Cash Store Financial: Out of the Shadows?
Is the Edmonton company changing its ways, or just its tactics?
by Tim Querengesser
Cash Store Financial is in trouble again – this time over its decision to offer lines of credit in Ontario. It says that it’s simply trying to serve customers better, but provincial regulators haven’t been convinced.
Illustration Dushan Milic
The neon ‘payday loans’ signs that once buzzed in windows in Ontario’s 178 ‘Instaloan’ and ‘Cash Store’ outlets weren’t silenced by the law. In February, Cash Store Financial turned the signs off itself, officially abandoning its best known product in its largest market. But the timing was interesting to say the least. On February 1, roughly one year after making public its intentions to become a direct lender rather than a loan broker, Cash Store Financial announced that it now exclusively sold lines of credit in Ontario. Four days later came another press release: the company calmly reported the province was working to revoke its payday operating license and that it would appeal. Then came the kicker: since it didn’t sell payday loans now, the company stated in the release that “the registrar’s proposal to revoke the companies’ payday loan licenses is not expected to cause any interruptions.”
Disagreements between Cash Store Financial and Ontario – and many other provincial regulators – date back to at least 2006, when Ottawa began transferring jurisdiction over payday loans to the provinces. At issue are fees the company charges for the money it provides, and whether these qualify as interest. The Criminal Code defines usury, or criminal interest, as anything above 60 per cent per year. Cash Store Financial charges well under that 60 per cent limit, but then tacks on “brokerage fees” that can push the effective financing costs far above it.
According to Evan Minsky, an analyst with Canaccord Genuity, the company sees these fees payment for its services, such as assessing an otherwise unbankable customer’s credit and acting as their “intermediary” with a third-party lender. And without these fees, some say, it’s questionable whether the payday business would even be a viable one. A 2004 study by Ernst & Young found the cost of lending $100 through payday loans was between $15 and $21, thanks mostly to operating costs and bad loans. According to Minsky, even with brokerage fees Cash Store Financial’s business model is “not overly profitable.”
Yet the provinces haven’t shown much sympathy. Payday lenders, which a 2006 federal law made exempt from laws that define criminal interest, have nonetheless seen the maximum amount of interest they’re allowed to charge reined in to just 17 per cent on every $100 borrowed in Manitoba, 21 per cent in Ontario and 23 per cent in Alberta, B.C. and Saskatchewan. The company has long tried to separate loan interest from brokerage fees for this reason, but regulators and judges haven’t always agreed that it’s legal. In 2008, a statement of claim in a class action in Ontario asserted that Cash Store Financial charged “in excess of 1,200 per cent” interest on payday loans because of those extra fees, and the court awarded the plaintiffs $3 million. A case launched by a provincial regulator in B.C., set to be decided this May, could cost the company another $1 million.
Legal troubles have always been part of doing business for Cash Store Financial, but credit lines have not. Is the decision to offer them a sign the company, founded in Edmonton in 2001, is finally graduating from the back-alley shadows of payday loans to the sunnier, more respectable world of direct lending? Is it a strategic move for a company that, like any other publicly-traded entity, is looking to find ways to expand its margins and grow its top and bottom lines? Or is the decision to offer lines of credit in lieu of payday loans just another attempt by Cash Store Financial to evade regulators?
Payday loans arrived in the mid-1990s. Companies selling them gained notoriety during Money Mart’s cloying “It’s, like, $3 bucks on a hun” advertising campaign. But as the people who took out the loans frequently discovered, it turned out to cost more – a lot more – than that. Payday loan companies earned a reputation for their aggressive tactics recouping loans, like the now-banned strategy of roll-over loans that trapped people in debt and those much loathed additional fees. But research shows that desperation drives much of the clientele to accept this. A 2009 study in Alberta conducted by Leger Marketing found that 40 per cent of those using payday loans used them to pay overdue bills, had incomes far below the median and used the products as a last resort.
