The Competition and Markets Authority (CMA) said the average customer could save between £30 and £60 a year if the market were more competitive, given they typically take out around six loans annually.

In a summary of its provisional findings, it found the gap between the cheapest and most expensive deals for a month-long £100 loan is more than £30.

The CMA estimates that increased competition in the payday loan space could save UK customers more than £45m a year, relative to total revenue earned by payday lenders of around £1.1bn.

The watchdog said it would now look at ways of increasing competition including a possible independent price comparison website.

Simon Polito, Chairman of the Payday Lending Investigation Group and CMA Deputy Panel Chair, said:”If you need to take out a payday loan because money is tight, you certainly shouldn’t have to pay more than is necessary.

“While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least. This can particularly apply to late payment fees, which can be difficult to predict and which many customers don’t anticipate.

“It’s not surprising that payday lending customers tend to focus more on availability and speed rather than the cost of loans but even for those who do shop around, it can be very difficult to compare prices, given the difference between products, the lack of transparency on additional fees and charges and the shortage of effective comparison tools.

“There is a substantial gap between the cheapest and most expensive loans, so borrowers could benefit if we can help them compare prices more effectively, which in turn would stimulate greater price competition and lower costs.”

The CMA said its measures would sit alongside changes already being made by the Financial Conduct Authority (FCA), the regulator for consumer credit.

Moves by the FCA to strengthen consumer protection will mean closer regulation of lenders.