OCTOBER 30, 2011 8:18 p.m. (0)
The company sees opportunities in the nascent public recognition that it is a mainstream lender for small-dollar, short-term credit, a growing need for more credit options and, indeed, in acquisitions to increase its dominance in payday lending.
The company launched a campaign to present its typical borrower as a middle-income worker making an educated choice for a short-term, small-dollar expense between paychecks.
Its consumers see payday loans as more transparent, more convenient, more straightforward and cheaper than late fees on bills and bank charges overdrafts and bounced checks, the company says.
In a study of 250 checking account disclosures of the 10 largest banks, the Pew Charitable Trust found that the average fee of $35 on the average overdraft of $36 calculated as a loan for seven days represents annualized percentage rate of interest (APR) of more than 5,000.
Advance America’s median loan of $370 with a $55 fee, or $15 per $100, has an APR of 391 percent.
That 77 percent of bank customers have opted for overdraft privileges is evidence of demand for small, short-term loans, the company believes.
Not What You Expect
Chairman William Webster IV, Chief Executive Officer and President Patrick O’Shaughnessy and Public Affairs Vice President Jamie Fulmer discussed the business in a far-ranging interview last week at the company’s headquarters in downtown Spartanburg.
On the lobby wall is a large photo of a young couple, real life Advance America customers, against a backdrop of suburban housing, an image from its You Might Be Surprised campaign depicting its customers “as middle income, educated, employed and mostly homeowners,” as Webster put it.
That has been true since the company began in 1997 and has become even more characteristic as other small-dollar credit options have dwindled, he said.
Webster said payday lenders often are “portrayed as preying on the poor. It is not even a demographic segment we target. To get an advance, you need to have a steady source of income and a bank account. It is not the unemployed; it is not the under employed.”
Customers Speak Out
O’Shaughnessy said the You Might Be Surprised advertising promotion gives “our customers the opportunity to get their voices out there. I’ve always marveled that we have so many negative perceptions. When we survey our own customers, we get a 95 percent satisfaction rate all the time. “
Said Fulmer, “We feel like we’re the only business everybody hates except for the customers.”
Some of the negative perception comes from mistakenly being lumped in with the pawnshops, check-cashing stores and vehicle title lenders that cluster along highways in depressed urban areas, Webster said.
Advance America’s more aggressive public outreach comes at a time banks and credit unions are entering the payday market with loans identical to payday advances, which Advance views as giving credibility to payday lenders as well as creating new competitors.
In the Upstate, Wells Fargo and Regions offer payday loans. The National Consumer Law Center (NCLC) said banks are offering loans “slightly cheaper than traditional payday loans but can have steep late fees that payday loans do not.”
On its Web site, Regions offers a payday loan for up to 50 percent of a qualifying direct deposit, which will be repaid, plus a fee, when the next deposit is credited. The NCLC said the cost at Regions is $10 per $100.
Overdraft Privileges as Loans
The line between traditional and untraditional financial institutions service has become blurred, said O’Shaughnessy.
“I think people are starting to realize that bank overdrafts and other products are sources of credit. They are exactly the choices our customer makes when he is making in a decision to come to us.”
The Community Financial Services Association (CFSA), which represents payday lenders, cites research showing that two-thirds of payday customers are under 45, 41 percent earn $25,000-$50,000 and 39 percent more than $40,000, 90 percent were graduated from high school and 54 percent have some college education or a degree.
The three most common reasons for taking out a payday loan are to pay utility bills, purchase a car and living expenses, according to CFSA. Also common are to pay rent, fix a car, repair a home, pay off a debt and help a friend or relative. The average duration of an Advance loan is 18 days, the company said.
Of Advance America’s 1.5 million customers, about 600,000 will be first-timers, and “on average a customer will use this product seven or eight times a year. Compare that to the average customer who writes a bad check. They write 10 or 11 a year,” said Fulmer.
Using 2008 data from the FDIC, the Center for Responsible Lending and Stephens Inc., Advance America notes that payday lenders collected $5.5 billion in fees on $35 billion in credit while banks charged $23.7 billion for $29.5 billion in overdraft credit.
Looking for Acquisitions
Webster, 54, Greenville, founded Advance America in 1997 with Spartanburg financier George Johnson. It has become the biggest player in the business with 2,600 stores, including 300 recently purchased from CompuCredit of Atlanta. It holds 12 percent of the market.
It closest competitors are Check’n Go with 1,000 stores and Check into Cash with 1,100 in a fragmented market of several smaller regional players and some ma and pa stores. In the last couple of years, the industry has contracted from 23,000 stores to 19,000, Fulmer said.
O’Shaughnessy, 46, who was promoted from chief financial officer to CEO when Kenneth Compton retired, believes the company is well positioned for acquisitions having cut costs, paid down debt and eliminated nonproductive stores.
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