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Payday lenders don't exactly seem to face a rosy future. Congressional scrutiny is rising, and Elizabeth Warren of the Consumer Financial Protection Bureau (CFPB) is out to thwart financial predators. But for several reasons, payday lenders' supposed plight might not be as dire as it looks.
For one thing, the CFPB doesn't have the power to cap interest rates. It could cause trouble by calling for more transparency, thereby educating consumers about the true steepness of the interest rates payday lenders demand. But those who need loans will still consider the option, and they may well take advantage of it.
Warren might expect enlightened borrowers to balk if they learn that the $15 they pay in interest on a two-week $100 loan equates to a nearly 400% APR. But it's also just $15, and more attractive than many banks' overdraft fees and other charges. That's not likely to kill off the entire payday lending industry.
Revenue down… and up
Instead, it appears that the industry has winners and losers. Overall, payday loan volume (excluding online lenders) fell from $35 billion in 2008 to $30 billion in 2009, and some 1,700 shops closed their doors. That sounds bad, right? Not so fast. Check out these recent revenues at the following companies:
|Advance America (NYSE: AEA )||$676 million||$648 million||$613 million|
|QC Holdings (Nasdaq: QCCO )||$223 million||$221 million||$203 million|
|Dollar Financial (Nasdaq: DLLR )||$572 million||$528 million||$640 million|
|EZCORP (Nasdaq: EZPW )||$457 million||$597 million||$767 million|
|First Cash Financial Services (Nasdaq: FCFS )||$321 million||$366 million||$415 million|
|Cash America (NYSE: CSH )||$1.03 billion||$1.12 billion||$1.25 billion|
Data: Capital IQ, a division of Standard and Poor's.
While the first two show flagging revenue, the rest have been doing rather well. Recent financial reforms on more traditional lenders such as banks and credit card issuers may well drive even more business to payday operations. For example, the Fed and Goldman Sachs estimate that $80 billion in subprime credit card business might be lost because of Dodd-Frank and other regulations. As banks tighten their lending, people needing money will simply have to go elsewhere -- and "elsewhere" may lead them straight into the welcoming arms of payday lenders.