Rent-A-Center Expanding Services for Underbanked

Five years after it began offering financial services to its underbanked clientele, Rent-A-Center Inc. is renewing its commitment to the sector.

The Plano, Texas, company, whose main business is renting big-ticket items like appliances and electronics, largely to people who can't afford to buy them, now offers check cashing, payday loans, money transfers and prepaid debit cards in about 350 stores in 17 states. Rent-A-Center's financial services arm turned its first profit in the second half of 2009. After taking a breather last year, when it added financial services to just 11 locations, the company plans to pick the pace back up and add the offerings to a net of 50 stores this year.

"First they were making sure that the model worked," said Arvind Bhatia, managing director of equity research at Sterne Agee. "And now they're saying 'let's roll this out a little bit faster.' "

Rent-A-Center is also creating a website where consumers can apply for short-term loans. And it is ramping up a service the company started testing in 2005, in which it acts as a backup source of customer financing for traditional retailers when they turn shoppers down for credit.

Financial services remains a small part of Rent-A-Center's overall business (the company has 3,000 stores in all 50 states, Canada and Puerto Rico). And increased competition and regulatory hurdles are likely to challenge the nascent business' growth.

Much of the company's success in the sector so far, analysts said, is due to its brand recognition among underbanked consumers — those who are often shut out of traditional financial services because of poor, or nonexistent, credit histories and are in need of alternatives.

Brent Turner, head of the company's financial services unit, estimates that as much as 40% of Rent-A-Center's customer base is unbanked and at least half is underbanked.

"We saw an opportunity for customers that walk in our door on a weekly basis," Turner said. "These are customers that have to go elsewhere to transact those and to use those particular services. For us, we thought if we can offer that in the same footprint we probably have an opportunity to leverage that."

Rent-A-Center's dominant presence throughout the country gives it an advantage, too, analysts said, enabling it to add financial services to existing store locations without a lot of overhead cost.

"The one thing I really like is that they are not opening new stores per se," Bhatia said. "Their model is to open stores within existing stores, so that can really leverage their rent and their personnel costs a little bit. It provides them a lot of flexibility."

The market for alternative financial services has grown considerably in recent years as the pool of underbanked consumers widens. The group has historically referred to low-income individuals or immigrants who were deemed undesirable by traditional lenders. Today, though, the group increasingly includes young, college-educated individuals who are building their credit profiles and middle-class homeowners who have perhaps run into hardships during the recession or have become discouraged with big banks.

Turner said the company's customer profile varies by region, but shoppers tend to be ethnically diverse and between the ages of 18 and 34. The company estimates that about 30% are homeowners with the median household income about $48,000 a year. Roughly the same number of men shop the stores as women.

"Credit availability for this demographic remains extremely tight," said Robert Straus, senior analyst at Gilford Securities. "And Rent-A-Center, like many companies, is trying to service that need. And to that degree, it is a potential growth driver for them as it further leverages the brand they've had, the brand they've built up over decades."

Rent-A-Center has been forging partnerships with traditional retailers in which it stands by as a last resort for consumers who are denied credit for purchases. By maintaining a presence inside retailers' locations, the company can offer someone the ability to rent-to-own an item that he or she can't otherwise afford.

Currently, the company has 98 of its "RAC Acceptance" locations in 13 states in retailers such as Ashley Furniture HomeStore, The Room Store and Gardner-White Furniture. Rent-A-Center plans to open 40 to 80 additional RAC Acceptance locations this year.

Bryan Derman, a partner at Glenbrook Partners LLC, a consulting firm in Menlo Park, Calif., said the strategy should be well received by retailers.

"The Rent-A-Center approach is sort of purpose-built credit for that transaction," he said. "The big chains would probably prefer a private label card with a revolving line because that would give the customer the ability to come back and spend more. But if they were not able to approve those, they might find it attractive to complete the sale that was pending at that moment."

Rent-A-Center does not break out the results of its financial services business separately from its overall earnings and only said that the unit's profit during the last six months of 2009 was "small." All told, Rent-A-Center earned $167.9 million last year, a 20% increase over the previous year.

Outside of payday lenders and pawn shops, many retailers and nonbank financial services companies have gotten in on the game as more and more retail banks clamp down on credit. Wal-Mart Stores Inc. is probably one of the more recognizable names in alternative financial services. Sears Holdings Corp. also has recently started devoting some of its retail space to financial services.

"Wal-Mart has entered the business and really put a lot of pressure on all the other retailers out there to respond in kind," Turner said. "There're a lot more entrants this year and last year to the check-cashing space than there ever has been."

"It used to be a practice that was looked down on. If you were cashing checks you were somewhat of a secondary retailer," Turner went on. "More and more retailers have come to know this is a very important segment of the U.S. economy; this is a very important customer base."

Perhaps the biggest obstacle Rent-A-Center faces with its financial services business is the regulatory landscape. Many states have cracked down on payday lenders in recent years, restricting the fees they can charge. For now, Rent-A-Center is focusing on expanding its financial service offerings in states that have "enabling legislation" that explicitly allows payday lending. But it hasn't been easy.

"The regulatory environment has been extremely difficult to navigate," Turner said. "Several states have new laws and/or changed statutes so that it's no longer profitable for us to offer the products" in those states.

The industry may face new challenges with the creation of a consumer protection agency as part of the financial reform bill, which is still working its way through Congress.

Rent-A-Center may be forced to discontinue one activity altogether: refund anticipation loans. The company began offering the short-term loans about three years ago when it added tax preparation services to its suite of financial products. The loans have become a controversial product amid increased regulatory scrutiny.

This spring, Rent-A-Center's banking partner for the RALs, JPMorgan Chase & Co., announced it was getting out of the business.

The company said it plans to look for a new partner, but it is uncertain whether Rent-A-Center will be able to offer the loans.