Everyone knows that responses by NACHA, banks, and others to the recent action from regulators in New York have had the effect of crippling the online payday loan industry. But for the moment, the enforcements and letters in that work have created subsequent waves that will disrupt other elements within alternative financial services.
Online payday lending depends upon lead generation. The customer churn created by all of those destroyed household
balance sheets means that online payday lenders must constantly search for new clients. Competition is fairly fierce. Good leads can be expensive. Ping trees attract scores of bidders.
I spoke with one lead generation professional recently. Here is what he said:
It is cause and effect. The lenders themselves are being affected and so if the lenders are effected the lead generators are affected. They can’t buy leads or the margins get cut or it takes them longer. Overnight, many many lenders were impacted by decisions made by ACH processors that no longer want to play in that space.
His last point - that it now takes the longer to pay their bills - creates trouble for lead generation. It turns out that lead generation has been built on a very short-term billing cycle.
Let's review how lead generation works:
- Consumer clicks on some kind of online advertisement.
- Consumer is directed to a web site where he or she fills out a form. The form asks for many different pieces of information. The customer is asked to indicate his or her longevity at their job and at their current address. The site focuses on verifying income and bank details first and foremost. Traditional elements of underwriting - DTI and credit score - are irrelevant.
- An aggregator of leads - the lead generator - buys the information. Aggregator then seeks to improve the quality of said lead. Aggretator pulls a Federal Reserve database of known bank routing numbers in order to make sure that the transaction is possible. Aggregator appends data purchased from third-party providers to flesh out the substance of the information in the lead.
- Aggregator starts up the ping tree, takes bids from online payday lenders, and sells to the highest bidder. In some instances, the aggregator may manage to sell a lead four or five times.
- Aggregator pays the third party providers of data and the managers of the web sites.
- Aggregator pays lead generator.
Some of the payday lenders appear to have decided to change how they manage their short-term cash flows. Instead of paying weekly or bi-weekly, as has been the standard, some are pushing back on the speed by which they pay the lead generation invoices. This creates a cash flow challenge for the aggregators.
Would it be wrong to posit that some of those lenders - particularly the ones with tribal sovereignty - are not paying their bills at all?