Global consolidation in the payday loan industry and a trend toward short-term consumer loans being made through the Internet enabled owners of Vancouver's Credilogic to sell their venture for US$12 million to Kansas-based QC Holdings Inc. (Nasdaq:QCCO).
QC, which operates 500 payday loan stores in the U.S., announced October 13 that it was diversifying its revenue streams by expanding to Canada and the world of online loans by buying Credilogic.
“We're not as diversified as any of our competitors,” QC's CEO Darrin Andersen told Business in Vancouver the next day. “This is an attempt to get us there.”
Credilogic generated about $7 million in revenue in the past year by providing small consumer loans via the Internet that are up to two weeks in duration and can be deposited in customer bank accounts within 30 minutes of being approved. Most of the loans are between $300 and $400 and are aimed at people who can prove they have a job and bank account and are a good credit risk.
“Someone might face missing a payment on a utility bill where the fee to miss the bill is $45. Add a $45 non-sufficient-fund charge from a bank and you're facing $90 in fees,” said Credilogic co-founder and president Nathan Slee. “Or you could be facing a $17 charge for each $100 that you borrow from us.”
Canadian law allows provinces to regulate payday loans, which are not subject to conventional interest rate limits as long as the loan is not larger than $1,500 and the term is no more than 62 days, Slee said.
Many provinces limit the fees payday loan companies can charge for loans. The current fee range for a two-week, $100 loan is between $17 (Manitoba) and $25 (Nova Scotia).
Despite persistent global economic uncertainty, QC Holdings is not the only payday loan company to make an acquisition. Nor is it the only bricks-and-mortar consumer loan provider to launch or expand its online loan business through acquisition.
Kansas-based Speedy Cash expanded its online payday loan business when it bought Ontario's CashMoney in May for about $100 million. One month earlier, Philadelphia's Dollar Financial Corp. (Nasdaq:DLLR), which bought Victoria-based Money Mart in 1996, spent US$195 million to buy U.K.-based Purpose U.K. Holdings Ltd. – the parent of the Month End Money chain, which is Britain's largest online consumer loan provider.
Dollar Financial followed that up in July with the US$46 million purchase of Finland's Risicum Oyj., which provides loans in Finland primarily via the Internet and mobile phones. Dollar Financial also diversified late last year into pawn loans, secured by gold and jewelry, when it bought Sweden's Sefina for US$73 million.
“It's been very difficult for traditional street-front payday loan businesses to build an Internet platform,” Stephens Inc. consumer finance analyst David Burtzlaff told Business in Vancouver. “Cash America [International Inc. (NYSE:CSH)] also got into the Internet business in 2006 through an acquisition.”
Burtzlaff said one challenge for large payday loan companies, which are focused on bricks-and-mortar operations yet want to attract younger tech-savvy customers by expanding via acquisition into online loans, is that North America has few businesses focused on online loans. That made Credilogic a desirable acquisition target.
Large payday loan companies trying to develop their online business face huge startup and customer acquisition costs.
“You'll get a lot of first-time customers, and they'll be your biggest business risk,” Burtzlaff said. “There will be a lot of losses up front with people not paying you back. Until you can weed out those customers and get more repeat business, your loss rate will be high and your customer acquisition costs will also be high.”
Payday loan companies have closed storefront locations as Internet-based loans surge – another trend that made the Credilogic acquisition attractive.
QC almost bought Credilogic in late 2008, in the lead-up to the October stock market crash.
“It was a week before the big disaster when they said, ‘We're going to hold off,'” Slee said.
He, his three silent partners and 25 staff consequently returned to focusing on building the company as a private entity. Then, in late 2010, an investment banker phoned Slee with news that QC was again interested. Negotiations ensued, and a deal was struck just as the stock market started to plunge again.
“It absolutely had a déjà vu feel to it,” said Slee, who will remain with QC as its director of strategy. “We were thrilled that we were able to pull this deal off in this environment.” •
