Sometimes I drop the following slide into presentations to illustrate the business need to not nickel and dime customers. It’s a smart line from Frederick Reichheld’s THE ULTIMATE QUESTION...
I always thought those “Cash Advance” businesses were built upon earning bad profits. That is, charging people super-high interest rates for a cash advance to tide them over until their next paycheck.
Businessweek recently ran an excerpt from BROKE, USA: From Pawnshops to Poverty, Inc.—How the Working Poor Became Big Business by Gary Rivlin. In the excerpt, we learn “Cash Advance” businesses actually profit from a good profit and not a bad profit. That's because these places charge around 20% interest for a short-term quick loan.
How can charging 20% interest be a good profit?
When you consider the average fee for a bounced check is nearly $30 (and rising), the 20% interest rate from a “Cash Advance” place can be cheaper, especially with loans under $150, for people needing quick cash until their next payday. (Go ahead. Do the math. You'll see the obvious advantage.)
While its disheartening to know the "Cash Advance" business is a cash cow, its fascinating to learn they profit from a good bad profit.
Can't agree with you here. These payday loan businesses rollover those short-term loans again and again until people are paying 300% to 400% interest. They prey on poor people in the most shameful way. This is "bad profit" at its worst.
Sad to say, it's expensive to be poor in America. All sorts of rent-to-own and high-fee businesses take advantage of people who can least afford things. Shameful.
Posted by: Ken Honeywell | June 09, 2010 at 08:42 AM
I'm with Ken on this. Sure, if the bulk of their clientele were looking to smooth over a short-term cash shortage in their checking account, this makes good math.
Usually, these folks are standing in this line on Friday because they can't even get a checking account any more (this is anecdotal evidence from my own network, not Serious Research.)
If my younger brother had been forced to find another route to money management, instead of falling back on these folks when he hit his first financial bump 25 years ago, his story might have been a little different. Maybe not; hard to say.
But either this is a bad profit, or a good profit, because, c'mon, John; do we really get to call something 'a good bad thing' ?
Posted by: Joel D Canfield | June 13, 2010 at 10:43 AM
Joel ... I say its a "good bad profit" because its disheartening to know people need short-term cash advances. So yeah, I think we can all this a good bad profit.
I've long used the term "better bad choice" to describe eating something that's unhealthy but not as unhealthy as it could be. Eating baked chip is a better bad choice compared to friend chips. Eating a pizza with half the cheese is a better bad choice. Dig?
Posted by: john moore | June 13, 2010 at 03:17 PM