Long-tail effect: Birth of Payday Loans
Our culture and economy is increasingly shifting away the focus from relatively small number of “hits” at the head of the demand curve to a huge number of niches in the tail. This “long tail” is about the economics of abundance. And this has given rise to a variety of businesses that didn’t even exist a decade ago. One such industry is the online lending organizations which connect networks of lenders with those in need of loans. This is a long tail approach to borrowing and lending, as it looks beyond larger loans from financial giants and instead concentrates on markets for smaller loans. During the summer I interned with one such organization and my experience of associating closely with this industry has taught me that an efficient feedback loop and stress on reliable lending is necessary to succeed in this market. “The payday lending industry has enjoyed exponential growth over the last 12 years. Estimates of payday loan volume range from $28 billion to over $40 billion per year.”1
“Cash America International, Inc. (NYSE: CSH) an online payday lender, reported that its net income for the second quarter ended June 30, 2011 was up 29% to $26,981,000 (84 cents per share), which compares to the second quarter 2010 net income of $20,889,000 (66 cents per share).”2 What sets these companies from the rest is reliable lending to lower-middle to lower class and poor people who would otherwise be ignored by the traditional banking business. “This was a niche market segment that was ignored by traditional banks since the beginning of time. “7
Some of the major risks these industries face are in terms of security and fraud. They have advanced analytics teams that develop algorithms to identify fake records (Emails, wrong SSN, stolen credit card numbers etc.) to lower their default rates.3Also, maintaining a secure system to avoid any sort of customer data leakage is their prime agenda. Like other online industries, payday loan providers rely greatly on digital marketing (SEO, PPC and affiliate) for any marketing efforts.5 “Mass marketing is no longer a long-term strategy. Mass-marketing campaigns have a 2% response rate and are on the decline. However, by 2015, digital strategies, such as social marketing, will influence at least 80% of consumers’ discretionary spending.”6 says Gartner’s market analyst Adam Sarner. The term “payday loans” is one of the highest bided keyword in Google Pay per click campaigns.4 Unless you have major resources and capital to fight the merchant or the top affiliates head-on, it can be a losing proposition.
In conclusion, the future for payday lenders is very promising. Every month a new lender jumps into the arena with better interest rates and plans. Because of the high turnover rate there are numerous bad players in the industry which have given a very controversial vibe to the industry as a whole. Hence, it is solely in the hands of the customers to pay special attention while they pick the right lenders (while some may have a lower interest rate, they might have hidden terms that might cost the customers a substantial amount of their income). Many countries like UK, Australia, Canada and the US have encouraged reliable lending. Players like CashnetUSA(www.cashnetusa.com) in the US and QuickQuid (http://www.quickquid.co.uk/) in the UK are one of the most trusted lenders with reasonable APRs. The employees at these organizations are highly motivated and the growth is tremendous with low default rate. Moreover, the recipients of small credits tend to be very good payers of loans, despite their non-existent credit history. They are also willing to pay higher interest rates than the standard bank or credit card customer. It is a business model that fills an important developmental role in an economy.
Reference:
1 Nancy Pierce,”Payday Lending: The Credit Union Way”, April 2008, White Paper from Cuna Lending Council
2Cash America International INC Financial Statement, Jun 2011, Datamonitor, www.lexisnexis.com
3 Harsh Dhand, “Internet Based Social Lending”, IBIMA publishing, Said Business School, Oxford pg.3-4
4Proquest.com research papers
5 www.whoisandrewwee.com/affiliate-marketing/mastering-long-tail-affiliate-marketing/
6 Adam Sarner,”Digital Marketing:The Critical Trek for Multichannel Campaign Management.”
Source: Gartner
7Michaela Stelzner, “2011 Social Media Marketing Industry Report:How Marketers Are Using Social Media to Grow Their Businesses”, April 2011 Pg. 4
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