Great for Cash America, not so Great for America

Cash America (CSH) reported a strong (indeed, a “blow-out!”) quarter this morning, and although their stock is down this morning, their success would indicate more activity for payday and pawn lending. Their volume is up, which certainly contrasts with the lamentations about low loan demand that we have heard from the big banks, and they are growing their customer base is expanding.

This is really not a great sign for our economy. It points to the poor alternatives that people face once they move out of the banking system. More people are making that move, unfortunately.

Cash America’s has opened 88 new stores in the 18 months. However, the real change in their lending is through online e-commerce.

In their earnings call, they outlined why there is so much e-commerce activity (paraphrased for now):

We are doing more, with how banking customers that are being disenfranchised.  Is it a long-term secular trend? I am assuming that is…certain to me that they are being flushed out of the banking system. If you look, at the past week, FICO put out a study, that sub-prime scores and particularly below 6-00, it is about 25 percent that fall below 600. Previous recession was 15 percent; that is a huge deterioration in credit quality. Customers are not going to have options that they use to have. Couple that with what is going on in DC…great opportunity to increase our customers…and it is much easier for those customers to get online than it is for them to walk into a storefront.

There is something distinct and new about online customers, according to management. Online borrowers tend to be first-time borrowers.

It isn’t all about the gradual exit of households from the banking system. There’s also the exposure in pawn to the upside of gold. Gold has been trading well above $1000 an ounce for most of the last year. When people bring gold into a pawn shop, it has two benefits (for a pawn broker). For one, it increases the volume of business. That creates a two-path outcome. If the customer returns to buy back their jewelry, then the pawn lender gets a profit. The jewelry is back out in the community, too, and as many borrowers are there because they are shut out of credit, then it is likely that the jewelry will come back in the store again. There’s gain when customers forfeit, because the pawn shop gets a big margin on the sale.

Cash America calls that gold “potential future collateral items.”

“When we melt it,” a spokesman said, “we don’t get it back later.”

The implications for that are pretty cold.