Cash connection: Are its payday lender strategy and its business model ethical?

After operating through years where the market growth seemed to have peake due to
the large number of rival companies, cash connection’s president, Allen Franks, sat as his
desk pondering new ideas on how to differentiate his firm from others in the short-term cash-
lending business. In addition to rival companies, cash connection was also facing the looming
influence of a financial czar designed by the federal government to heavily influence the
operations of all companies within the financial services industry, primarily those within
banking. The costs of audits that accompanied governmental regulations could be quite
substntial for financial service companies. Franks believed that additional governmental
restriction would indeed take away from his company’s ability to compete. He needed to find
a way for cash connection to differentiate itself from its competitors so that it cloud gain the
largest amount of market share possible in an attempt to weather the strom of the restriction
being imposed by the financial czar.
Allen franks was born and raised in shreveport, lousiana. The son of a local
veterinarian, graduated from jesuit high school. After high school, he attended lousiana state
university and graduated in 1979 with a degree in business administration.
While attending college, franks purchased and remodeled rental homes in shreveport.
Upon completion of his degree. He owned and rented approximately 30 units and continued
in the real estate industry until 1986, when he opened a check-cashing store in shreveport.
The first store of its kind in shreveport, however, franks came to understand that the first
store in a city was always more profitable than succeeding stores.
After this realization, he decided to open check-cashing stores only in cities that did
not yet have one. After establishig stores in Jackson, Mississippi, Montgomery, Alabama and
Toledo, Ohio, Franks left real estate to work full-time in the chack-cashing industry, his
company became known as cash connection,. In addition to providing payday advances and
check cashing, cash connection expanded into offering bill payment services, prepaind phone
cards, anad money orders, its stores also served as westrern union agent to allow customers to
transfer funds.
Troughout the mid to late 1990s, Cash Connetion was one of several companies competing in
an industry of substantial growth: short-term cash lending. Although the principle of
extending short-term loans to borrowers i need hasbeen around since the 18th century, much
of the pioneering credit for making microloans to cash constrained people living at or near
the poverty level has been given to Muhammad Yunus. President of Grameen Bank, for his
acts in the 1970s in Bangladesh. During this time Yunus began making microloans to
impoverished people in Bangladesh to enable them to create their own fledgling business
entreprise. Yusup hopen that such microloans for cas-constrained entrepreneurs would allow
borrowers to become selfsupporting and, ideally, to build sufficient wealth to exit poverty.
Over the course of several years, yunus was said to have loaned approximately $ billion to
some million aspiring entrepreneurs in Bangladesh. As a result of his generous initiative, he
was awarded the nobel peace prize in 2006.
Payday advance services emerged in the early 1990s and grew as a result of rebust
consumer demand and changing conditions in the financial service market place, including
the following :
1. The exiting of traditional financial institutions from the small-denomation, short term
credit market – a change largely due to the market’s high cost structure
2. The soaring cost of bounced checks and over draft protection fees, late bill payment
penalties, and other informal extensions of short-term credit.
3. The continuing trend toward regulation of the payday advance service, providing
customers with important consumer protections.

As of 2010, industry analysts estimated that there were more than 22,000 payday
advance locations across the united states, a higher number than the 9,500 banks
spread throughout the country. Payday advances extended about $40 billion in short-
term credit each year to millions of middle-class house holds that experienced cash
shortfalls between paydays.

PAYDAY LOANS
Payday loans were short-term cash loans intended to cover the borrower’s expenses until the
borrower’s next payday. Although repayment amounts could be very high, the loans were
quick and convenient. The borrower typically wrote a postdated check that included the loan
fees and was used as “collateral” for the loan; the borrower could also sign an automated
clearing house (ACH) authorization to debit the borrower’s account on payday.
The average payday loan amount was $300 and term was typically for 14 to 30 days.
Fees varied but averaged between $15 and $20 per $100. For a 14-day loan at $20 per $100,
the annual percentage rate (APR) was an astounding 520 percent. That APR, as most payday
lenders were quick to point out , would apply only if the borrower had the loan for the whole
year and paid $20 every two weeks. Payday loans fees were high because such loans carried a
lot of risk for the company, many people who took out payday loans did not pay them back.
 Throughput the united states, governments on every level were looking at payday loan
outlets with increasing concern. Many people thought that they took advantage of low-
income people in financial trouble. Some went as far as to say that payday lenders"preyed"
on the poor. Those providing the loans argued that they were filling a need and not doing
anything illegal.
The following situation illustrates why many people felt that payday loans worked
against the favor of a large number of people. Suppose that you had an unexpected expense
one month and took out a short-term loan to provide you with enough capital to solve your
problem and allow you to get on with your life. Well, what if your next paycheck, after your
budgeted expense, wasn’t enough to allow you to pay back the loan? If you came up short
again, you could renew, of extend, your loan. This process was called a “rollover” if you
rolled over you loan too many times, however, it could end up costing you a lot of money.
Say you borrowed $100 for 14 days until your next payday. You wrote a check to the lender
for $115 (the $100 in principal plus a $15 fee) .the APR of that loan would be 391 percent! If
you couldn’t payback the $115 on the due date, you could roll over the loan for another two
weeks. If you rolled over the loan three times. The finances charge would reach $60 for the
original $100 loan.
To avoid appearid to roll over the debt, some lenders asked the debtor to take out a
“new loan” bay paying a new fee and writing another check. Also, in a practice “touch and
go” lenders too a cash “payoff” for the old loan and immediately provided the brrower with
funds from the “new loan”. Irrespective of whether the repeat transactions were cast as
“renewals”, “extentions” or “new loan” the result was a continuous flow of interest-only
payments at very short intervals that never reduced the principal. Given the high fess and
very short terms, borrowers could find themselves owing more than the amount they
originally borrowed after just a few rollowers within a single year.
The potential to recognize substantial frof its through fees and interest charges, along
wtih strong consumer demand, resulted in heavey saturation of payday lending companies
through out large cities and towns in the united states. Another reason for the high numbers
of payday lending firms was that the star-up cost for an individual location was only
approximately $130,000.
In addition to providing credit to money consumers, the payday loan industry had
made significant contributions to U.S. and state economies (see exhibit 1). The industry
contributed more than $10 billion to the U.S. gross domestic product in 2007 and supported
more than 155,000 jobs nationally; some 77,000 people worked in nearly 24,000 retail
locations that made payday loans.
In 2007, the payday lending industry provided approximately $44 billion in credit
U.S. consumers. Between 2006 and 2007, there was a decrease of 2.5 persent in the number
of payday loan stores in the united states, from 24,189 to 23,586. There was no clear pattern
for store closings. Some states experienced large drops in the number of stores per state.
States with the highest growth in the number of stores in 2007 were south Dakota, kansas,
and nevada. States with the biggest drops were Oregon, Indiana, and Minnesota.
Overall,the total labor income impact from the payday loan industry was $6.4 billion
in 2007,as the industry helped generate over $2.6 billion in federal ,state, and local
taxes.through direct employment,payday loan stores contributed $2.9 billion in labor income
,which translated to approximately $37,689 per store employee.suppliers to the payday
lending industry contributed $1.4 billion in labor income as an indirect result of the revenues
generated by the payday loan industry .altogethers, $2.1 billion was generated as payday
loan store employees and supplier industries‘ employees spent their wages in local
economies. In regard to the size of companies that served as industry players, any company
with more than 51 branch locations nationwide was considered a national player. Cash
advance America, check & go, and check America were examples of national players.