The payday lending industry has suffered from a poor public perception based at least in part on inconclusive data. The public, hearing horror stories of payday loans gone wrong, appears to believe that the entire industry needs to be regulated. One assumption for regulation is that payday lenders make an enormous profit from their services.1 This assumption is grounded in the relatively high cost of short-term credit obtained through payday lenders.2 As a response to poor public perception, the industry has searched to justify itself, falling on the explanation that operating costs and loan losses require the high fees associated with their loans. Without hard data indicating that payday lenders are making extraordinary profits, however, this call for regulation is without foundation. To date, no conclusive data has been presented to either justify or refute the claims of either consumer groups or the industry.
This article does not suggest that payday lending is a desirable service, or that the industry should be entirely free from regulation. Rather, this article intends to provide the reader with an objective financial analysis, along with conclusions, of seven publicly traded payday lenders. The payday lenders in this study have been analyzed against six commercial lenders and one large company with a similar business model.3 The study shows that, despite the common belief, payday lending firms do not always make extraordinary profits. In fact, when compared to many other well-known lending institutions, payday lenders may fall far short in terms of profitability.4 If that is the case, then the call for regulation should be based solely in principle, moral, or other subjective reasoning-not on high fees.5
This article attempts to shed light upon two specific aspects of the payday lending industry. First, it will provide more information regarding the typical payday borrower.6 Next, it provides insightful financial data regarding the typical payday lending company.7 New information regarding the typical borrower is available from the Colorado study as well as from an in-depth investigation by the Federal Deposit Insurance Corporation ("FDIC").8 Additionally, this article discusses the financial and operating results of individual stores within one publicly-traded payday lender.9 Finally, by reviewing the operating results of seven publicly-traded payday lenders, this article provides profitability information upon a relatively unexplored market.10
II. THE HISTORY AND BACKGROUND OF PAYDAY LENDING
A. The Emergence of Payday Lending
Methods of providing short-term financial solutions to others are not new. In the early twentieth century, "salary buyers" offered to purchase a consumer's paycheck in advance at a discount.11 For instance, a lender would give the borrower $20 today for the right to receive athe borrower's next paycheck of $24.12 This market arose for a number of reasons: with many people moving from rural to urban areas, and with a significant influx of immigrants, there was a large supply of manpower for a small number of jobs. As a result, meeting cash-needs was challenging for many people. Banks were not offering small-dollar short-term cash loans because they were considered too "risky." Additionally, few of the borrowers had assets with which to secure a loan.13 The salary-buying industry arose to meet the needs of this underserved market.14
In the 1980s, new factors created a similar need for short-term cash loans. The deregulation of the banking industry, the absence of traditional small loan providers and the elimination of interest rate caps set the stage for the emergence of payday lending.15 As banks eliminated less profitable services (such as short-term loan services), families and individuals in need of short-term cash flow were left with nowhere to turn.16 While the payday lending market emerged at about this time, many consider the father of "modern" payday lending to be W. …