Payday lending: fixing a broken market - ACCA Global

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Payday lending: fixing a broken market - ACCA Global
Payday lending: fixing a broken market
About ACCA
                                                             This report analyses online payday
                                                             lending business models and
                                                             outlines a proposed framework to
                                                             be used to determine the level for
                                                             the cap on the cost of credit, which
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2   2014
Payday lending: fixing a broken market

Sarah Beddows,
Independent Consultant


Mick McAteer,
Financial Inclusion Centre.

Thanks to Robin Jarvis, Special Adviser, ACCA and Professor of Accounting at Brunel University.


1. Introduction                                     7

2. The structure of the UK payday lending market   10

3. Literature review                               12

4. Data sources                                    13

5. Customer Acquisition Cost                       15

6. Default                                         25

7. Rollovers and refinancing                       40

8. Intensity of use                                46

9. Market failure                                  54

10. Framework for setting the Rate Cap             60

11. Conclusion                                     65

12. Technical appendix                             66

References                                         69

1. Introduction

In 2012 over 12m short-term cash                 Figure 1.1: Total UK originations (billions)
advance or ‘payday’ loans1 were
arranged in the UK. A total of £3.7bn-
worth of credit was extended in this way
and UK borrowers paid over £900m in                 4                                                            £3.709
interest and charges.2 The lack of
appropriate regulation, post-crisis                                                                     £3.016
constrictions in traditional forms of
unsecured lending and a large
population struggling with falling real             2                                         £1.902

incomes have combined to create an
attractive market for payday loans in the           1                       £0.780
UK. As we can see in Figure 1.1, growth                            £0.508
since 2006 has been explosive.                            £0.330
A payday loan is a small, short-term                       2006     2007     2008     2009      2010     2011     2012

unsecured loan with both principal and
interest scheduled to be repaid on a             Source: 2006 and 2009 figures from Burton 2010; 2011 and 2012 estimates based on lenders’ financial
single date. The average payday loan is          statements. All other years are interpolated.4
currently around £270 for 30 days
(Office of Fair Trading 2013b). Payday
loans represent one of the highest-cost
forms of credit available, interest
charges range from £15 to £35 per £100
borrowed for 30 days, equivalent to
between 448% and 3,752% Annual
Percentage Rate (APR). Late payment
and transmission fees further increase
the Total Cost of Credit (TCC)
associated with these small loans.
Payday loans are the fastest way to
obtain credit: first-time, store-based
loans take about an hour to process
(BBC One 2012), first-time online loans
can take as little as 15 minutes,3 and
repeat loans are even faster to obtain.
Online lenders are open 24 hours a day
seven days a week.

1. The generic term ‘payday loan’ is used
throughout to refer both to traditional payday
loans and short-term cash advance loans.

2. Estimates based on lenders’ financial
statements and Office of Fair Trading (2011a)
estimates of market shares.
                                                 4. In their Payday Lending Compliance Review Final Report, The Office of Fair Trading (2013b) appear to
3. Online lenders’ own estimates from their      have based their estimate of the size of the UK payday lending market of £2.0bn to £2.2bn on ‘initial loans’
websites.                                        only. We include all loans in order to allow comparison between years.

  PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                                                   7
Those in favour of payday loans typically         Credit Act and other legislation’ (Office   SMALL LOANS – HIGH CHARGES
advance one of four main arguments in             of Fair Trading 2013b: 2) and that
support of the product. First, the high           ‘Payday lenders are also not meeting        The payday lending industry’s principal
interest rates charged simply reflect the         the standards set out in our                defence of the high interest rates
high costs involved in providing small            ‘Irresponsible Lending Guidance,            charged is that they simply reflect the
sum, short term loans. Second, the low            (Office of Fair Trading 2013b: 2) The       high costs involved in providing small
absolute cost of each loan means they             entire industry has now been referred to    sum, short-term loans (see, for example,
are often cheaper than alternative                the Competition Commission and the          Booth 2012). This implies that their
sources of short term credit such as              Banking Reform Bill will confer a ‘duty     pricing policy is based on a cost plus
unauthorised overdrafts. Third, the               to cap interest rates’ (HM Treasury 2013)   pricing methodology.
‘bullet’ structure (principal and interest        on the Financial Conduct Authority
repaid on a single date) of payday loans          (FCA).                                      The Consumer Finance Association
makes the product simple to                                                                   (CFA) currently has this Industry Briefing
understand and means prolonged                    The level and form of this new interest     regarding APRs on its website: ‘the
indebtedness is less likely. And fourth,          rate cap is yet to be determined. There     costs of lending this way are high. The
lenders have a clear incentive to lend            are questions, however, as to whether a     cost of lending someone a small
responsibly: they want to get their               cap on APR alone will be sufficient to      amount, eg £200, is the same as lending
money back. For its supporters, a                 make the payday lending market              a larger amount, eg £5000. It entails the
payday loan is a useful income-                   function well for borrowers. In             same credit checks, bank verification
smoothing tool with clearly stated                particular, the potential for lenders to    checks, fraud prevention checks and
terms.                                            derive revenue from interest charges        regulatory requirements including
                                                  and from default fees and interest          anti-money laundering, mental capacity
On the other hand, critics assert that            accrued post-default means a cap on         and responsible lending checks.
the very high interest rates charged are          the TCC may well be more appropriate.       Underwriting 25 × £200 loans (£5,000
predatory by definition (see, for                                                             total) clearly increases the cost to the
example, Mendick 2012). They argue                The purpose of this report is to develop    lender 25 fold.’ (Consumer Finance
that the bullet style of repayment makes          a detailed understanding of the             Association 2013b)
payday loans very hard to repay and               business models driving UK payday
means borrowers are often sucked into             lending in order to inform the debate       Similarly,’s founder and
a ‘debt spiral’: unable to pay back their         about the level and structure of the new    former CEO Errol Damelin commented
first loan they take another loan (called         interest rate cap and to examine which      that ‘We do small, short-term things,
‘rolling over’, ‘extending’, ‘refinancing’        other regulatory interventions may be       and the cost of delivering that service is
or ‘renewing’), incurring more and more           necessary to create a small-sum lending     high’ (Shaw 2011). The CFA further
charges. And they are concerned that              market which allows lenders to innovate     argues ‘Set the rate (cap) too low and
the increasing numbers of borrowers               and also delivers good outcomes for         payday lenders will no longer be able to
reporting problems repaying such                  borrowers. This report is designed to       afford the high operational costs ...
loans5 constitutes clear evidence of              support the ongoing work of the             thereby putting them out of business’
irresponsible lending.                            Competition Commission (CC) and the         (Consumer Finance Association 2013b).
                                                  FCA, but it may also be of interest to
The industry’s own regulator, the Office          consumer groups and, ultimately, to         Determining how much ‘headroom’ – in
of Fair Trading (OFT), has found that             investors.                                  the form of profit and costs which could
‘The payday loans market is not working                                                       be reduced while still providing loans –
well for many consumers. Our review                                                           exists in prevailing business models is
has found evidence of widespread                                                              therefore now critically important in the
non-compliance with the Consumer                                                              determination of a cap that is fair both
                                                                                              to borrowers and lenders.

5. For example, the number of people contacting
the Consumer Credit Counselling Service (CCCS;
now called ‘StepChange’) about payday debt
more than doubled between 2010 and 2011 (Hall

