One of my favorite shows recently has been the HBO series Game of Thrones. One of the sayings from the series is “Winter is coming.” This is a dire warning to all that the current favorable conditions are ending and you need to prepare for the inevitable struggle of a long, harsh winter. During the CFSA conference last week it struck me that this saying could apply to the payday loan industry and its anticipation of new rules coming from the CFPB. While it may be a stretch to say that the landscape after the rules are implemented will be as foreboding as what is portrayed in the Game of Thrones, the sentiment shared by the operators in the industry certainly is not one of excitement and understanding.
One of the questions repeated by operators in the industry is why there are new rules being created when there are already existing laws in each state? Historically there have been comments that the numbers of complaints from consumers about payday lenders to the state agencies are very low. If consumer satisfaction is high, why the need for more rules? Maybe to help clarify this, the CFPB created a mechanism for consumers to make complaints directly to them – not only for payday lenders, but other industries (credit cards, private student loans, mortgages, bank accounts and services, credit reporting, consumer loans, money transfers, & debt collection). Based on a presentation given by the CFPB at the CFSA conference, the bureaus started collecting complaints on 11/6/2013. As of 1/31/2015 they had received 538,300 complaints covering the named industries. The payday loan industry had over 7,100 of these complaints. My rough math says that is about 1.32% of all the complaints. Out of the nine groups they are compiling data on, the payday loan group had 1.32%. One of the attendees stated, “This seems really low”. Obviously with complaints this low there must be a problem…. just not sure it is with the operators.
As I was walking between workshops I overheard one operator tell another that she was shutting her business down due to her bank kicking her out with no notice and no past issues. Another victim of Operation Chokepoint? Apparently, she could not find a replacement bank. While recent news has been positive that this “initiative” has been halted, are the banks opening their doors back up to those they kicked out unnecessarily? I actually had a bank representative (name withheld to protect the “innocent”) contact me to try and help place their customer with another bank that would accept check cashing and payday lending. I asked the obvious question – “Do you not serve businesses in the industry?” The response was, unfortunately, not surprising, “No.” I sent him an article to enlighten him about the change in Operation Chokepoint. Never got a response. I still go back to the high customer satisfaction in the industry and the high product demand and just don’t understand the disconnect.
There was much discussion during the conference about the CFPB’s timeline for the rules to be effective. It appears that the final rules may not be effective until 2017, but that could change. At this point we still don’t know if the rules will only cover payday loans or if they will reach over into title loans, installment loans and other products. Based on the amount of time this is taking, it may be safe to assume the reach will go beyond payday loans. Not only are there going to be industry-changing rules in the future, data at the conference illustrated that customer demand has been shifting from a single-pay product to a multi-pay product. Customers are also getting more comfortable operating in an online environment for their financial products. Think about these last two items as they relate to your current operations. Do you offer a multi-pay product now? Do you offer your products in an online or mobile environment? If you said no to either of those, winter may be closer than you think!
So what should your strategy be to prepare for the upcoming “winter”? Here are a few things to consider as the landscape continues to evolve:
- Continue to provide excellent customer service in a compliant, ethical fashion. The best way to maintain and grow your business is to still offer it at a high standard.
- Explore options to add installment loans to your portfolio. There is a lengthy runway to implementing installment loans successfully – start now! At the same time, you might want to start looking for extra funding – installment loans tie up cash.
- Look at your current systems to understand what it would take to offer your products online or in a mobile environment. Will your current system handle installment loans? Do you need to change platforms?
- Maintain good relationships with your vendors and bankers. At the same time, look for effective replacements. Don’t let yourself get caught without a way to operate.
- Stay informed. The product and regulatory landscape are changing quickly and dramatically. Monitoring regulations and your competition are critical to gain insights to the future.
While these times are fluid and maybe a little ominous, there is also good news. If you have the right strategy and the ability to adapt with the times, customer demand is out there. If you don’t, there are experts out here that are able and willing to help you succeed. Winter is coming. Let’s get ready!