Cash Connection
Cash Connection
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
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