Google announced Wednesday that it will ban all payday loan ads from its site, bowing to concerns by advocates who say the lending practice exploits the poor and vulnerable by offering them immediate cash that must be paid back under sky-high interest rates.
The move also shows the willingness of big tech companies to weigh in on critical policy issues -- and exert their power as the gateways for the internet. Facebook also does not display ads for payday loans. But others, such as Yahoo, still do.
Consumers will still be able to find payday lenders from a Google search. But the ads that appear on the top and right-hand side of a search results page will not show marketing from the payday lending industry beginning on July 13.
"We’ll continue to review the effectiveness of this policy, but our hope is that fewer people will be exposed to misleading or harmful products," Google global product policy director David Graff said in a blog post about the change.
Washington regulators, as well as a handful of states, have been trying to limit the activities of payday lenders by capping how much they can charge consumers in an interest rate. But the decisions by tech giants Facebook and Google – the two biggest websites on the planet – might have as much impact as any single regulation in restricting access to payday lenders.
Industry officials, speaking generally of advertising restrictions placed on payday lenders, called the policies “discriminatory,” adding that some consumers may need access to the short-term loans if they can’t get credit them through a traditional bank.
“Facebook and others are making a blanket assessment about the payday lending industry rather than discerning the good actors from the bad actors,” the Community Financial Services Association of America, a payday lending trade group, said in a statement. “This is unfair towards those that are legal, licensed lenders.”
Millions of low-income Americans use the short-term loans to get cash quickly while planning to repay their balance once they get their next paycheck. But all too often, borrowers get caught in a vicious cycle where fees quickly mount and annual interest rates can be in the triple-digits.
In many cases, this debt drama plays out online -- and starts with a search query.
"You search the internet when you need help -- and as a result you may give search engines some really sensitive information about your finances," explained Alvaro Bedoya, the executive director of Georgetown Law's Center on Privacy & Technology. When those desperate searches return targeted ads for payday loans, lenders end up profiting from the weaknesses those people have shared, he said.
But once a borrower has committed to an online payday loan, they may end up facing unexpected financial risks. According to a recent Consumer Financial Protection Bureau analysis, half of borrowers who took out online payday loans were later hit with an average of $185 worth of bank fees or penalties when a lender submitted automatic repayment requests they couldn't afford.
And payday loans taken out online can also be more expensive than those borrowed from storefronts. For example, borrowers taking out the average payday loan of $375 would pay a $95 fee online compared with $55 at a store, according to Pew Charitable Trust.
While the total amount of payday loans taken out each year has declined slightly in recent years, online payday lenders are making up a bigger share of the market. About 40 percent of the roughly $40 billion issued in payday loans in 2015 were taken out online, according to estimates from Jefferies.
The move could make it more difficult, though not impossible, for online payday lenders to find new customers, said John Hecht, an analyst at Jefferies.
“Certainly when Google modifies or limits advertising or search results it can have a definite impact on an industry right away,” Hecht said. But consumers who want a payday loan would still be able to turn to other search engines or they could visit a storefront, he added.
The CFPB is working on a proposed rule targeting the industry which it expects to unveil later this spring. The agency is considering rules that would limit the number of times consumers could rollover a loan, capping them at two or three loans total. The rules might also require lenders to verify consumers’ income and borrowing history to gauge their ability to pay back the loan.
Google itself had previously taken some steps to limit payday loan ads. The decision to ban them outright came in part after pressure from a coalition of civil liberties, consumer protection, and privacy groups that reached out to the search giant about the issue late last year.
The Leadership Conference on Civil and Human Rights was one of those groups. “This new policy addresses many of the longstanding concerns shared by the entire civil rights community about predatory payday lending," Wade Henderson, the group's president and chief executive, said in a statement. "Low-income people and people of color have long been targeted by slick advertising and aggressive marketing campaigns to trap consumers into outrageously high interest loans.”
To enforce the policy, those seeking to market financial products through Google's sprawling advertising network will be required to disclose the length of the loan and the annual interest rate before they will be allowed to place ads. In addition to the broad payday loan ad ban, Google will not display ads from lenders who charge annual interest rates of 36 percent or more in the United States. The same standards will apply to sites that serve as middlemen who connect distressed borrowers to those lenders.
That's important because banning ads for payday loans themselves may not be enough, according to some advocates. "If you type in a search term that indicates financial distress, most of the ads you'll see will be for websites that are not the payday lenders themselves, but marketing companies who collect leads then auction them off to the lenders," said Aaron Rieke, one of the authors of a report on online payday lending advertisements released by consulting firm Upturn last year.
Google, of course, has also profited from those ads. Although they likely make up only a small fraction of the company's staggering online advertising revenues -- which were more than $18 billion in the first quarter of this year -- banning them will mean the company is leaving dollars on the table.
To advocates like Bedoya, that's a good thing.
"Google is taking a principled stance here," he said. "Hopefully, it's one that will help set a new standard for search engines."