This report will examine in detail the        We explore the potential for adverse        Could a new framework be devised to
following areas.                              selection and product design to             determine the level of the new rate
                                              contribute to high levels of defaults.      cap?
Do charges faced by borrowers really                                                      We outline a proposed framework for
correlate to the operating costs              How profitable are rollovers?               determining the level of the new rate
incurred by lenders? What are the             We extend the simple model using a          cap. We argue that the low elasticity of
costs involved in providing online            theoretical distribution of rollovers       demand exhibited by existing payday
payday loans?                                 based on that found in the OFT’s            borrowers makes a ‘cost plus’ approach
To answer these questions we construct        Payday Lending Compliance Review            to pricing inappropriate for this market.
a simple model using cost information         Final Report (Office of Fair Trading        Building on the work of the National
taken from Cash America’s financial           2013b) and find that rollovers are          Consumer Law Center in the US we
statements. We argue that the level and       disproportionately profitable –             argue that affordability should be of
structure of advertising and marketing        accounting for 200% of our model            primary importance in setting the new
costs exceed income on first-time loans.      business’s profits. (Rollovers are loan     rate cap and that the patterns of
If this is the case then online business      extensions. They are fully defined and      repayment and default experienced by
models are reliant on repeat lending for      discussed at the beginning of Chapter 7.)   existing payday borrowers can help
their profitability.                                                                      inform our thinking about affordability.
                                              Has innovation in the form of
What proportion of lenders’ revenues          charging interest on a daily basis
is absorbed by losses due to default?         actually resulted in shorter, cheaper
We examine the relative riskiness of          loans for borrowers?
online and retail payday lending in           We construct another simple model
the UK.                                       using revenues earned, average loan
                                              sizes and average loan lengths taken
We develop a simple methodology to            from’s 2011 financial
estimate the numbers of loans                 statements in order to examine the
borrowers have difficulty repaying,           possible distributions of loan sizes and
using the percentage of revenues              lengths.
lenders are willing to lose to defaults. It
is not surprising that these estimates        Why is competition not working for
are broadly consistent with the OFT’s         consumers and which policy options
finding that ‘...around a third of loans      could improve the functioning of the
are repaid late or not at all.’ (Office of    payday lending market?
Fair Trading 2013b: 2)                        We examine market failure and argue
                                              that there is a risk that multiple loans
We develop an understanding of the            allow lenders to finance each others’
distribution of defaults and argue that       activities – more payday loans may lead
if, as the evidence suggests, elevated        to more payday loans.
losses are associated with new
borrowers, this increases prevailing          We also argue that existing regulation
business models’ reliance on repeat           may allow ‘bad’ behaviours to be more
lending for their profitability.              profitable than ‘good’ ones and that
                                              this can lead to the crowding out of
We examine the extent to which                responsible lenders.
defaults are a function of the
creditworthiness of the pool of
borrowers and the extent to which they
are the function of underwriting

  PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                         9
2. The structure of the UK payday lending market

There are two markets for payday              THE IMPORTANCE OF THE ONLINE                           Similarly, the OFT, consumer advocacy
lending in the UK, the retail market and      BUSINESS MODEL                                         groups, and lenders all report little
the online market. These markets have                                                                overlap between the online and retail
distinct characteristics and customer         Online payday lending is a distinct                    customer bases in the UK. Online
bases.                                        business from traditional retail payday                lenders have reached different
                                              lending. Online lending businesses                     demographic groups, attracted by the
THE RETAIL MARKET                             face:                                                  anonymity and speed of online loans
                                                                                                     (and, no doubt, encouraged by high-
Payday lending first started in the UK in     •   lower operating costs                              profile advertising campaigns).
pawnbroking and cheque-cashing shops.
There are currently estimated to be           •   higher marketing costs – in                        The focus of this report is the online
around 1,800 stores providing payday              particular the use of third party ‘lead            market for a number of reasons:
loans as part of their product offering.          generators’ – companies that
For some alternative financial providers          specialise in sourcing the personal                •   The online market is significantly
payday lending provides a significant             details of prospective borrowers                       larger than the store based market
revenue stream, while for others it is a                                                                 with around two thirds of loans now
small part of their overall business.         •   higher loss rates due to greater                       originated online.8
                                                  difficulties in assessing
The retail market is dominated by two             creditworthiness and preventing                    •   The online market is growing faster
US companies: Dollar Financial and                fraud.                                                 than the store-based market and is
Axcess Financial (both of which operate                                                                  of increasing importance.9
under multiple brand names on the             The online and retail business models
high street). Other retail lenders            are significantly different; this is                   •   Online loans carry higher charges
include: Cash Converters, Albemarle           evidenced by the fact that successful,                     than store-based loans, so
and Bond/Herbert Brown (which                 experienced retail lenders have not                        prolonged use carries a greater risk
recently acquired a small online lender).     always been able to make the online                        of consumer detriment.
Ramsdens and, until recently, H&T             business model work. In the US the
(Farrell 2013), all of their operations are   largest retail lender does not underwrite              •   Default rates among online
dwarfed by those of the big two.              online loans, choosing instead to act as                   borrowers are significantly higher
                                              an online broker for a competitor.6 In                     than among store-based
It is difficult to comment in detail on the   the UK few retail lenders underwrite                       borrowers.10
business model driving retail payday          online loans and those that do have
lending for two reasons:                      typically grown via the acquisition of
                                              established online businesses.7
Most of the retail providers are privately
owned (rather than listed on a stock
exchange) making it difficult to obtain
detailed information about their                                                                     8. Evidence from lenders’ financial statements
                                                                                                     combined with the OFT’s analysis of overall market
operations.                                                                                          size and 2010 online market shares (Office of Fair
                                                                                                     Trading 2011a).
The ‘multiline’ nature of the business.
                                                                                                     9. Evidence from lenders’ financial statements
Retail payday loans are always offered                                                               combined with OFT estimates of 2010 online
as part of a broader product offering,                                                               market shares. The rapid growth of online lending
there are no standalone payday lending        6. Cash America’s subsidiary,           is best illustrated by considering Cash America
shops in the UK. This means that while        (formerly Enova), offers online loans marketed         and, both of which operate exclusively
                                              through Advance America’s website www.                 online and entered the UK market in 2008. In 2012
revenue streams can be categorised by                                     they accounted for over £1.75bn of the total £3.7bn
product, even lenders themselves find it                                                             of credit extended – that Is over 47% of the
                                              7. Dollar Financial has expanded into the UK
difficult to accurately attribute costs to                                                           combined retail and online markets.
                                              online lending via the acquisition of various online
different products offered in the same        lending businesses, including Month End Money          10. A detailed discussion of levels of default in
shop.                                         (MEM). Cash America expanded into global online        both retail and internet businesses is presented in
                                              lending via the acquisition of CashNetUSA/Enova.       Chapter 6, ‘Loss rates’.

