In the UK there is presently talk of banning pay day loan providers from advertising. Some suggest there is a problem with advertising being targeted at young people and students. Perhaps what is envisaged is something similar to the Tobacco Products Control Amendment Act which was passed in South Africa in 1999 which bans all advertising and promotion of tobacco products including sponsorship (the UK also has a tobacco advertising ban). Similarly France, Norway and Kenya have banned all alcohol advertising on television and billboards.
What were the reasons for banning tobacco and alcohol advertising? Has it worked? Will it work and should it be done for pay day loans?
Pay day loan providers have used all sorts of ways to grab the attention of potential customers. One very successful marketing campaign has been run by the UK branch of wonga.co.za. They also are the new sponsors of Newcastle United football team. They obviously have a lot of exposure. Will the possible ban on advertising effect companies like them?
Tobacco and alcohol advertising is banned in some countries because the use of these substances is known to have potentially adverse health consequences. However, many studies have looked at the effect of tobacco and alcohol advertising. Most studies show that if tobacco and alcohol consumption are not increased if they are advertised.
A study done by Penn State Professor Emeritus of Economics Jon Nelson entitled “Do Advertising Bans Work? An International Comparison” looks at countries which have a wide ban on tobacco and alcohol advertising. The Professor considers that a ban on advertisements for say, spirits, does not mean it reduces drinking but it pushes customers towards alternatives like beer or wine. He also says bans on alcohol and tobacco marketing are among the least effective tactics for combating underage drinking and smoking. So, if you were to apply this logic to the proposed ban on advertising pay day loans it would not reduce borrowing or the desire to borrow. For many people who use pay day loans the only alternative might be an unregulated loan shark or to face the consequences of not having the necessary money to pay of a vital utility bill. That is not an ideal situation either.
Preventing access to pay day loans seems elitist – it is like saying that only the rich should have access to credit and they are the only group capable of managing their debt in a way that they chose. A more constructive way to protect consumers would be through financial education and a greater focus on ensuring lenders were transparent in their lending terms.