1. What are the dominant economic characteristics affecting the payday lending industry? The industry for short-term cash loans (payday loans) grew in the early 1990’s because of the shift in financial services marketplace. The cost structure of the market rose due to bounced checks, overdraft protection fees, and late bill payments penalties. Second the trend of regulation of payday advance service that allowed protection for consumers. To avoid such cost, payday loans were the solution for consumers. It is estimated that there are over 22,000 payday loan locations in the United States. Those locations exceed the number of banks, which are 9,500 banks across the nation. Studies show that million middle-class households used the payday loans to extend about $40 billion in short-term credit each year. Middle-class households used the money to cover shortfalls or emergency between paydays. Analysts estimated that 5% of the population has taken out at least one payday loan at some time. Also 24 million Americans say the chances of taking out a payday loan are somewhat or very likely. The industry contributed $10 billion to the U.S. gross domestic product in 2007 and 155,000 jobs. It is safe to say the payday industry has met half the potential market and there is great opportunities for growth. 2. What is competition like in the payday lending industry? How strong are each of the competitive forces that make up Porter’s Five Forces Model? What do your strength ratings reveal about the overall attractiveness of the payday lending industry? Competition in the payday lending industry increased due to the relaxation of federal restrictions in the early 1980s. Increase in regulation in loan services as well as financial services made it easier for new companies to enter the industry and remain competitive against companies that are well established. Big players in the industry included large retail bank firms such as Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup. These companies could generate portfolios of service loans. New companies could not achieve their own service loan portfolio or purchase loans from a third party. The other company’s performance depended on the company’s cost structure and relative services offer to other companies. The performance of the equity market affected the demand and the quality of lending portfolios. A positive response in the stock market resulted in an increase in lending. A negative response was due to a fall of shares, causing an increase in risk to extend credit.
| SUPPLIER POWER
Banks, credit unions will not give out short term loans.Availability of small quick loans decrease. Emergency loans are popular with payday lenders.| | BARRIERS
High barriers to entry.Regulation and restrictions un-Favorable to new entries.Risk of low – income involvement.High profits and low start up cost. | | THREAT OF SUBSTITUTES
Banks and overdraft protection in checking accounts. Credit cards.Credit unions.| | BUYER POWER
Multiple options for quick cash. Emergency borrowers give power to lenders.| DEGREE OF RIVALRY Possibilty for large profits.High barriers and strong competition.|
The rivalry is strong since there is reported 22,000 payday locations and only 9,500 bank location in the United States. The reason for the stiff competition is the relaxation of federal restriction in the 1980s. Yet the increasing state and federal laws make it difficult for new companies to the industry. Allen Franks’ Cash Connection along with other payday advancement companies; Cash Advance America, Check & Go, and Check America, are big players in the industry. The quick high profits are the reason for the various lending companies. The low start cost of $130,000 is very appealing for new entrants. Smaller banks would have a hard competiton against the payday companies because they too...