Cash Connection Case 8 Teaching Notes

Case 8 Teaching Note

Cash Connection: Are Its Payday Lender Strategy and Its Business Model Ethical?

Overview

The payday advance service, which issues short-term cash lending to borrowers, emerged in the early 1990s, and grew as a result of robust consumer demand and changing conditions in the financial services marketplace. A number of changes in the marketplace prompted growth, including:

1. The exiting of traditional financial institutions from the small-denomination, short-term credit market; a change largely due to its high cost structure.

2. The soaring cost of bounced checks and overdraft protection fees, late bill payment penalties, and other informal extensions of short-term credit.

Today, industry analysts estimate that more than 22,000 payday advance locations across the United States extend about $40 billion in short-term credit to millions of middle-class households that experience cash-flow shortfalls between paydays. This number is higher than the 9,500 banks located throughout the United States.

Throughout the U.S., governments on every level are looking at payday loan outlets with increasing concern. Many people think that they take advantage of low-income people in financial trouble. Some go as far as to say they “prey” on them through fees and interest charges. Still, those providing the loans argue that they’re filling a need and not doing anything illegal. Analysts who closely follow the industry have estimated that about 5% of the U.S. population has taken out at least one payday loan at some time and that more than 24 million Americans are likely to obtain a payday loan at some point in the future.

Payday lending companies service the heart of America’s working and middle class of individuals. The fact that most borrowers have relationships with mainstream financial institutions means that payday lending firms are at competition with other credit service medians such as traditional banks, credit cards, and credit...