This report concentrates on the three
biggest online lenders operating in the
UK: Dollar Financial, Cash America, and These lenders have been
selected for three main reasons:

•    They are the largest lenders:
     together they account for around
     70% of the online payday lending
     market in 2010 (Office of Fair Trading

•    They are among the most
     responsible lenders operating in the
     UK. The purpose of this report is not
     to highlight areas of exceptionally
     poor practice by ‘rogue’ lenders,
     but to further the understanding of
     the online payday lending market as
     a whole.

•    It is possible to bring together
     sufficient data to understand the
     business models of each of these

3. Literature review

UK RESEARCH                                     a two year period have 12 payday        loans were significantly higher than the
                                                transactions in their second year of    costs associated with repeat loans. They
This is a relatively new product in the         borrowing, up from 9 transactions in    concluded that, ‘The operating costs of
UK so there has been little prior               the first year. In addition, evidence   servicing new customers represent over
research into payday lending here.              suggests that borrowers’ loan sizes     85% of the total costs across the
None of the existing UK research deals          increase after their initial loan.’     industry.’(Ernst & Young 2004: 34) And,
with the payday lending business                                                        ‘Clearly, the long-run survival of a
models, or with the relative profitability   The profitability of repeat lending        payday loan operator will depend on
of first-time and repeat loans, focusing     A number of attempts have been made        achieving a steady repeat customer
instead on international regulatory          to assess not just the revenues            business’ (Ernst & Young 2004: 37)
alternatives and borrowers’ reported         generated by repeat borrowing but the
experiences.                                 profitability of repeat borrowing.         (It should be noted that when the
                                             Stegman and Faris (2003) used loan-        CACFS commissioned a number of
INTERNATIONAL RESEARCH INTO                  level data from payday lending stores in   follow-up reports into the cost of
RETAIL PAYDAY LENDING BUSINESS               North Carolina to conclude that repeat     providing payday loans in individual
MODELS                                       business was a key determinant of          Canadian provinces, data on the
                                             financial performance. Conversely,         relative costs of first-time and repeat
Revenues from repeat lending                 Flannery and Samolyk (2005), again         loans do not appear to have been made
In the US, where payday lending is well      using loan level data provided by US       available again.)
established, concerns have frequently        payday lenders, concluded that while
been raised about the length of time         repeat borrowing contributed to loan       While providing by far the best available
borrowers remain indebted to lenders         volumes it is no more profitable than      insight into the payday lending business
and the proportion of revenues               first-time borrowing. Both these studies   model, the scope of the Ernst and
generated by repeat loans (King and          used multivariate regression analysis to   Young report is limited to costs; it
Parrish 2011; King, Parrish and Tanik        determine the impact of repeat             contains no analysis of how revenues
2006). The Center for Responsible            borrowing on revenues (Stegman and         and therefore profits are generated. It
Lending, based in Durham, North              Faris 2003) and profitability (Flannery    also does not go far enough in its
Carolina, has published two reports of       and Samolyk 2005). While regression        analysis of patterns of default. Losses
particular relevance:                        analysis is a useful tool, it has many     due to default are assumed to be evenly
                                             limitations and is by no means a           distributed across all loans when, in
•    Financial Quicksand (King, Parrish      substitute for the business model          fact, loans to new borrowers carry a
     and Tanik 2006) used data from          approach this analysis takes.              greater risk of default, further increasing
     regulatory databases and found that                                                the costs associated with first-time
     90% of retail payday lenders’           In 2004, Ernst & Young was                 loans. It also contains no analysis of the
     revenues come from borrowers who        commissioned by the Canadian               online lending business model, as the
     take five or more loans per year        Association of Community Financial         vast majority of payday loans were
                                             Service Providers (CACFS – the payday      originated in store rather than online in
•    Payday Loans Inc. (King and Parrish     lenders’ industry association whose        2004.
     2011), tracked 11,000 borrowers over    members include both Dollar Financial
     the two years following their first     and Cash America) to conduct an
     loan and found that ‘in their first     objective, independent survey on the
     year of payday loan use, borrowers      costs of providing payday loans. The
     are indebted an average of 212 days.    resulting report, The Cost of Providing
     Over the full two-year period,          Payday Loans in Canada was prepared
     borrowers are indebted a total of       with the cooperation of 19 payday
     372 days on average;’ and that          lenders and provides the best available
     ‘Payday borrowers’ loans increase in    analysis of the business models of
     size and frequency as they continue     payday lenders. Crucially, Ernst and
     to borrow. Those payday borrowers       Young identified that the costs
     who continue to take out loans over     associated with providing first-time

