Payday Loan Industry is Booming
July 21, 2006 (PRLEAP.COM) Business NewsToronto Ontario July 21, 2006
For Immediate release
Payday Loan Industry is Booming!
"There are approximately 22,000 storefront payday loan outlets in the United States generating roughly $40 billion a year in loans and $6 billion in finance charges"
Just before Christmas last year, more than 10 million people took out a payday loan, according to industry statistics. Between 2000 and 2003, the number of outlets offering payday loans more than doubled to 20,000—not counting the many Web sites that give high-interest quickie loans. These storefronts have become as commonplace in America's shopping centers as Blockbuster movie rental stores or fast-food franchises.
The Consumers Federation of America estimated that there are approximately 22,000 storefront payday loan outlets in the United States generating roughly $40 billion a year in loans and $6 billion in finance charges. The Fannie Mae Foundation reported fifty-five to sixty-five million payday loan transactions a year.
"Payday lending is so profitable (an estimated 34% on sales) that the industry has mushroomed in the last ten years"
For lenders, payday lending is so profitable (an estimated 34% on sales) that the industry has mushroomed in the last ten years, particularly in states where there is no regulation of this type operation and/or no cap on the APR that can be charged. In states that regulate the loans or that prohibit them, payday lenders are getting around state law by promoting their loans over the Internet while they are based in an unregulated state, using the charter of a lending institution in an unregulated state (rent-a-bank), or just claiming that they aren't subject to usury laws because their "fees" aren't interest. Whatever payday lenders call their fees; payday loans are currently generating billions in fees.
"The payday loan product has the strongest growth among financial service offerings and is not well known on Wall Street. Growth opportunities are high in this industry"
The business is booming because of the massive growth in low-wage service-sector workers. People on the edge have turned payday-advance outlets into a kind of alternative banking sector. It's not illogical. The payday loans are safer than dealing with loan sharks—they won't break your legs if you don't pay, only break your credit rating. And, the industry claims, payday loans may end up being cheaper than actual banks.
As many as 14 million of the 105 million U.S. households used payday lenders in 2003, according to Stephens analyst Dennis Telzrow. In May, he projected the industry's revenue would increase 12 percent to 18 percent in 2004. In particular, Telzrow estimates that the payday loan center industry, which makes small high-interest loans for a short period of time (traditionally "until next payday"), is growing at a rate of 15 percent a year. "The payday loan product has the strongest growth among financial service offerings and is not well known on Wall Street. Growth opportunities are high in this industry," he explains. "People in the lower income level live paycheck to paycheck. If they need a loan of some sort, they don't have much of an alternative, and that is why the payday loan is so strong."
"The industry itself estimates the potential market for payday loans at approximately 35 million households."
The industry itself estimates the potential market for payday loans at approximately 35 million households.  It is difficult to estimate the growth in the industry as a whole since 1990 but information from several states is illuminating. Since 1990, the number of outlets offering such loans in Colorado rose from about 12 to an estimated 188 and Colorado officials estimate that payday lenders make up 20% of all licensed lenders.  In its 1997 annual report, the Attorney General of Colorado noted that these lenders made 374,477 such loans totaling $42,823,089. The average annual percentage rate (APR) charged on these loans was 485.26%. Missouri reports that this is a growing business and licenses about 450 lenders. Florida has registered 368 payday lenders since 1994. Idaho now has about 74 payday lenders in its state, up from just 2 in 1993. North Carolina licenses approximately 203 lenders while it neighbor, South Carolina, accommodates 325. In 1998, Tennessee was home to about 257 companies operating 605 offices statewide. Information from the state of Washington reveals that 562,031 loans were made by check cashers for a total of $144,923,986 in 1997. Lenders collected $21,541,338 in fees. In Indiana, the number of payday lenders leaped from 15 in 1994 to 115 (with 454 outlets) in 1998. The loan volume grew from $12,688,599 in 1995 to about $296,098,015 in 1998. Since 1998 alone, Mississippi has issued about 625 payday loan licenses.
Repeat Borrowing habits
• 91% of all payday loans are to borrowers with 5 or more payday loans per year
• 2 in 3 borrowers (67%) incur 5 or more payday loans per year, while nearly 1 in 3 incur 12 or more loans per year
• Borrowers on average receive 8-13 loans per year
Nine out of 10 payday loans are made to repeat borrowers with more than five payday loans per year, according to the Center for Responsible Lending.
Among the bricks and mortar clients the market is extremely fragments with over 80% belonging to what we call “mom an Pop” operations.
The Payday loan industry has expanded beyond storefronts into cyberspace. Estimates of on-line short term lending are as high as 2.8 Billion in revenue. The new frontier in the fringe small loan market in cyberspace is payday loans marketed on-line, delivered directly to borrowers bank accounts, and collected electronically with no contact between borrower and lender.
This business model takes a completely different set of skills and automation compared to Bricks and Mortar lending. Software systems are key, and intelligent ACH (Automated Clearing House) integration can make or break profitability.
A Delaware-based online marketing firm reported that it was generating 20,000 loan applications a week for its payday-lending clients.
Internet Lending dynamics: A typical store caters to approx 50,000 population with 18% users (9,000) spread among an average of 10 or more companies. This means a potential customer base of 900 customers.
North American Internet Usage
INTERNET USERS AND POPULATION STATS FOR THE AMERICAS
AMERICA Population( 2005 Est. ) Internet Users,Latest Data % Population( Penetration ) % UsageAmerica Use Growth( 2000-2005 )
North America 328,387,059 224,103,811 68.2 % 75.4 % 107.3 %
With over 224 million Internet users even the most conservative estimates of potential for payday loan revenue is in the billions of dollars. If 68% of the approx 6 billion in fees are available through cyber loans a Web operator can tap into a market of approximately 4 billion whereas a store operator is marketing to achieve a few hundred thousand is sales. The unique part of this is that this is that cyber loans are virgin territory where NO company or web site dominates.