Westpac last of Big Four to dump payday lenders in "commercial" move

Westpac has become the last of Australia's major banks to cut ties with the controversial payday lending sector.

The decision by Westpac comes after a lengthy internal review into doing business with payday lenders who often charge exorbitant interest rates to sometimes vulnerable people.

Payday lenders Money3 and Cash Converters have been told by Westpac they will need to source their funding from other finance providers.

ABC's Peter Ryan with Goodshepherd Microfinance chief executive Adam Mooney

In a statement, Westpac confirmed it was a "commercial decision to exit customers who provide payday lending products".

"We .. will no longer support new customers where we are aware that they provide 'payday' lending products.

"We are currently working with our affected customers as they source alternative banking services.  We will honour existing contractual obligations as they manage this transition."

Shares in Money3 dived 7.5 percent while Cash Converter shares plunged 8.6 percent when Westpac's decision to dump payday lenders hit late yesterday.

Money3  confirmed it received notice from Westpac of the decision to end the relationship "with certain small amount consumer credit providers, including Money3".

"Westpac have committed they will honour all existing contractual agreements with Money3. The existing facility has a 12 month run off period after December 2015."

While Westpac says the decision to dump payday lenders was pragmatic, it is also protecting its reputation given the bank's policies on corporate social responsibility and increased scrutiny of the payday sector from the corporate regulator ASIC.

Payday loan providers have been criticised for targeting unemployed, disadvantaged consumers but also people in jobs who can't make ends meet.

Loans that are rolled over, or not paid back on schedule, can sometimes carry annual interest rates that can be in excess of 300 percent.

Goodshepherd Microfinance provides an alternative to payday lenders providing low or no interest loans sourced through a $130 million in capital provided by the National Australia Bank on a no interest basis.

Chief executive Adam Mooney, a former ANZ banker, welcomed Westpac's decision to dump their relationship with payday lenders.

"We hear daily stories of  people who have been caught in endless cycles of debt through very expensive forms of finance. It has an impact at a human level and an economic level," Mr Mooney told the ABC.

"This cycle of debt leads to additional anxiety, resources are held back within the family from food, education and health. At an economic level, it does lead to entrenched poverty."

Mr Mooney said payday clients helped by Goodshepherd had often been caught in a cycle of exhorbitant interest rates.

"Prima facie it seems like they're reasonable rates but when you keep cycling and keep taking that 20 percent upfront establishment fee on a $2000 loan, over a year you can end up paying 350 percent as an effective cost of finance."

Money3 and Cash Converters might now need to seek finance from overseas lenders or international debt markets to fund their payday businesses.

The move by Westpac follows moves by the other major banks including the ANZ, Commonwealth and the NAB to cut all exposure to payday lenders.