4. Data sources

The principal motivation behind this                     Also, in the case of Dollar Financial and             High-level information on the market in
report is the need to improve                            Cash America, both of which are                       general is drawn from the publications
transparency. The biggest barrier to                     publicly traded, additional information               and press releases of the CFA – the
fully informed debate about payday                       needed to separate information                        trade body representing 70% of UK
lending in the UK is a lack of hard data.                pertaining to their UK operations from                payday lenders, including Dollar
Payday lenders are currently under no                    information pertaining to their                       Financial and Cash America – and the
obligation to release data into the                      international operations and to enhance               OFT, and from a report by the Personal
public domain, where independent                         the analysis of costs and patterns of                 Finance Research Centre at the
researchers would be able to carry out                   default is drawn from investor relations              University of Bristol (2013).
their own analysis of the industry and                   materials and earnings calls.12
individual firms operating in the market.                                                                      All information used is publicly
This report aims to bridge this                          In the case of, which is                    available.
information gap as far as possible:                      privately held, additional information is
                                                         drawn from their Written Evidence to                  (This work has been undertaken on a
In order to ensure the accuracy of                       Parliament, testimony to the Public                   ‘best efforts’ basis and enormous care
calculations, only lenders’ own data                     Accounts Committee, company                           has been taken to maintain a high level
regarding costs and revenues contained                   approved interviews in the press, and                 of accuracy and to provide a fair
in their published financial statements11                statistics provided via their                         representation of lenders’ activities. By
are used.                                                OpenWonga website.                                    necessity some assumptions are made.
                                                                                                               These are explicitly highlighted in the
                                                                                                               text and the basis on which they are
                                                                                                               made is fully explained.)

                                                                                                               Table 4.1 presents a summary of
                                                                                                               statistics for the ‘big three’ lenders for
                                                                                                               2011. (The most recent year sufficient
                                                                                                               information can be found in lenders’
                                                                                                               financial statements.)

