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Bloomberg.com: Exclusive: "Finns Ring Up Debt as Gamblers, Party-Goers Send Texts for Cash

By Kati Pohjanpalo
More Photos/Details

Finns Ring Up Debt as Gamblers, Party-Goers Send Texts for Cash

By Kati Pohjanpalo
More Photos/Details

July 11 (Bloomberg) -- Veli-Pekka Kaipainen needed cash in a hurry to pay off gambling debts. So he started texting.

The Zamboni ice-resurfacing machine driver used his mobile phone to contact Finland's text-message lenders. The only catch was he had to pay fees equivalent to an annual interest rate of as much as 1,600 percent.

``The easiness tricks people,'' said Kaipainen, 30, who lives in Heinola, 105 miles north of Helsinki. ``You get the money in five minutes.''

Text-loans account for 20 percent of problem debts in the home of Nokia Oyj, the world's largest maker of mobile phones. That's prompted the government to start drafting rules regulating text lending, which emerged in Finland three years ago and is now spreading across Northern Europe.

``Even the pawnshop is less expensive,'' said Leena Veikkola, executive director of the Guarantee Foundation, a Helsinki-based non-profit organization that helps over-extended borrowers. ``It's profiteering.''

To get a loan, Finns send a text message containing the amount requested, their address, personal identity number and bank account number. The lender checks an online credit database, transferring the cash if the details check out and the applicant has a clean credit record. No security is required.

Borrowers receive the money in as little as three minutes and typically must repay it within a month, said Kari Kuusisto, who heads an association of six text-message lenders. Finns took out 270,000 text loans in the first quarter, according to the country's statistics bureau, which released its first data on the topic on July 4.

Flat Fee

Interest is charged as a flat fee, usually about a quarter of the amount borrowed. That translates to a median interest rate of 621 percent on a 100-euro ($157) loan, according to a survey of 30 companies published by Taloussanomat, a Helsinki-based financial news Web site.

One company, Oy Atlas-Invest Ab, charges fees ranging from 12.25 euros to 33.60 euros for 14-day loans of 20 euros to 80 euros. For the smallest loan, the fee is equivalent to annual interest of 1,597 percent, according to a calculation formula by the Economy Ministry. The company doesn't have a listed office number and didn't respond to an e-mail seeking comment.

Pawnshops charged the equivalent of 122 percent for 100 euros, the survey showed.

``Is it unreasonable of us to take 20 euros for lending 100 euros for 14 days to a person we don't know at all?'' says Richard Rosenius, chief executive officer of OPR-Vakuus Oy, the third lender to set up shop. ``What do they use that 100 euros or 50 euros on? I'd say they spend it on everyday life.''

Instant Poker Chips

A promotional video for lender VipMoney shows a man at a bar table full of empty bottles who receives a text-message loan after his debit card is refused. Antti Koivisto, a Turku-based VipMoney board member, declined to comment when reached by phone.

A television commercial for J.W.-Yhtioet Oy featured a man running out of chips at a poker table. A text message later, stacks of chips appeared. The spot was withdrawn in May after the Finnish Consumer Agency deemed it ``inappropriate.''

The Justice Minister set up a group in October to probe text lending. In the first half of the year, Finland's courts issued 15,500 orders for text borrowers to repay loans, 63 percent more than a year earlier. Forty percent involved borrowers under 25.

The committee, which includes representatives from the financial regulator and consumer agency, is scheduled to report its proposals in November.

``Text message loans are taken out when the crisis hits, when there is no alternative,'' said Veikkola at the Guarantee Foundation. ``I don't know what else they can do but ban SMS loans.''

40 Text Lenders

While he opposes a ban, Rosenius said tighter rules may help weed out inappropriate practices.

``We absolutely want regulation,'' he said.

Finns have been quick to adopt new financial technology. The nation uses less cash per person than any other country, with about 95 percent of payments made electronically, government figures show.

Finland has more than 40 text lenders, and the industry is spreading. About 25 firms in Sweden offer the loans, and there are text lenders in Estonia and the Netherlands, Rosenius said.

Zamboni driver Kaipainen said he took out more than a dozen text-message loans for amounts ranging from 50 euros to 400 euros as he ran up debts betting on horses and playing slot machines.

Earlier this year, the Guarantee Foundation gave him a low- interest loan to pay off debts totaling 24,000 euros. He says he couldn't keep track of how much exactly he owed the text lenders.

``It's a vicious circle,'' Kaipainen said. ``You take out one loan to pay another and in, say, two months, you have five at the same time, and soon you can't pay them all.''

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net
Last Updated: July 10, 2008 17:01 EDT