengthening the life and size of its average loan, Provident
Financial plc increased the average revenue it earned for each £1 it
advanced from 47.7p to 52.6p over the period 1996 to 2002.
4. Provident Financial plc has managed its affairs to appear to be a
normal provider of loan finance for the purposes of stock market
review, and that market has capitalised its extraordinary ability to make
income of 77% of average loan balances outstanding in a year when
compared with 6.9% for Lloyds TSB Group plc, for example. The result
is that the market values each of them similarly. This will result in
substantial stock market pressure against change in the trading
environment in which Provident Financial plc operates.


The financial markets have welcomed the ability of Provident
Financial plc to produce financial results that appear, on profit
and loss indicators, to match those of other companies in the
sector, albeit that it is clear that on balance sheet ratios it is
aberrational. They are likely to resist changes to the business
model that creates this result without compulsion.

They charge very high interest rates plus charges.

Their return on capital appears to be about the same as other financial companies.

Every economist in the universe then says, well, must be an expensive thing to do then, lend small amounts for short periods of time, if there are no excess profits despite the interest charges.

Spudda doesn’t get this.

5 thoughts on “Apparently Ritchie’s always been like this”

  1. Provident’s (formerly) principal competitors: London Scottish and Cattle’s have both gone bust and Provident needed a “rescue” Rights Issue after its (then) CEO tried to change the business model.
    Provident’s business model involved sub-contracting the leg-work (literally leg-work, walking round council housing estates) of handing out loans and collecting weekly (only recently has it become fortnightly) repayments to a small army of self-employed “agents”. So it’s high-cost as each agent has to feed and clothe herself out of her slice of the profits on the loans on her round.

  2. APR bundles all the admin overheads into the figures and then applies compound interest over the period of the loan. It’s a perfectly reasonable way of working out which of two alternative 20-year mortgages is better value, or equally which of two one-month unsecured loans. But if you try to compare the APR on a one-month loan to that on a 20-year mortgage, the result is essentially meaningless.

    (If you want to work out the APR on going £20 overdrawn on a Barclays current account for a day, you’ll need a calculator with a lot of digits!)

  3. If Wonga really charged the headline APRs, it would be the most profitable business of all time. But it’s now going bust. So Wonga’s business model appears to be (as it always appeared to be): charge high rates of interest to those that can afford to pay them, and forgive (or be sued by) poorer borrowers who can’t afford them. It’s an implicit subsidy from richer to poorer Wonga customers.

    And this differs in substance from Ritchie’s “idea” of a social lending fund… how, exactly?

  4. And the alternatives for short-term lending without risk of gbh are…..? I just hope these guys know that when they applaud the demise of Wonga, the Krays revive

  5. “Every economist in the universe then says, well, must be an expensive thing to do then, lend small amounts for short periods of time, if there are no excess profits despite the interest charges. Spudda doesn’t get this.”

    Lots of people don’t get this. As Chris Miller says, it’s purely because APR is a misleading statistic to use for very short-term loans with admin fees.

    You’ve gone out to lunch and realise you forgot your wallet when you get to the checkout. Your colleague pays for your £4.95 lunch. When you get back to the office an hour later, you give them a £5 note and say “Keep the change.”

    That’s 1% over an hour, there are 8760 hours in a year, so compounded that would add up to an APR of 1.01^8760 x 100% = 17,206,610,405,614,362,880,390,262,524,050,237,849,500%. That’s a number with more than 40 digits in it!

    However, 5p is not “expensive”, poorer borrowers would certainly be able to afford it (although they might be well-advised to make their own packed lunch), and nobody is subsidising anybody.

    It’s simple innumeracy, combined with the mandated use of an unsuitable metric.

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