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Six Takeaways from Community Choice's Latest Quarter

Adam R.'s picture

Posted November 19, 2013

Executives at Community Choice Financial, whose company is the corporate parent of Check$mart and also (through a convoluted definition of ownership) of Insight, made some interesting comments during last Friday's analyst call that reveal plenty about

the meta-changes going on in payday. 

Community Choice Financial operates under state licenses in nine states. Given that, it has not faced the same headwinds currently buffeting off-shore and tribal lenders in the moment of ACH restrictions. It derives revenue from short and medium-term consumer loans, check cashing, title loans, and prepaid cards. In the third quarter of 2013, it made $537.8 million in loans. Historically, they have done most of their lending from retail, but they have been diving into online business recently. 

I see six significant themes in their call. Here they are. By the way, I'm going to do my best to provide the best transcription of their comments but in some instances I may failed to record them in exact detail. Even then, I believe that the intent of the speaker is accurately expressed.  

1) They made a strategic decision to capitalize on the disruption in online payday. They are spending more on buying customer leads, even it means that their profits are suffering in the immediate moment. When an analyst at Credit Suisse asked CCFI's CEO William (Ted) Saunders to explain why they "sacrifice this much in near-term earnings," he responded:

Customer acquisition, we don’t have a crystal ball but were we sit today the window is still open. Suffice to say, we are enjoying that. Let’s consider this example. If I put one hundred customers on the books prior to the disruption in July versus one hundred in September, my expectation of the lifetime customer return is 30 to 40 percent greater. It is a meaningful difference. 

I doubt they are the only state-licensed lender to make this decision. 

2) They will use the impending CFPB rule-making as a basis to defend their business in state legislatures. CCFI plans to hire lobbyists and push back on anti-payday efforts.

When we have a ruling, it is a chance to take it to the state legislatures….and we can say ‘This has been debated at the highest levels for guidance…on how these products should exist…which is a testament that they should exist.’ There will always be winners and losers from any regulatory regime and our goal is to be a dominant player.

3) Medium-term loans are increasingly taking up more share of their overall business. Saunders thinks that the caps on loan sizes set years or decasdes ago are now beginning to run up against long-term inflation. The opportunity is often greater than $500. While their overall loan size averaged $408, medium-term loans made up more than ten percent of activity for the first time.
4) They still have a we win-you lose vision of conflict resolution. If you are familiar with the Harvard Negotiation Project, then you will be aware of their idea that bad-faith representatives try to use any concession from the person across the table in a negotiation as an opportunity to take an advantage. To sum it up simply: if you give an inch, I will play hardball demand even more.
To that point, CCFI has seized on Pew's recent policy report on short-term credit as the pivot point to argue that 36 percent rate caps are a thing of the past. To paraphrase, "Pew's report shows that unfair people [CRL and Pew are named specifically] are putting a new stake in the sand that is now giving up on 36 percent."

What is consumer harm? Define harm. That is where I have spent a lot of time with them [the CFPB]. What the heck is a cycle of debt? Can you explain what it is besides what the CRL did? Is it owing more than you can pay at one time…they said ‘yes’…well then everyone in a mortgage is in a cycle of debt. There are 60 million people; I honestly believe it…that are a target market for this product. But I have become more and more comfortable that a world without short-term credit is not the place to be. Look at Pew’s report. The history is that 36 percent APR is the way to go and that is what is fair. But one of our greatest distractors just said that Colorado is the new way to go. What you see is that unfair people are staking a new flag on what is fair. 

5) The business of payday remains far less profitable than might be imagined by the prices seen in store fronts. These companies make bad loans and as a result, they tend to experience lots of bad debt expense. It turns out that charging such high rates makes it that much harder to get back your principal. Go figure. 
6) They are fine with the ACH crackdown and in fact, they see it as a great thing for their company.

What does tribal and offshore lending mean to the company and how do we position ourselves as a state-regulated player in this space and what the regulatory contradiction has meant? My position has been that either the other business models will join us and participate [in legal lending] or the other business models will come under scrutiny and will come under market disruption and it will be an opportunity for us to capitalize on it. In q3, that is what we saw.