It looks like the party stopped for the underbanked stock market. In the last six months, underbanked stocks are down. Simultaneously, the Dow and the S&P 500 are up. This is reversal from the recent past.
It is a broad reversal. These shares of companies that serve the underbanked are down in almost every sub-sector of the
underbanked. Overall, my 28-name index has dropped about 1.6 percent in the last six months. During the same period, the S&P 500 is up about 6.6 percent. On a year-over-year basis, the broader markets are doing very well. For the under-banked - well, not so much.
Some of the results seem to confound common sense. For example, one on-the-ground trend that is hard to ignore is the steady migration among high-cost lenders away from reliance upon payday lending and toward an increasing concentration in longer-term installment products. Yet in spite of that, the holdouts like QCCO and the still-going-strong guys like Cash America are doing fairly well. World Acceptance and Regional Management, by contrast, are both struggling.
Credit insurance is an interesting but very much under-the radar element within the world of the underbanked. A lot of electronic and furniture retailers force consumers to get insurance on their refrigerator or mattress during the period of any loan. Regional Management - a diverse company that also dabbles in consumer loans and auto finance - is one example of a firm that brokers a lot of credit insurance. It is the same story with Conn's. Those guys don't actually write policies. They are instead merely acting as brokers. The big insurers are Assurant and Fortegra. Assurant is by far the larger of the two. Indeed, with a market cap of almost $5 billion, it is actually on the larger end of all of the companies in this index. Well, Assurant treaded water. Fortegra began to sink.
The best-in-class sector would have been tax preparation. Block surged and Liberty Tax did even better. To me, this suggests that companies can actually do well in the period after regulatory intervention. While Liberty still sells refund loans (but not through a bank), both Block is out of RALs and Liberty is making far more RACs than it has in the past.
Compare these results to what happened last year. In 2013, my index of 35 companies picked up 33.1 percent. Tax prep was still a solid gainer, but prepaid debit cards did even better. Green Dot gained 91 percent that year. Cardtronics, the company behind the AllPoint-branded network of fee-free ATMs, gained 81 percent. In the last six months, Green Dot is down 24 percent and Cardtronics has fallen 23 percent. Prepaid issuers were red hot - Metabank and Bancorp did almost as well as Green Dot, with returns of 67 and 56 percent, respectively.
Many of these sectors are confronted by investor anxiety over regulatory scrutiny. The CFPB's rule-making on payday is going to be here quickly. Once that happens, two things will occur. First, the payday folks will embark on an endless series of lawsuits. The CFPB will press on, though, and then begin to contemplate its work on consumer installment lending. For both groups, the long-term cash flows are potentially at risk, or at least that is a viable thesis in the minds of those people who believe that regulation can crimp profits.
Credit insurance could face a similar future. Already you can see the writing on the wall when it comes to force-placed insurance. Representative Maxine Waters is very concerned about FPI on mortgage loans. Will regulators look past the kinds of insurances that are sold on installment loans for a variety of other loan products?
I think the prepaid issuer question is something that has nothing to do with regulation and everything to do with market forces. The problem in prepaid is that margins are getting to be too thin. At NBPCA, people were talking about long-term issues with price compression. One person got up during a session to ask what price compression will portend for the future of the platform. Cards like Bluebird, Serve, and T-Mobile's Mobile Money Card are free or close to free, yet each offers a full suite of functionalities. The days when an issuer could charge $6 per month and then add scores of incidental fees are gone. In that context, prepaid is becoming more and more of a scale business. Only the really big players can survive, and only if they don't get tripped up. Bancorp got tripped up twice - once for problems with their commercial real estate portfolio and then again with their compliance management.
The most confounding result, in my mind, is the lack of success in the buy-here pay-here space. Now that more people are working, they should be doing well. People can find work far before they can restore their damaged credit. Since it can take years to go from deep subprime to prime, the buy-here pay-here companies should be in high cotton for some time in to the future.