Payday lenders are making bank on new, high-interest products
Payday lending stocks are beating records. Mostly because they're no longer payday lenders.
Enova International has more than doubled so far this year, the best performer in the Russell 2000 Consumer Lending Index, followed by rival Curo Group, up 64%.
Helping to drive those gains are a raft of new financing products that carry the same ultra-high interest as payday loans. But, because of their length, size or structure, these offerings aren't subject to the same regulatory scheme.
"We made a big effort over the last five years to diversify our business," Enova Chief Executive David Fisher said in an interview. The diversification was meant, in part, to spread out regulatory exposure, he said.
These products quickly became so popular that Enova and Curo now report that a vast majority of their revenue comes from them rather than payday loans, as before. Enova now mostly offers installment loans and lines of credit. Curo is also largely focused on installment loans too, while also doing some gold-buying, check-cashing and money-transferring.
Whereas payday loans are ideally paid back in a single payment, many of the new products are paid back in installments, over time.
The companies had little choice but to reinvent themselves. Payday lenders were widely criticized for allegedly creating debt traps through their loans, ensnaring debtors in a spiraling vortex of ever-increasing fees and loan renewals.
"Any lender who had the resources at that point in time said, 'Gosh, if they're going to kill my product — and they're making it very clear that they're trying to — I'm going to diversify,' " Jefferies analyst John Hecht said in an interview.
From 2012 to 2016, revenue from payday lending contracted from $9.2 billion to $6 billion, according to data from the Center for Financial Services Innovation. In that time, short-term installment lending revenue jumped from $4.3 billion to $6.5 billion.
Enova, one of the biggest subprime consumer lenders in the U.S., saw revenue from short-term single-payment loans, like payday loans, drop to 22% from the firm's total 99% in 2008. Curo, which introduced installment loans 10 years ago, now gets only 28% of its revenue from single-pay loans (most from outside the U.S.). Curo didn't respond to multiple requests for comment and earlier figures were not available.
Fair-lending advocates say these are the same products that trapped poor Americans in debt.
"It's the same predatory lending schemes in a different package," said Diane Standaert, director of state policy at the Center for Responsible Lending. "What has remained unchanged for all these years is that the debt trap remains the core of the business model."
For Enova's subprime loans, including installment and payday products, APRs can range from 100% to 450%, according to a recent presentation for investors. For near-prime customers, the rates range from 34% to 179%. Most Curo loans have interest rates in the triple digits as well. Enova's Fisher said the profitability of payday loans, installment loans and lines of credit are all similar.
The Consumer Financial Protection Bureau had an early-stage rulemaking process underway for major installment lenders, but that was effectively tabled by the current acting director, Mick Mulvaney. The CFPB said that the move was not intended to signal a substantive decision on the merits of the project, and that the next permanent director will make the final decision on the rulemaking process.
The regulatory environment for the companies’ remaining payday lending may also improve. The CFPB and payday lending industry groups asked for a pause last week in litigation aiming to overturn the bureau’s rules until the CFPB complete a revised proposal regulating the industry. It may be released as soon as February, according to the motion reported by Bloomberg Law.
For the moment, though, the diversified companies are certainly stronger, according to Moshe Orenbuch, an analyst at Credit Suisse. "As these companies started diversifying, they were diversifying to protect themselves, but they were also finding products that customers preferred and were successful," Orenbuch said in an interview.