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Why the Payday Loans Market Won't Go Away Just Yet


- By Nicholas Kitonyi

The payday loan market continues to draw controversy from different experts as calls to curb interest charges continue. While some of them advocate for stricter regulation, others feel that recent regulatory implementations are already beginning to cripple the $50 billion market yet, according to statistical developments in the market, signs indicate that it continues to grow.

One of the main reasons the payday loan market is becoming hard for authorities to control is the ease of entry. A few years ago, most players in this industry operated pawn shops or storefront lending joints. However, things have changed over the last 10 years with more online lenders now taking over the payday loans market.

Most of the players in payday lending operate as private companies with just a few companies traded publicly. The largest U.S.-listed company in the market is Fast Cash Inc. (FCFS), which has a market cap of $2.34 billion. It is also one of the best-performing stocks in the industry after recording a 112% increase in revenues in fiscal year 2016.

Fast Cash Financial Services has experienced a steady rise in top line over the last 10 years. The company has more than 1,000 pawn shops and payday loans centers in the U.S. and Mexico and continues to grow despite recent regulation hurdles.

These hurdles have affected its ability to grow its bottom line in tandem with top-line growth, with net income remaining virtually unchanged in the last two fiscal years, at about $60 million. The company's top line crossed the $1 billion mark for the first time in 2016 after reporting a revenue of $1.1 billion.

Now, with the increase in online payday loans players, the company's competition now has firsthand access to potential customers. These online players are able to offer fast approval payday loans at competitive rates thus giving giant players a run for their money.

New Mexico is one of the most popular states in payday loans; it passed a bill last month that will limit the maximum interest rate charged on payday loans at an annualized rate of 175%. In some states like New York, the rates are capped at just 16%.

There are also those pushing for borrowers to be allowed more time to pay their loans. Currently, most payday loans require borrowers to pay up the whole amount (including interest) on the due date while others allow installment payments and a lump sum on the due date.

However, some are calling for a period of three to six months to be provided for borrowers to pay up their loans. There are also proposals to limit the payday loan periods to a minimum of three months.

On the other hand, online payday lenders have found a way to dodge some of these rules. This is largely due to the fact that only 15 out of the 50 states have placed strict regulations on payday lending. The other 35 do not have such regulations in place. This allows online players to sneak in some paid ads to borrowers from other strictly regulated states in a bid to direct them to their web sites. For instance, in 2015, officials in New York fined a South Dakota-based payday lender for luring customers to its web site through late-night TV ads that ran in New York.

In addition, there are those that are pushing for a bill that will double the number of payday loans a borrower can take per year. This illustrates a contradicting picture with regard to the regulation of payday lending, which also shows why it's so hard to control the market.

This makes the payday lending market highly unpredictable for investors, and Fast Cash Financial Services' stock price chart below illustrates just how choppy the market can be.

After reporting record revenues for fiscal year 2016, shares of Fast Cash failed to respond in kind, instead remaining subdued during the first quarter of 2017.

Based on the price-book (P/B) value ratio, it's clear that the company is trading at historical lows. Fast Cash's P/B ratio has averaged at 3.0x for the last three years, and it's currently pegged at just 1.6x, which indicates a potential discount of about 45% at the price of $48 per share.

The company's risk exposure is tied to regulation and online players who are able to dodge some of the rules that various states have put in place, but this does not justify its record low P/B.


In summary, payday lending won't go away just yet. The players have found their way with the internet and regulatory authorities are finding it hard to control them. However, the brick-and-mortar pawn shop lenders might find things a little tough going forward if they do not embrace the online lending trend.

Disclosure: I have no position in stocks mentioned in this article.

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This article first appeared on GuruFocus.