After evaluating all factors in identifying the dominant economic features of the payday lending industry, it can be concluded that the dominant economic features are market size and growth/rate, number of rivals, scope of competitive rivalry, and degree of product differentiation. Market Size
• According to the case: Ø This industry in comprised of an estimate of more than 22,000 payday advance locations and more than 9,500 banks across the United States. Ø These locations extend an estimate of $40 billion dollars of short-term credit to mostly middle-class households each year. Ø Industry analysts estimate that 5% of the U.S. population has taken out at least one payday loan at sometime in their lives. Ø 24 million Americans, which is about 10% of the population say they are somewhat or very likely to receive a payday advance according to an industry trade organization reports. Ø The payday loan industry began to emerge in the early 1990’s and grew rapidly during this time due to consumer demand and evolving conditions in the financial services market. Ø Payday Loan Industry Growth was due to mainly three significant economic changes: 1) The exiting of traditional financial institutions from the small-denomination, short-term credit market, due to its high cost structure. 1
2) The soaring cost of bounced checks and overdraft protection fees from banks, late bill payment penalties and other informal extensions of short-term credit. 3) The continuing trend toward regulation of the payday advance service, providing customers with important consumer protections. • The payday loan industry is in a position of stagnation. Due to rapid growth early in its industry product life cycle and an increasingly regulating and rule-laden environment due to stricter government regulations, the industry’s growth has rapidly slowed and is in somewhat of a decline. • Table 1 displays the financial performance of Cash Connection from 2007-2009 which will reflect the declining nature of the overall payday loans industry. Table 1: Excerpts from Cash Connections Profit/Loss Statement (6-7) Jan-Dec 2007 Total Income Total Expenses Net Operating Income Net Income $1,336,617 $342,689 $271,961 $6,348,544 $5,017,173 $1,331,171 Jan-Dec 2008 $6,283,860 $5,488,623 $795,237 Jan-Dec 2009 $5,768,805 $5,569,912 $198,893
This decline is due largely to the fast-growing number of competing firms in the industry, other financial institutions finding ways to differentiate themselves and become more appealing to customers, saturation of competitors, and overall decline in economy.
The payday loan industry is comprised of two main industry segments: 1) Small, local payday loan franchises with less than 51 locations nationwide such as Cash Connection. 2) National payday loan franchises with more than 51 locations such as Cash Advance America, Check & Go, and Check America.
The industry is not consolidating to a smaller number of competitors, instead it is forecasted that more small, local payday loan franchises, that will be established to meet consumer needs.
Rivalry • • Rivalry in the payday loan industry is on national and local levels. Companies such as Cash Connection, whose strategy is to set up locations where they are the first payday loan company in the area and can therefore gain a market advantage, compete with local and national branches of payday loan franchises who may later locate to these areas. • National franchises compete on a national level to obtain the greatest market share of the industry. Number of
• Market demand is fragmented...