DFC Global, the parent of Dollar Financial and an international purveyor of payday loans, released the numbers on a poor third quarter. While investors focused on if Dollar can recover, the transcript from their investor presentation provides a few telling gems about the state of the payday industry. There is a lot of disruption in
payday right now, with new regulation in the US and the UK as well as fearfully aggressive competition on the internet side of the business.
One) Dollar made a lot of bad loans. The company reported that they lost 35 cents of every dollar advanced during the last quarter in the United Kingdom, which is well above their historical norm of approximately 25 percent. Most of their UK business is derived from their purchase of Month End Money. Month End Money was once owned by CompuCredit.
Two) Someone was intercepting applications made to Dollar over the internet. What a bunch of cut-throats.
"One or several of our sites were hijacked in traffic that was meant for us for was diverted for some period of time to other players and we were I think unfortunately slow to pick up on this because we were so focused on confirming our platforms in internet guidance....Diverted loan applications away from us for people who were probably thinking they were going to one of our websites probably were customer that we have done business with in the past."
Three) They would have made more money if their competitors were following the law. Ha! What a business! "Better" players lose business when they conform to the rules. Dollar's CEO, Jeffrey Weiss, made a telling statement about the race-to-the-bottom that is endemic in payday lending:
"We have said in the past and we continue to believe that it is quite reasonable to take significantly higher losses by being less discriminating the underwriting by imposing late fees and other charges et cetera. And make significantly more money than we make now."
Within Dollar, that limit probably explains the higher loan-loss rates.
The rollover limit is a factor in the UK, where the Office of Fair Trading established a three-rollover limit for payday loans. So, DFC lost money when it decided to comply with the new OFT framework, unlike some of the other guys down the High Street.
More broadly, it reflects a regulatory approach that is possibly more effective to curb payday lending than it the more common effort of trying to put a ceiling on interest rates. Illinois established a similar rule for small-dollar loans. The underlying challenge to make extortionate loans is that customer acquisition costs and loan loss rates have to made up by getting the best customers to take out loan after loan after loan. At a certain point, the loss of principal is irrelevant because it has been replaced by fee income.
Four) America may be a net importer of goods and services, but payday lending is becoming one of fastest growing exports. From the back end of a small collections shop in Cleveland, Tennessee, payday lending has spread like a weed into most of the Western economies in the developed world. DFC is perhaps the best expression of that reach. The company has subsidiaries in the US, the UK, the Czech Republic, Spain, Poland, Scandinavia, and Canada. Not to be outdone, their rival EZCorp has stores in almost thirty countries.