Types of Cash Advance Lenders

Business Models

There are two cash advance business models, each serving different demographic marketings.

1. Mono-Line Operator – single product storefront that typically offers only payday advances. This is the most rapidly growing and is characterised by the lowest average losses due ot more active client service relationships and collections programs, as well as clients that fit in a relatively higher income level demographic.
2. Multi-Line Operator – engaged in check cashing, small loans, pawn load and payday loan. Higher losses relate to less focus and targeting lower income demographic.

The differences also arise due to regulatory frameworks. For Standard [non-bank] operations, funds are advance directly by the operator to a client and the loan is backed by a direct debit. This significantly lowers the losses related to cheques.

Bank Agency Models

In this business model, the operator partners with a bank and acts as a “marketing and servicing” agent that solicits the clients and forwards an application to the bank for approval solely by the bank. Upon approval by the bank, funds are disbursed to the borrower. In both cases, the operator is the servicer and collector.

In the public policy arena, the issue of cost has been debated and the camps are polarised.

The general cost of a payday loan is between $15 and $17 per $100 loaned for approximately 14 days. This sounds high to many who do not appreciate the costs of the marketing, delivery and servicing/collection of the product.

Those in the business are required to maintain storefront operations, market their services and service and collect loans.

Compare the cost of the ability of a consumer to pay $17 for a $100 loan versus paying $25 to $28 for a bounced $100 cheque. The bank expects the cheque to be made good the next day, the payday lender allows for a10-14 days period.

The most important issue affecting the bank-agency model was the recent release of the FDIC Guidelines for state banks participating in making payday loans. This included capital requirements, reserve and loss requirements, evaluation of intangible bank risks and record keeping and accounting issues. Whilst this will not prevent all banks from entering the industry it will prevent many.

Banks generally enter the sector though the purchase of an industry operator.

Main Concerns

Legislation and other product offerings and expanded services to the consumer. We expect the next leg of the evolution to include additional product offerings and expanded services to the consumer/ the over 15,000 storefronts could become branch bank for the under-banked tomorrow.

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