You might remember the tiny remote controlled car ads that every emailer ran several years ago. If you wanted one of those cars though, or to buy the non-remote controlled kind, you need one thing – money. December revolves around money. People spend it in droves, but to spend it, they must first have it, and for many, having it means borrowing it. If you are like me, you wouldn’t have thought about this before, but in addition to this month being far and away the largest for shopping, the same is true for those in the payday loan space. They will do more business during December than several other months combined. This week, we take a direct marketer approach to the Holiday season by looking into the money behind much of the money.
Payday loans fall into a broad category of online advertising offers – those targeted at the sub-prime financial consumer, i.e. someone with poor credit. Direct lenders and their affiliates have marketed payday loan offers for years, perhaps as early if not earlier than mortgage, but as a vertical, it stayed somewhat below the radar. Outside of those with hands on experience with the offers – affiliate networks, emailers, and affiliates – very few people could probably name a payday loan brand. As we’ll see, much of this comes from payday loans maturity level along the ad / industry spectrum.
Pretty much anyone can enter the payday loan space, and pretty much anyone has. The demand is high and the barriers to entry are low. Lending though, is not a pretty business, and lending in small amounts to those with an above average risk of non-payment makes it even less attractive. Home loans average tens if not hundreds of thousands of dollars, and they require a consumer to put up their house. If you don’t pay back a home loan, you can lose your home. Payday loans require no such commitments from users; no wonder as much as one-third of all money lent does not get paid back. Add to that some other bizarre facts, one of my favorite being that on the order of 5% of all requests to borrow come from fraud rings, the most common tactic being using Social Security Numbers of people no longer alive. So why would companies want to put up with all this? You guessed it – money.
Unbeknownst to many, those in the payday loan industry, specifically lenders, have seen some absolutely incredible returns. They have limited restrictions on the interest rates they can charge consumers, and despite the default and fraud, for many the cash advance space has turned into a veritable printing press. Money, of course, attracts other money, and in this case, big time money – from big investors looking for new ways to generate large returns. And, these investors have poured millions into new lending operations. As one in the space put it, we now see Economics 101 playing out before us.
The cash advance space has had significant consumer demand, and for years, the availability of money has kept up if not lagged slightly. The influx of new lenders with large backing has changed all that. For perhaps the first time in the payday loan / cash advance space, we have more money than consumers. More money chasing the same number of consumers means only one thing in the lead generation world, rising lead prices. Looking to put their new capital to use, the well-financed new lenders will pay what it takes to acquire new customers. Some of the existing guys who have enjoyed such amazing returns will continue to play even as rates go up, because they can afford to do so. Some of the smaller shops will start to cut back, though.
They say rising tides lift all boats. Those generating leads will see this, but the good times, which have already started, will come to an end. A shakeout is coming. Those who overpay never stay in business for long, and we will see that here. This feeding frenzy for leads has played itself out once already, in mortgage. During the refinance boom, the same three things happened that we see here – price jump, disintermediation, correction. The price jump needs no explanation. The demand for leads sent lead costs increasing dramatically year over year. Disintermediation took place because affiliates found themselves wanting to bypass the affiliate network. Those buying leads had no issues working with a large number of relationships and didn’t show a lot of loyalty to the networks. Unlike mortgage banking, lead generators do not need licenses to sell leads, only increasing the number of those trying to do so.
When the correction occurs things will get interesting. Understand what will happen, and you can benefit, but if you don’t, you could get burned. Companies who have overspent to acquire will see they cannot make the returns necessary; this will lead to lower payouts, or worse, defaulting on payouts. These lenders are not strong in all aspects of the process, e.g. managing defaults, having collections in house, and focusing on lifetime customer value not just initial acquisition. The lenders that survive will start to consolidate their affiliate/vendor relationships, much like the mortgage market saw. And, like the mortgage market, many affiliates who made money off overpriced leads from undereducated buyers will close shop and/or jump ship to a different vertical. The smarter ones who cannot simply close shop have already started to diversify in anticipation of the correction.
The current feeding frenzy will have an impact on the legislative level as well. State and federal legislators have already begun to look into the payday world, and if it gets out of hand, you can assume they will act more quickly and more broadly. If legislation occurs, we could see fixed rates for consumers which would lower the upside for those lending and decrease the CPA, or it might cause the companies to relocate offshore. The government might make online cash advance illegal, like it did with gambling, again causing companies to move offshore. Adding to the general murkiness is the general lack of disclosures. Most online marketers with the exception of three are not in the actual lending business, but you’d never know from the landing pages; their pages contain no verbiage such as “Not a Lender”, or “Free Matching Service.” And, that each marketer has who knows how many brands, certainly doesn’t help either.
Payday loans ultimately do a service, but as a service it has a long way to go before it can shed its less than savory reputation. Many customers find themselves in a vicious cycle. They need the money and have no other way to get it. Once they sign up for an offer, they find themselves part of a list manager’s database that sends them more of the same offers and continues the trend. I think many would be surprised if they knew just what percent of email list management profits came from payday loans, or as they like to say – short-term loans. The consumers know what they are getting into though and even that they are being taken advantage of when they have no other choices. Ultimately, though, the goal would be to help the customers not just live to see another payday loan but help them to rebuild their credit in the process; the payday loan doesn’t feed back into users’ FICO scores. One day someone will find a way to go the extra step to build the users back up.
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