                                                         12. An earnings call is a conference call in which
                                                         senior management of a listed company discuss
                                                         the company’s results with a panel of investment
                                                         analysts. It is intended to provide investors and
                                                         analysts with deeper insight into the company’s
11. For these consist primarily of their       operations. Cash America and Dollar Financial
accounts filed at Companies House and their 2012         webcast their earnings calls via their investor
published annual report. For Dollar Financial and        relations websites. For this report the relevant
Cash America these consist of their statutory            earnings calls were accessed via the lenders’
filings with the Securities and Exchange                 websites as they became available and were
Commission (SEC), in particular, the “Form 10k”          transcribed by the authors. Interested readers
– a detailed, audited annual filing essentially a very   may access historical earnings calls free of charge
detailed annual report and “Form 10q” – a less           at or transcripts may be
detailed, unaudited quarterly filing.                    purchased from a number of online providers

  PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                                                13
Table 4.1: Statistics for 2011

                                                                                                        Dollar            Wonga            Cash America
                                                                                                        (Online only)
Total credit extended                                                                                  £495ma            £707me            £507mh

Total revenue                                                                                          £122ma            £184me            £114mh

Revenues as a % of credit extended                                                                     25%               26%               22%

Losses as a % of revenues                                                                              35%    b
                                                                                                                         36%   e

Average loan size                                                                                      £270 c            £287f             £336 h

Average revenue per loan                                                                               £66               £75               £75

Average number of loans per borrower                                                                   3.68   d
                                                                                                                         3.00   g
                                                                                                                                           3.68 d

Average revenue per borrower                                                                           £243              £225              £276

Key and sources
a Includes estimated full-year activities of Month End Money (MEM). Source: Dollar Financial 10ks and 10qs.(DFC Global Corp 2011a, b, c and 2012b) MEM
accounts filed at Companies House (MEM 2011)
b Includes estimated full-year activities of Month End Money (MEM). Source: DFC Global Corp 2012a
c Source: OFT2013b
d Source: Consumer Finance Association 2012a
e Source: accounts filed at Companies House ( Limited 2012)
f Source: accounts filed at Companies House ( Limited 2012)
g Source:.UK Government 2011
h Source: Cash America 2012a
i Source: Cash America 2012a

5. Customer Acquisition Cost

Lenders’ principal justification for their   However, if operating costs are the            WHAT IS CUSTOMER ACQUISITION
high charges is that the set-up, or          principal determinant of payday interest       COST?
operating, costs of a loan (things like      rates, firms facing the lowest costs
credit checks, verification of borrowers’    should charge the lowest interest rates.       Customer Acquisition Cost (CAC) is the
details, setting up payments, etc) are       Why, then, do online lenders, who face         cost to a business of acquiring each
broadly the same regardless of the           substantially lower operating costs than       new customer. CAC is computed as
loan’s size and length. This,                retail lenders, charge the highest APRs?       total acquisition cost, ie the sum of all
unavoidably, makes small-sum, short-                                                        expenses related to introducing new
term loans such as payday loans very         Far from competing with retail payday          customers to the company’s goods and
expensive in APR terms.                      lending and driving prices down in both        services, divided by the number of new
                                             markets, online payday lending charges         customers. For online payday lenders
The CFA currently has this Industry          started high and have remained high.           total acquisition cost includes money
Briefing regarding APRs on its website:      Why is this? What costs do lenders             spent (or revenue foregone) on the
‘the costs of lending this way are high.     actually face? A Dollar Financial              following:
The cost of lending someone a small          executive commented: ‘as we’ve said
amount, eg £200, is the same as lending      before internet loans typically carry          •   lead purchase
a larger amount, eg £5,000. It entails       higher loan losses but with significantly
the same credit checks, bank                 lower fixed operating costs than the           •   TV, radio and print advertising to
verification checks, fraud prevention        company’s existing store based                     new customers
checks and regulatory requirements           businesses in those countries.’ (DFC
including anti-money laundering,             Global Corp 2012a) One of Cash                 •   internet advertising (‘pay per click’,
mental capacity and responsible              America’s executives identifies the two            ‘pay per call’ and search engine
lending checks. Underwriting 25 × £200       key drivers of costs in his lending                optimisation) to new customers
loans (£5,000 total) clearly increases the   business as: ‘it’s a function of, obviously,
cost to the lender 25 fold’ (Consumer        loss rates, it’s a function of customer        •   sales and marketing headcount
Finance Association 2013b).                  acquisition cost.’ (Cash America 2012b)            costs attributable to new customer
Similarly,’s founder and           Loss rates and Customer Acquisition
former CEO Errol Damelin commented           Cost explain why online payday lenders         •   ‘Refer a friend’ programmes
‘We do small, short-term things, and the     charge higher prices than retail payday
cost of delivering that service is high’     lenders. They also have important              •   discounting of first loans
(Shaw 2011). The CFA further argues          implications for the length of time
‘Set the rate (cap) too low and payday       borrowers remain indebted and the              •   additional work involved in
lenders will no longer be able to afford     number of borrowers experiencing                   processing the borrower’s initial
the high operational costs…thereby           repayment difficulties.                            application
putting them out of business’
(Consumer Finance Association 2013b).        Loss rates, and the patterns of default        •   processing initial applications which
Determining how much ‘headroom’              they imply, are examined in detail below           are subsequently declined.
there is in existing business models is      in First Customer Acquisition Cost, the
therefore now extremely important.           total cost of acquiring a new borrower,
                                             is explored.

  PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                             15
How significant is CAC?                      THE RELATIONSHIP BETWEEN CAC                            marketing spend and the return it
Advertising and marketing often seem         AND REPEAT LENDING                                      generates. In the words of Dollar
like optional extras that help a business                                                            Financial ‘We actively measure and
grow but are not central to its survival.    No business spends more money on                        conduct testing of our advertising
However, online businesses often need        customer acquisition than it expects to                 programs to ensure we achieve a
to spend significant amounts on              get back through increased sales. For                   positive return on investment’ (DFC
advertising as they lack a physical          payday lenders increased sales means                    Global Corp 2012e: 16). Therefore,
presence with which to draw attention        more loans – specifically, more loans to                analysis of CAC yields very robust
to their products. For online payday         the same borrowers.                                     information regarding lenders’
lenders CAC is significant and a key                                                                 expectations of CLV and hence levels of
driver of overall profitability.             How many more loans? Each new loan                      repeat borrowing.
                                             generates revenue in the form of
Peer-to-peer payday lender Lending           interest charges and fees, but not all of
Well claims that CAC is one of the main      this revenue is available to offset the
reasons the APR of 4,200% it charges         CAC. This is because there are other
borrowers is so far above the rate of        costs associated with making loans,
return of 12% it pays investors. ‘One of     regardless of whether the borrower is a
the main reasons that payday lending         new customer or not, things like
can seem expensive is that the cost of       financing cost, some operating costs
customer acquisition, credit checking        and administrative costs, etc. Only the
and so forth is fixed and high’ (Insley      pre-tax profit – interest and fees minus
2012).                                       other costs but before taxes – is
                                             available to offset CAC. Lenders only
Removing or restricting CAC can              break even when the sum of all pre-tax
significantly reduce APRs, as in the case    profits13 the borrower generates – called
of US lender BillFloat (now called ‘Better   the ‘Customer Lifetime Value’ (CLV)
Finance’), which offers short-term loans     – exceeds the CAC. (To break even is
to utility companies’ customers via their    obviously a baseline scenario, in fact, a
websites: ‘BillFloat CEO Ryan Gilbert        good online business aims to generate
says his company’s loans, which max out      CLV many times greater than CAC.)
at $200 (£120), don’t exceed a 36
percent APR. The much lower cost             Whatever form it takes, CAC is always
doesn’t come so much from better risk        an up-front cost paid out by lenders
assessment, though that plays a part,        before even the first loan is repaid.
Gilbert says. Instead, he says, BillFloat    Lenders really put their money where
can keep its own costs low because it        their mouths (or, rather, their statistical
doesn’t have to spend money on               models) are when it comes to the
getting new customers. Rather than           amount they are willing to pay to
having to advertise, BillFloat just shows    acquire new borrowers. They are
up as another option alongside Visa          acutely aware of advertising and
and Mastercard when you sign in to pay
your bill’ (Wohlsen 2013).
                                             13. Technically, the pre-tax profit should be
                                             discounted from the date it is accrued to the date
                                             the CAC was incurred at the lender’s cost of
                                             capital. As we do not know when the borrower will
                                             take each loan and as the effect of discounting will
                                             always be to increase the number of loans required
                                             to break even (the lender’s cost of capital is always
                                             greater than zero) this step has been omitted in
                                             the interests of simplicity. The analysis presented
                                             here could be extended to add this extra level of
                                             complexity if required.


