Enlarge This ImageStorefront payday lenders are making a combative new pitch to state lawmakers as they push for an expansion of short-term, high-cost lending in states across the country. Their message, in essence: if you don't allow us to do business, our would-be customers will find shadier sources of credit on the Internet.
"We see on the television commercials from other companies that are preying upon these people," Trent Matson, director of governmental affairs at Moneytree Inc., a payday lender that operates in five states, said in recent testimony to lawmakers in Washington state. "There is a need and demand that is being met by an illegal black market."
That argument elicits cackles from consumer advocates, but it is echoing through legislatures in states that have banned or restricted storefront payday lending. At least three states — including Washington, North Carolina and New York — are now considering lifting their bans or easing restrictions on the theory that if consumers are going to obtain payday loans anyway, they might as well use an outlet that gets licensed and pays state taxes. Similar pieces of legislation are expected to be filed in Arizona and Pennsylvania.
Traditional payday companies are licensed to do business in more than 30 states, while Internet-based lenders — some of which operate from overseas — often lend in the states where laws prohibit payday loans.
Storefront lenders, which have long been portrayed by consumer advocates as the bad guys, argue that they're abiding by the law, and their upstart challengers often do not. The mud is flying in the other direction, too, with online lenders claiming that traditional lenders are trying to thwart competition.
"The industry is changing. And those who cling to a dying business model look for ways to preserve it," says a source from the online payday industry, who asked not to be identified.
Payday lending is a roughly $7.4 billion-per-year industry and an estimated 12 million Americans take out payday loans each year.
No one knows exactly how much payday lending takes place on the Internet, in part because some of the industry operates in the regulatory shadows. In late 2011, 16% of U.S. payday borrowers said they were getting their credit exclusively online, according to a survey conducted by the Pew Charitable Trusts' Safe Small-Dollar Loans Research Project.
Other estimates of the online market share are higher. And there's one point that payday industry officials from both sides of the digital divide agree on: Internet lending is growing rapidly.
In states that are considering changes to their payday lending laws, the question of whether bans are driving would-be storefront customers to online borrowing has become a key point of dispute.
Consumer advocates, who've long accused payday lenders of trapping poor people in a cycle of debt, say the state bans have done what they were intended to do.
Last year's Pew study found that the percentage of U.S. adults who took out payday loans from brick-and-mortar stores was four times as high in states that permit the loans as it was in states that ban or significantly restrict them. The amount of online lending was slightly higher in the states that ban or restrict payday loans than it was in states that permit them, but not by a statistically significant amount, according to the report.
Tribes offer payday loans and are immune from usury rates imposed by states. Stores offer them where allowed by law. Internet lenders based in the states and offshore make them available as well; some licensed under the state model and others are not.
Regulators and so-called consumer advocates had better embrace payday loan styled products because their constituents demand them. Millions of borrowers "vote" for small dollar loans every day via the Internet, stores and some times both.
Jer Trihouse