Steal This Sector: Payday Loans
The payday loan industry generates $11 billion in revenue. It is also a hated, predatory sector that uses its size to influence legislation in order to keep it alive and growing. It’s an industry that everybody hates, but nobody has a clear answer on how to counteract it because it is essentially a monopoly. It goes where banks are afraid to tread and preys on the "unbanked"—nearly one-third of the U.S. population is "unbanked" or "underbanked." That’s a lot of people in need of affordable financial services. Much of this population is also the population that the nonprofit sector serves.
While nonprofit policy activists have tried to push for legislation to limit what the payday sector can do and how much it can charge to its mostly low-income customers, the sector spent more than $15 million to influence the 2013-14 election cycle. No one in the nonprofit sector can simply compete with the payday loan sector on a legislative sector.
This is why nonprofits need to stop fighting this sector on a policy level. There is no way to win this fight—it’s the wrong battlefield.
If You Can’t Fight ’Em, Join ’Em
As you can imagine, the users of payday loan stores are incredibly price-sensitive and have zero brand-loyalty. If "unbanked" consumers had an alternative solution, they would flock to it. This is why the nonprofit sector should steal this entire industry. Nonprofits can and should set up their own payday loan stores and simply undercut the for-profit predators. Nonprofits that provide financial services to virtually the identical population—removed of their need to churn a profit to shareholders, their mission-driven values and their outside funding to actually provide financial services—can simply charge less and provide superior services.
This pivot to provide the same services as payday loan stores will kill off the industry while providing the nonprofits with sustainable earned revenue to continue their missions. The for-profit payday lenders will not be able to compete on price, service and benefit to the community and will go out of business.
This is not just a thought exercise, it’s starting to happen but it hasn’t reached the scale it needs to really damage the for-profit lenders. In Oakland, Calif., there is the example of Community Check Cashing (CCC), which is a program of Community Development Finance, a 501(c)(3) tax-exempt nonprofit organization.
Community Development Finance opened what I believe to be the first and only nonprofit, full-service, stand-alone check-cashing store in the country in May 2009 in the Fruitvale neighborhood of Oakland, Calif. CDF offers below-market rates, prices and fees and a broad range of targeted financial services designed to help low-income families move out of poverty, including financial coaching and small-business services.
CCC tries to operate the store on a social-enterprise model: a nonprofit check-cashing institution in which the check-cashing services component of the operations is financially sustainable through earned revenue while the donations and grants support the coaching, social services and administration.
Every nonprofit that helps people to any sort of financial service, be it credit repair, financial education or simply working with low-income individuals, should steal this idea and steal the sector away from the predators that are keeping the population that those nonprofits are serving in a cycle of poverty.
Check out this national map of the payday loan sector to see what’s going on in your state. Right now 27 states allow payday loan APRs of 391 percent or higher. It’s simply not acceptable, but nonprofits need to think like capitalists to bear capitalists in a capitalist society. Here is a industry with little to no competition, high earnings and a captive market with no loyalty. Only the nonprofit sector can slay this sector, because we have no profit motive and we have access to alternative funds to subsidize any losses. If your nonprofit is looking for a social enterprise to generate revenue and do good in, I can think of no better business to get into.
Tivoni Devor, MBA, has spent his entire career in the nonprofit sector. While working for diverse institutions in many roles, Tivoni has often found himself developing earned revenue models and designing strategic partnerships. Tivoni currently works as manager of partnerships and outreach at Urban Affairs Coalition, where he helps social entrepreneurs leverage fiscal sponsorship to jumpstart their nonprofit endeavors. Tivoni lives in Philadelphia, with his wife Jennifer and daughter Ava. The thoughts and content of his columns are his and his alone.