June 20, 2008
Killing free enterprise, drip by drip
"Payday" lenders have been getting a bad rap lately, and most of their critics seem to be arguing that short-term loans generate excessive profits at the expense of low- and middle-income Americans. "Solutions" range from outright bans on the service to suing or capping the industry out of existence. But are payday lenders really making more profits than, say, mainstream commercial lenders? Or big-time cappuccino chains? We'll give you two guesses, and the first one doesn't count.
Suspecting that the jihad against payday lenders may be a case of regulation without foundation, University of Colorado researcher Aaron Huckstep looked at the industry's profitability. Last year in the Fordham Journal of Corporate & Financial Law, Huckstep found that businesses dealing strictly in payday loans (pure payday lenders) had an average profit margin of 3.57 percent. That average shot up to 7.63 percent when he included pawn brokers who made loans on the side. By comparison, the average profit margin of Starbucks is 9 percent:
Setting aside a handful of anti-globalization activists who might still be among us, the idea of a citizens crusade against Starbucks seems far-fetched. Sure, four bucks may be a bit much for a latte, but $9.4 billion in 2007 revenue suggests that most of us are happy to shell out the extra cash.
And what about mainstream commercial lenders, like Capital One, HSBC, Money Tree, and American Express? Why not bust them for late charges, ATM withdrawal fees, and killer APR rates? Huckstep found that those lenders' profit margins were over three times higher than "pure" payday lenders -- 13.04 percent!
Clearly payday lending profits pale in comparison to the margins on credit cards, long-term loans, and iced coffees. But at the end of the day all three industries are offering consumers something they want, and most Americans are consuming them responsibly. As Cato Institute scholar Will Wilkinson pointed out on NPRs Marketplace this week, 60 percent of Americans say they usually pay the full balance on their credit cards each month, and the percentage of people who carry balances is going down.
Wilkinson's point is an important one: It used to be a lot harder to borrow money...give credit credit where credit is due. Payday lending foes offer little more than a knee-jerk scowls to support the notion that some lenders' profits are excessive and others' are not. They cite a handful of anecdotes -- mostly from individuals who have abused the service -- and claim that no one should have the option of trying to behave better.
Sorry, guys. The plural of "anecdote" still isn't "data."
