Payday Loans Case

What are the dominant economic characteristics affecting the payday lending industry?

The payday lending industry began to emerge in the early 1990’s due to consumer demand and the changing dynamics within the financial services industry which include the following:

1. Financial institutions shying away from the small-denomination, short-term credit market due to the high cost structure.

2. Consumers wishing to avoid the costs of bounced checks, overdraft fees, and late payment penalties on bills.

Along with consumer demand came rapid growth in the payday lending industry. By 2010, it was estimated that there were more than 22,000 payday advance locations across the country, which was more than the estimated 9,500 banks throughout the country.

Due to the widespread growth of the payday lending industry across the country, 5% of the United State population is estimated to have taken out one or more payday loan at sometime during there lives. According to a survey by the Community Financial Services Association of America, 10% of the population stated that they are somewhat or very likely to obtain a payday loan. Looking at these two numbers together, these estimates suggested that only half of the potential market had been penetrated meaning there is growth potential.

What is the competition like in the payday lending industry? How strong are each of the competitive forces that make up Porter’s Five Forces Model? What do your strength ratings reveal about the overall attractiveness of the payday lending industry?

Rivalry

The payday lending industry has become very competitive. This is in large part due to the relaxation of federal restrictions in the early 1980’s, which make it easier for payday lending companies to enter the financial services industry and remain competitive against