YOUR PAYDAY LOAN INDUSTRY RESOURCE

Payday lender Allied Cash Advance got its start five years ago when two investment bankers ditched their jobs raising capital for the Bay Area's wealthiest entrepreneurs in favor of bringing cash to the struggling masses.

This month the company is expanding into Oregon and then Washington state shortly thereafter. That will be in addition to the 150 outlets the company already operates in six states from coast to coast.

Making short-term loans for hefty fees is a lucrative, if high risk, business. Allied's revenue of about $20 million a year will double this year as it's done every year since the company's founding.

Allied is a long way from its early days when John Lie-Nielsen and Scott Crockett left their corporate finance positions at Montgomery Securities in early 1999 to launch Emeryville-based ACA Financial LLC, Allied's parent.

The genesis of Allied grew out of the bankers' careful reading of a payday lender's regulatory filing to go public, which was being handled by a rival investment bank.

The two bankers, whose friendship goes back to their college years, liked what they saw in terms of the profitability of extending short-term loans to school teachers, mechanics and others who sometimes have trouble making ends meet at the end of the month.

The bankers also got bit by the entrepreneurial bug after sitting in countless meetings at Montgomery.

"We saw that the person with the most money in the room wasn't necessarily the smartest, but the one who took action," Lie-Nielsen said.

The founders opted for financial backing from members of North Bay Angels and other wealthy individuals instead of venture capitalists or institutional investors so they could hold on to more of the company. The two founders together still own a little more than half the business.

Research on the road In researching the payday lending industry, in which a California customer typically borrows $100 until payday for a $17 fee, the two bankers went around the country getting payday advances.

"We got some strange looks given the salaries we were making in corporate finance," Crockett said.

But the experience gave the two first-hand knowledge of how their payday advance requests were handled and the condition and location of the lenders' offices. In some cases they purposely were late in repaying the loan to see how lenders responded.

In opening their first office in El Cerrito in 1999, the two bankers ran the office themselves for two months.

"I took it personally the first time a customer didn't pay us back," Crockett recalled.

Allied's customer demographics offer insight into middle-class America. Half the company's clients make $25,000 to $50,000 annually. The balance of customers is divided equally among those under $25,000 and over $50,000.

Crowded field
Allied is operating in a crowded field. Thousands of mom-and-pop operators compete against larger players like Ace Cash Express and Check into Cash, much like the highly fragmented, early days of the video rental industry.

Industry players include Wells Fargo, which has a popular payday advance service that offers cash advances against direct-deposited paychecks. The service costs $10 per $100, with up to $500 available for most borrowers.

"There are several catalysts for growth in this industry, including demographic trends, heightened consumer awareness and new product offerings," said Jim Fowler, an analyst with San Francisco-based JMP Securities.

But the high fees for short-term loans have drawn significant criticism.

Payday lenders counter that their fees help customers avoid the even costlier penalties associated with bouncing checks. The typical bounced-check fee is $32 and that can add up quickly under the widespread banking industry practice of clearing the biggest check first and bouncing the rest.

(Banks say that the largest check is usually the rent or auto loan payment so it's better to clear that one check and bounce a series of checks for smaller amounts. But it was just a little more than a decade ago that bankers were touting amongst themselves that the "clear the biggest check first" strategy was an easy way to boost revenue.)

b>Eyes on IPO
Crockett, who expected just a year ago that the company would eventually be acquired, now sees a path to an initial public offering.

Those hopes are fueled by QC Holdings' plans to go public The Kansas City, Kansas-based company has 295 offices and would have a market cap of about $300 million based on early indications of where the company's shares will be priced, Crockett said.

The newfound respect -- and understanding -- on Wall Street is a sign of payday lenders becoming a more accepted part of the financial services arena.

"Payday lending is becoming more of a mainstream product," Crockett said.

Business booming for PayDay

The check cashing and pay-day advance loan business model is airtight: high-fee loans, quick turn around on repayment, technologically advanced risk management and unlimited market growth.

The only strike against it is a reputation for being bottom feeders, exploiting that segment of a community that can least afford it.

But don't tell that to Craig Schafer, owner and president of Kaua‘i-based PayDay Hawaii, who says that understanding his business is really a matter of perception.

"Banks aren't likely to make small loans, and employers use to help out employees, but that rarely happens anymore," Schafer said.

