How much is a reputation worth? Westpac must have asked itself that question before it lent millions of dollars to Australia's biggest payday lenders. Those lenders have been making headlines for the wrong reasons lately. Some people inside Westpac may be slightly on edge about it.
Before we begin, we ought to know what we mean by "payday lending".
The payday industry goes by various names, such as "non-mainstream credit provision" or "high-cost short-term lending". That's partly for technical reasons, and partly because some organisations don't like the negative connotations attached to the phrase payday lending.
But whatever they like to call themselves, payday lenders are generally in the business of lending small amounts of money at very high interest rates for short periods of time, mostly to low-income earners.
Cash Converters is the biggest payday lender in Australia.
It's called payday lending because, as a recent report puts it, "the money is theoretically lent on the security of the borrower's next pay cheque".
The industry has been booming in Australia. The first payday lender opened its doors in Queensland in 1998. By 2001, there were 82 outlets across the country. By 2008, there were over 800.
Industry insiders estimate the market may have 1 million customers, and more than 400 lenders.
The typical payday borrower earns a low income, and many are repeat borrowers who finish repaying one high interest loan before signing up for another.
The main reason why borrowers use payday finance is to help them pay for basic living expenses such as power and water bills, rent, food or car registration. Many already receive Centrelink or pension payments.
The industry has a reputation for trapping customers in cycles of debt that are nearly impossible to escape.
Cash Converters is listed on Australia's stock exchange, so its business is relatively transparent. It is worth more than $400 million. Last financial year, it posted a profit of $57 million, up 18.6 per cent on the previous year.
Westpac provides it with a $60 million loan facility to fund 70 per cent of the growth of its loan book.
But in October, the legal firm Maurice Blackburn launched a $40 million class action against the company, alleging thousands of its customers had been caught by exorbitant interest rates.
The customer at the centre of the class action, a grandmother called Julie Gray, receives a disability support pension.
The basis of the legal claim is that Cash Converters "acted unconscionably" and devised and put into place a system that allowed it to evade a 48 per cent interest rate cap on short-term loans in NSW. It alleges that between 2010 and mid-2013, Cash Converters slugged its customers up to 633 per cent on small loans and about 145 per cent on slightly larger loans.
It believes 45,000 customers may have been affected by the fees.
Cash Converters says it will "vigorously" defend the allegations, saying the loans in question were not unlawful.
Australia's second biggest payday lender is a group called Money 3. It is also listed on the stock exchange and is worth more than $100 million.
Money 3 is growing rapidly. It is acquiring scores of branches, and more than 30,000 customers, from collapsed payday lender The Cash Store.
The company boasted a record net profit this year of $3.6 million, up 44.5 per cent.
Westpac has been in negotiations with Money 3 about a $20 million credit facility to expand its auto finance division.
But last month, Money 3 was found to have used advertisements on its website that purported to show genuine customers lauding its services. They weren't real customers at all. As it turns out, some of the customers in its ads were also happy customers of companies in Sweden and Ireland and Canada.
Banks are generally wary of the payday lending market given the reputational risks involved in writing short-term loans at high rates to low-income earners.
The only reason we know about Westpac's involvement with Cash Converters and Money 3 is because they are listed companies, so their financial information is publicly available.
National Australia Bank, the biggest business lender in Australia, says it has deliberately stepped back from the industry.
A NAB spokesman says: "Earlier this year NAB made a decision to not pursue business from payday lenders, in line with our corporate responsibility agenda."
That doesn't mean the bank isn't involved with payday lenders because it might have some on its books from previous years. But if it knows a prospective customer wants to borrow money to use for payday lending then it won't pursue business with them.
It will be interesting to watch where the two banks' policies lead them.
Payday lending is a complicated area and you can understand why banks might not want to get involved. Industry participants' attitudes are themselves ambiguous.
A recent academic report, called Caught Short: Exploring the role of small, short-term loans in the lives of Australians, found only a small minority of participants felt the industry ought to be abolished.
The report was supported by NAB and the religious order Good Shepherd, and it had great access to Money 3 customers who wanted to participate.
It found that even though borrowers might not like having to take out high-interest loans, many felt that if the loans did not exist, they'd have "far fewer options".
"Less than one-fifth of the sample thought the short-term lending industry should be abolished," the report found.
"Most people had ambivalent and conflicting opinions. The industry and financial counsellors and regulators also had conflicting views and different ideas about the nature of the problem and the solution."
The Consumer Action Law Centre has pushed for reform of the industry for years.
It says policy makers ought to think about the reasons why there is such demand for short-term loans in the first place.
It has suggested increasing welfare payments, or rescheduling them so they are paid weekly rather than fortnightly.
It has also challenged the "conventional logic" that the best way to provide low income households with easier credit is to charge them more for it.
As the report points out, a "vast majority" of payday loans are paid on time because loan repayments are withdrawn automatically by direct debit.
That would seem to invalidate the argument that borrowers are high-risk clients that justify the higher fees and charges.
It's hard to argue with that.