Rent-A-Center Inc., the largest company in the business of renting big-ticket items like appliances and electronics, is trying to leverage its knowledge of its customers and its distribution network in financial services.
Analysts say the skills it has honed in the rent-to-own business - verifying customers' identities and collecting when they fall behind on weekly or monthly payments - make it a formidable competitor for payday lenders.
Though the Plano, Tex., company did not return numerous requests for comment, it boldly claimed in a Securities and Exchange Commission filing last month, "Traditional financial services providers ineffectively market to our customer base, and … an opportunity exists for us."
In June, Rent-A-Center acquired 27 rent-to-own stores in Idaho, Montana, Nevada, Oregon, Utah, and Washington that were already making payday and other short-term loans, and it is quickly ramping up its short-term loan business. By Dec. 31 it had started offering the loans in another 13 stores, and by the end of this year it plans to be offering them in 140 to 200 of its stores.
So far it has about 1,800 stores in the 35 states that permit payday lending, Mark Speese, the company's chief executive, said on a Feb. 7 conference call. The company says that 1,400 of those stores will generate enough financial services business for the line to be profitable.
Mitch Fadel, the company's president and chief operating officer, said on the conference call that it would start offering the loans in about 15 storefronts and kiosks in the first quarter and then increase that rate each quarter, to 30 by yearend.
According to the SEC filing, Rent-A-Center's financial offerings include short-term secured and unsecured loans, debit cards, and bill payment, check cashing, and money-transfer services under the trade name "The Cash AdvantEdge."
Rent-A-Center had 2,760 stores and 296 franchised locations at yearend. According to the Association of Progressive Rental Organizations, an industry trade group, there were 8,300 such stores nationwide last year.
Richard May, a spokesman for the trade group, said the rent-to-own industry has served about 2.7 million customers a year for the last 10 years or so, and this year should be no different.
Founded in 1986, Rent-A-Center grew substantially from 1993 through 2004, making nine major acquisitions. According to Henry Coffey, an analyst with Ferris, Baker Watts Inc. in Baltimore, the company "continues to play a meaningful role in the consolidation of the RTO industry."
But Robert Straus, an analyst with Merriman Curhan Ford & Co., said that over the last couple of years Rent-A-Center has faced declining same-store sales, caused by stiffened competition in the rent-to-own industry. Its foray into payday lending is a means to increasing its profits, he said.
Mr. Speese said the company is "testing" two types of locations: "in-store" kiosks, where "we're simply building a serivce counter in the back of the existing store next to the current customer transaction center," and "box-in-a-box" locations, where the company carves out a separate store with a separate entrance.
The kiosks cost $30,000 to $35,000 to build, while the box-in-a-box stores cost $50,000 to $60,000 apiece, he said.
Jaison Blair, an analyst with Rochdale Securities LLC in New York, said in an interview last month that using this approach, Rent-A-Center can be "more profitable" than stand-alone payday lenders, because it can save on infrastructure costs.
"When you piggyback [payday lending] on top of your existing business, you're already carrying the cost of overhead on top of the existing business," he said.
Robert Davis, Rent-A-Center's chief financial officer, said on the conference call that it hopes the payday lending and rent-to-own businesses will attract foot traffic (and business) for each other.
"One of the things that we hope to be able to accomplish is enhance the results of both of these. … That's part of the mindset that we're going in with this," Mr. Davis said. "We think about leveraging real estate, marketing and advertising, the customer base, and so forth."
The company also said in its filing, "Stores offering financial services products in addition to traditional rent-to-own products generally require one to two additional employees."
Rent-to-own agreements are not credit contracts, and the consumer can return the product at any time without any further obligation or cost.
But Mr. Blair said Rent-A-Center's business is very similar to payday lending. "They are a financing company which, rather than financing loans, finances products."
The type of customer Rent-A-Center serves is "lower-income, someone who can't afford to lay out the money for a flat-screen television, or who is living paycheck to paycheck and a needs a little extra cash for whatever reason," he said.
According to the trade group, rent-to-own companies generated $6.6 billion of revenue last year. On its Web site, it says the "majority" of the customers are "working Americans earning a weekly paycheck" who "have immediate needs for consumer household goods but either don't want or can't accept long-term obligations."
Mr. Davis said his company is "doing well" in the payday business, though it is "still learning, candidly, some of this business."
The small-loan business "behaves pretty similar" to the rent-to-own model in that "there's an outlay of capital on the front end" and "you get very little revenue until you build up the base of contracts," he said. "But then as you get out six months and you've now got this recurring large base of contracts … you're then collecting the fee," and "you start to break even and turn a profit."
Analysts said Rent-A-Center's acumen for verifying contact information and making collections have resulted in a relatively low annual loss rate of 2%; the industry's average is about 2.5%.
Mr. Coffey wrote in a Jan. 12 report that in both renting and lending to these customers, "the key to a successful product offering is verification (know who your customers are and where they live) and collections (taking the time to locate and speak with the borrower)."
In its lending business, Rent-A-Center "has already reduced loss ratios in its current test stores by 300 basis points without lowering revenue," he wrote.
Don Gayhardt, the president of Dollar Financial Corp., a large, publicly traded payday lender in Berwyn, Pa., said, "It's hard to see how 1,400 stores can tip the competitive balance" in a payday, check cashing, and pawnshop market that boasts 35,000 storefront offices or branches nationwide.
The fact that one in eight payday loans is made on the Internet makes it even more unlikely that Rent-A-Center could upend the competitive balance, Mr. Gayhardt said.
Mr. Straus said making payday loans is a riskier endeavor than Rent-A-Center's core business, because the loss ratios are much higher - typically 10% to 12%.
When a customer defaults, it is easier to recover rented merchandise than borrowed cash, because the customer likely had an immediate need for the cash and has already spent it, he said.
Mr. Straus identified another problem - one that sounds familiar to observers of the debate over the separation of banking and commerce.
"The additional potential liability that comes from a hybrid model at the store level is that you could have customers using your payday loan services to pay off their rent-to-own contracts, which arguably could be a conflict of interest," he said. "That conflict of interest may prove difficult to manage at the store level."