It comes down to this: the people who don't need advances look down on the business; the ones who need them are only too willing to pay up to a 15 percent fee for quick cash.

Nearly 3,000 Kaua‘ians are regular PayDay clients, and 2,000 people statewide use PayDay's services each month, Schafer said, making it the largest of its kind in the state.

The impetus for the industry's growth can be directly linked to a changing banking environment in the late ‘90s, Schafer said.

Because of processing costs, the small-loan industry increasingly abandoned the practice of making small, personal loans for short periods of time. Banks were also uninterested in serving the consumer who needed short-term limited funds unless they could qualify for a credit card. As a result, "deferred deposits," commonly called payday advances, proliferated, filling the gap in the consumer credit market.

In 1987, there were about 2,000 outlets. By year 2000, there were 9,500 outlets earning in excess of $1 billion on a volume of $55 billion in check cashing and $1.6 billion on a volume of $10 billion in payday advances.

And the future looks great, Schafer says.

Since starting his first store in Kapa‘a four years ago, PayDay Hawaii has expanded to six locations statewide, with two on Kaua‘i, netting over $667,000 in gross revenues on internal transactions of over $9 million.

Gross profit for fiscal 2003-2004 is estimated to be $666,979 on internal transactions of $8,983,397. Next year, he estimates he'll nearly double it, grossing over $950,000 on internal transactions of $14.6 million.

Today, Schafer's four-year-old company is poised for lightening-fast expansion: four retail offices are planned for Honolulu, Pearl City and Kaneohe by the end of 2005, and ten more retail offices are planned for Hawaii, Guam and American Samoa between January of 2005 and June of 2009.

"This model has been successful because it fills a need in the community," Schafer said.

As gas prices climb, rents jump and the price of a home slips from the reach of the average person on Kaua‘i, PayDay's services are becoming more and more necessary, he said.

It's not surprising, then, that PayDay's demographic looks surprisingly middle class.

"Our average consumer is between the ages of 25 and 35, with an annual household income of $25,000 to $35,000," Schafer said.

PayDay's typical client has young children, a two-person working household and slightly more than half rent their homes, Schafer said.

Using basic information such as a bank statement, pay stubs and identification, PayDay makes one-at-a-time loans of up to $510, which is a limit set by Hawaii law -- just enough to cover things like car repairs, emergency air flights, food, rent or paying off interest on loans.

Schafer has had clients come to him with medical emergencies and to pay off funeral expenses. When a car repair spells the difference between keeping and losing a job, services like PayDay's fills a grim need. "For some people, it's literally a lifesaver," Schafer said.

But it's not always a case of life or death, Schafer admits.

"I've had people come to me for money for lottery tickets or just ‘mad money' for a vacation," he said.

The company, which recently changed its name to the more respectable-sounding Money Service Centers of Hawaii, offers a wide array of services including money transfer services through Traveler's Express MoneyGram, electronic tax filing and tax refund loans.

The first location in Kapa‘a opened in May of 2000, and, because it had no significant competition, it was an ideal environment for testing and developing the PayDay Hawaii business concept, Schafer said.

Seven months later, a second office was opened in Lihu‘e, and in October of 2003, they acquired the assets of Keneka Corp., adding four offices, and expanding its over- the-counter business to Maui and the island of Hawaii.

PayDay Hawaii is now the dominant money service business on three islands and, if Schafer has his way, will soon dominate the state.

Schafer figures that statewide capacity for his business could be as high as 70 locations.

But all that success is tempered state laws limiting the fee on deferred advances to 15 percent. Schafer also says that he has a deeper understanding his industry's mission: that by the time a person comes to him, they are typically backed into a financial corner. Helping them is good, but he won't loan more than they can afford -- or he can risk.

"I don't think I'm doing anyone any favors by giving allowing them loans they can't afford," he said. Bank accounts are easily verified online, he said, and, if the person is a good risk, PayDay will loan. Service is huge part of the business, Schafer said. By offering other services such as money transfers and tax filing, the company is capitalizing on their marketshare.

They're even offering their customers the ability to register for county, state and national elections in a Voter Registration program that runs through the end of October. It's part of a national campaign sponsored by the Financial Service Centers of America. "We just thought it would be an added convenience," Schafer said. All six PayDayHawaii offices will participate, including both Kaua‘i offices in Kapa‘a at Waipouli Plaza and Lihu‘e at Kukui Grove.