The dilemma for regulators is that there’s no better alternative. The consensus in Ottawa has been that the devil that’s supervised at the fringes of loaning is better than the underworld that isn’t. A 2006 parliamentary report on payday lending found that Canada’s big banks ignore a large chunk of working people who need small amounts of short-term credit (and this was before the 2008 meltdown, after which lending dried up for clients with even marginally bad credit). And so, while the parliamentary report notes that fees charged by payday lenders can push the effective interest on loans as high as 1,200 per cent, closing them down would push customers to “turn to less desirable, underground credit options, including organized crime and loan-sharking.”
That’s partly why, in 2006, Ottawa began transferring full payday lending control to the provinces, allowing them to set interest rates outside the Criminal Code to allow for profits but also better protect consumers. In turn, Alberta, Ontario, Manitoba, B.C. and others have created home-grown payday lending laws. Before and after the shift, the Canadian Payday Loan Association, based in Hamilton, has pushed for the once unenforced regulations to be tightened, says president Stan Keyes. The result, Keyes says, is that customer complaints are down as much as 90 per cent (though, in 2011, payday lenders ranked sixth in consumer complaints in Ontario, with 1,067 cases), while a profitable business has been left intact.
But Minsky notes that all’s not well in the industry. “You could make the case that it’s not an overly profitable segment, based on the results that these companies are putting up,” he says. For Cash Store Financial, there’s a strong business case for leaving payday loans and switching to lines of credit. The company’s current customers tend to use the product about six times and then disappear, he says. “With this new product they’re hoping to retain customers beyond the past lifecycle,” Minsky says. “I don’t know if it’s necessarily [the goal] to be a bank, but they want to sort of fill this niche right outside the banking segment. You have the payday lenders and the banks, and between those you have a really wide gap. They’re trying to get in that gap.”
The upside is that customers will potentially stay longer, Minsky says, and take on bigger loans. At the moment, the credit lines offered in Ontario (and similar but not identical ones offered in Manitoba, where payday loans are also gone) see near identical, payday-like interest rates and brokerage fees for a third-party credit line on the bottom two tiers. But at the top tier, which customers must graduate to, the loans are directly with Cash Store Financial, feature lower interest rates and help build customer credit scores, Minsky says. The maximum loan in the top tier of the credit offerings is $2,000, versus the average payday loan of just $280.
While the business case for shifting to lines of credit may be sound, the company isn’t doing it strictly for business reasons. Credit lines are a federally regulated product, “and that’s also partly why this line of credit move was made,” Minsky says. “It brings them outside of provincial oversight.” Ontario had objected to Cash Store Financial’s payday lending methods, as well as to them offering other products. And outside those provincial regulations, potential profits are higher – the maximum payday loan is $1,500, while credit lines are already being offered by Cash Store’s competitors for up to $5,000.
Of course, the exemption from the Criminal Code also disappears. That’s what many in the lending industry don’t quite understand about Cash Store Financial’s move. Though he refuses to speak about the company directly because it’s not a member of his organization, Keyes notes that any broker who sells a product other than a payday loan could be waiving provincial protections and expose itself to the Criminal Code, where breaking the rules means jail time. “If a company chooses to offer a product that provides people a loan but does not fall under [Ontario’s] Payday Loan Act, well you know,” he says, letting the sentence trail off. “All our members are saying ‘We have a payday loan product, we’re regulated, we have caps on fees and we’re satisfied.”
When it comes to interest charges, the line between criminal and just extreme is one that has shifted thanks to payday lenders. The 2006 parliamentary report notes that since Canadians show willingness to pay more interest on loans than their laws permit, allowing payday lenders to survive is in the public interest, lest organized crime fill the unmet demand. But time will tell whether Ontario and Ottawa are satisfied that Cash Store Financial (which declined to comment for this story) its new credit lines – which aside from the top-tier product are effectively brokered loan with fees and a new name – hasn’t created a legal loophole. Their ultimate decision could define the future direction of the industry.