IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2306.01749.html

Detecting Consumers' Financial Vulnerability using Open Banking Data: Evidence from UK Payday Loans

Author

Listed:
  • Victor Medina-Olivares
  • Raffaella Calabrese

Abstract

This paper examines whether repeated payday loan use, commonly known as the debt trap, harms borrowers' financial wellbeing. Using Open Banking data from 1,815 UK borrowers observed between 2017 and 2018, we model borrowing intensity using a two-state hidden Markov model (HMM). The HMM outperforms single-regime alternatives and identifies two distinct borrowing patterns: occasional (low-intensity) and persistent (high-intensity) use. Each regime exhibits a characteristic relationship between borrowing intensity and wider transaction behaviour. We translate the decoded state sequence into a practical monitoring rule based on sustained high-intensity exposure. Defining a trigger event as 12 consecutive weeks in the high-intensity regime, we find that 36.4% of borrowers experience at least one such event. Among those who do, high-intensity weeks represent 17.8% of all borrower-week observations on average. Together, these results provide evidence for a persistent high-intensity borrowing pattern and demonstrate that it can serve as a simple, interpretable rule for monitoring prolonged reliance on payday loans.

Suggested Citation

  • Victor Medina-Olivares & Raffaella Calabrese, 2023. "Detecting Consumers' Financial Vulnerability using Open Banking Data: Evidence from UK Payday Loans," Papers 2306.01749, arXiv.org, revised May 2026.
    • Handle: RePEc:arx:papers:2306.01749
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2306.01749
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 517-555.
    2. J. Brandon Bolen & Gregory Elliehausen & Thomas W. Miller, 2020. "Do Consumers Need More Protection From Small‐Dollar Lenders? Historical Evidence And A Roadmap For Future Research," Economic Inquiry, Western Economic Association International, vol. 58(4), pages 1577-1613, October.
    3. Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, March.
    4. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
    5. Desai, Chintal A. & Elliehausen, Gregory, 2017. "The effect of state bans of payday lending on consumer credit delinquencies," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 94-107.
    6. Edward C. Lawrence & Gregory Elliehausen, 2008. "A Comparative Analysis Of Payday Loan Customers," Contemporary Economic Policy, Western Economic Association International, vol. 26(2), pages 299-316, April.
    7. Susan Payne Carter & Kuan Liu & Paige Marta Skiba & Justin Sydnor, 2022. "Time to Repay or Time to Delay? The Effect of Having More Time before a Payday Loan Is Due," American Economic Journal: Applied Economics, American Economic Association, vol. 14(4), pages 91-126, October.
    8. Altman, Rachel MacKay, 2007. "Mixed Hidden Markov Models: An Extension of the Hidden Markov Model to the Longitudinal Data Setting," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 201-210, March.
    9. John Gathergood & Benedict Guttman-Kenney & Stefan Hunt, 2019. "How Do Payday Loans Affect Borrowers? Evidence from the U.K. Market," The Review of Financial Studies, Society for Financial Studies, vol. 32(2), pages 496-523.
    10. Brian T Melzer, 2018. "Spillovers from Costly Credit," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3568-3594.
    11. Marianne Bertrand & Adair Morse, 2011. "Information Disclosure, Cognitive Biases, and Payday Borrowing," Journal of Finance, American Finance Association, vol. 66(6), pages 1865-1893, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ryszard Kowalski & Grzegorz Wałęga, 2022. "Regulation of Usury: Justification, Consequences, and Some Lessons from Polish Experience," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 57-73.
    2. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    3. Fu, Shun & Li, Emma & Liao, Li & Wang, Zhengwei & Xiang, Hongyu, 2025. "Unveiling the villain: Credit supply and the debt trap," Journal of Empirical Finance, Elsevier, vol. 81(C).
    4. Kabir Dasgupta & Brenden J. Mason, 2025. "The Effect of Liquidity Constraints on Labor Supply: Evidence from Interest Rate Ceilings," Finance and Economics Discussion Series 2025-110, Board of Governors of the Federal Reserve System (U.S.).
    5. Dasgupta, Kabir & Mason, Brenden J., 2020. "The effect of interest rate caps on bankruptcy: Synthetic control evidence from recent payday lending bans," Journal of Banking & Finance, Elsevier, vol. 119(C).
    6. Daniel Bjorkegren & Joshua Blumenstock & Omowunmi Folajimi-Senjobi & Jacqueline Mauro & Suraj R. Nair, 2022. "Instant Loans Can Lift Subjective Well-Being: A Randomized Evaluation of Digital Credit in Nigeria," Papers 2202.13540, arXiv.org.
    7. J. Brandon Bolen & Gregory Elliehausen & Thomas W. Miller, 2020. "Do Consumers Need More Protection From Small‐Dollar Lenders? Historical Evidence And A Roadmap For Future Research," Economic Inquiry, Western Economic Association International, vol. 58(4), pages 1577-1613, October.
    8. Wang, Jialan & Burke, Kathleen, 2022. "The effects of disclosure and enforcement on payday lending in Texas," Journal of Financial Economics, Elsevier, vol. 145(2), pages 489-507.
    9. Christine L. Dobridge, 2016. "For Better and for Worse? Effects of Access to High-Cost Consumer Credit," Finance and Economics Discussion Series 2016-056, Board of Governors of the Federal Reserve System (U.S.).
    10. Craig Wesley Carpenter & Kristopher Deming & John Anders & Michael Lotspeich‐Yadao & Charles M. Tolbert & Adam Ingrao, 2024. "Do payday lending bans protect or constrain regional economies? Evidence from the Military Lending Act's final rule," Contemporary Economic Policy, Western Economic Association International, vol. 42(2), pages 319-335, April.
    11. Lodermeier, Alison, 2024. "Credit access and housing insecurity: Evidence from winter utility shutoff protections," Journal of Public Economics, Elsevier, vol. 230(C).
    12. Desai, Chintal A. & Elliehausen, Gregory, 2017. "The effect of state bans of payday lending on consumer credit delinquencies," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 94-107.
    13. Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, March.
    14. Leandro Carvalho & Arna Olafsson & Dan Silverman, 2024. "Misfortune and Mistake: The Financial Conditions and Decision-Making Ability of High-Cost Loan Borrowers," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 3173-3213.
    15. James R. Barth & Jitka Hilliard & John S. Jahera & Kang B. Lee & Yanfei Sun, 2020. "Payday lending, crime, and bankruptcy: Is there a connection?," Journal of Consumer Affairs, Wiley Blackwell, vol. 54(4), pages 1159-1177, December.
    16. Cullen F. Goenner, 2024. "The impact of payday alternative loans on credit union performance and loan quality," Journal of Consumer Affairs, Wiley Blackwell, vol. 58(2), pages 558-586, June.
    17. Fitzpatrick, Katie, 2024. "Non-bank credit and food hardship: The association between payday loans, pawn loans, rent-to-own contracts and food hardship in households with children," Children and Youth Services Review, Elsevier, vol. 157(C).
    18. Thomas A. Hemphill, 0. "The small-dollar loan industry: a new era of regulatory reform—and emerging competition?," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 0, pages 1-11.
    19. Sarah Miller & Cindy K. Soo, 2020. "Does Increasing Access to Formal Credit Reduce Payday Borrowing?," NBER Working Papers 27783, National Bureau of Economic Research, Inc.
    20. Barth, James R. & Hilliard, Jitka & Jahera, John S. & Sun, Yanfei, 2016. "Do state regulations affect payday lender concentration?," Journal of Economics and Business, Elsevier, vol. 84(C), pages 14-29.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2306.01749. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.