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Pulling Back the Curtain on Retail Payday Loans

Adam Rust's picture

Posted April 17, 2013

Typical costs, both on an annual basis and on a per-loan basis, to operate a retail payday loan store:

  • wages: $77,015, $9.56
  • advertising: $10,836, $1.43
  • rent: $33,477, $4.38

  • loan losses: $40,830, $5.72
  • collections: $2,516, $.030
  • other (utilities, SGA, furnishings, franchise fees, interest expense, et al) : $28,639, $3.71

total costs of operating a mature store are then approximately $193,000 per year. Costs on a per loan basis are $25.10. The per loan basis is based on an average of 8,700 loans per year. Per loan costs are themselves a somewhat compromised means of describing operations, because "per loan costs" go up or down depending upon volume.

It makes for a business model that combines a lack of scale couples with high risk. It is broken, but the alternatives are even less promising. "Innovation" has brought forth a fix, but that innovation - internet payday - trades off store costs for customer acquisition, fraud prevention, and programming costs. Since it turns out that those costs are actually higher, the retail payday model is likely to remain the most sub-optimum model.

Moreover, while saturating an area with bank branches actually increases the number of customers using each branch, no such gain is possible with payday. New payday shops consistently attract fewer customers than do mature ones.

By the way, this data also colors the claims made by the industry about job creation. While each store does produce three jobs, those positions only pay about $25,600 per year - including benefits. Total compensation, assuming a 37.5 hour week, is just $13.17 per hour. Do payday shops give their employees a store discount?

Providing high-cost loans is expensive. There are two ways to respond to that fact: a) the costs are justified because it is hard to make a profit otherwise or b) it is a flawed model that creates problems for everyone. The first conclusion ignores all of the facts presented above. By its logic, price is irrelevant as long as a business can charge enough to clear a legitimate rate of return. But that conclusion is narrow. It ignores the external costs that are passed on to customers and then indirectly to the rest of society through all kinds of resulting "bads" (poverty, desperation, et al).

Interestingly enough, the banks seem to have a conclusion that captures both sentiments: big lenders are willing to loan these guys lots of money but their stock-picking brethren discount their earnings. To the first, I hope that readers will enjoy reading the ten entries that I'm going to submit over the next three weeks on how banks fund payday lending and other forms of very high-cost credit. To the latter point, these companies have price-to-earnings multiples that are lower than is common. Investors seem to think that there is something inherently unstable over the long-term.

Data: FDIC, 2005.