The relationship between CAC and CLV can be visualised            Figure 5.1: CAC and CLV at the inception of the
as a seesaw: on the left-hand side the CAC, the money             first loan
spent to get the borrower through the door, weighs the
seesaw down (Figure 5.1).

At the end of the first loan the borrower repays the
principal plus interest and fees generating a small pre-tax
profit for the lender; this money goes on the right-hand
side of the seesaw (Figure 5.2).
Each time a loan is repaid some more pre-tax profit is
generated and some more money can be added to the
right-hand side of the seesaw. It is only when the two sides
of the seesaw are perfectly balanced that the lender breaks
even and can start to make a profit (Figure 5.3).

For example, if CAC is £100 and pre-tax profit per loan is        Figure 5.2: Customer Acquisition Cost and Customer
£50 the lender breaks even when the borrower takes two            Lifetime Value at the end of the first loan
loans (2 × £50 = £100). If pre-tax profit is only £25, however,
the lender requires the borrower to take four loans
(4 × £25 = £100) in order to break even.

In the simple examples illustrated, each loan is equally
profitable. This need not be the case; perhaps the borrower                                             Loa n
takes a mixture of small and medium-sized loans,
generating a mixture of small and medium profits, or one                    CAC
large loan generating a single large profit. Whatever the
exact pattern of loans, one thing is certain: only when the
sum of the pre-tax profits adds up to CAC will the lender
begin to make a profit.

                                                                  Figure 5.3: Customer Acquisition Cost and Customer
                                                                  Lifetime Value at the end of the third loan

                                                                                                        Loan 3
                                                                             CAC                        Loan 2
                                                                                                        Loan 1

PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                 17

     By far the best insight into CAC comes from the prospectus                     Cash America do not customarily split out details of their
     Cash America produced in September 2011 ahead of its                           costs by geographic region but in the Enova prospectus
     (subsequently cancelled) attempt to spin off its internet                      they did so. Figure 5.4 shows the percentages of revenue
     lending operations, which it calls Enova International, Inc.                   spent on different categories of costs

     Cash America’s Enova business operates in the US, the UK,                      This information presents a unique opportunity to gain
     Australia, and in three provinces of Canada. It offers payday                  insight into the costs associated with providing online
     loans in all locations and, since 2010, instalment loans in                    payday loans in the UK.
     the US and the UK only (Table 5.1). Revenues from foreign
     operations are a significant and growing percentage of                         The cleanest data, from 2010, forms the basis of the
     total revenues                                                                 Customer Acquisition Cost case study presented here.
                                                                                    (Analysis of the 2011 data generates similar results but
     Table 5.1: Cash America revenues (online lending only)                         requires some additional assumptions.) In order to analyse
                                                                                    the data a few simplifying assumptions are required:
      Country                             2010            2011              2012
     US                                   73.0%           53.0%            50.5%    •   The percentages of revenue spent on the various
     UK                                   25.0%           44.0%            46.5%*       categories of costs remained the same for full year
                                                                                        2010.14 (The figures in the Enova prospectus were for
     Canada and Australia                 2.0%             3.0%             3.0%*
                                                                                        the first half of the year only.)
     *For 2012, 49.5% of total revenues came from outside the US, primarily the
     UK. We have assumed Canada and Australia continued to contribute 3% of         •   Instalment lending constituted less than 1% of total
     total internet revenues.
                                                                                        lending for the year, hence all loans are treated as if
     Source: Enova Prospectus (2011) and Cash America (2013)                            they were payday loans.

     Figure 5.4: Cash America profit and costs – UK, Canada                         •   As instalment customers were overwhelmingly recruited
     and Australia online lending only                                                  from the pool of existing payday borrowers, all
                                                                                        instalment loans are treated as repeat loans.
                       Profit, 5.45%                    Profit, 9.24%               •   As 93% of revenues came from the UK the entire foreign
                                                                                        business is assumed to be representative of the UK.
        80%               Losses
                          44.78%                          Losses

                 Advertising and marketing
        40%               19.20%                  Advertising and marketing
                   Administrative costs             Administrative costs
        20%             16.15%                           12.16%
                   Operations and tech              Operations and tech
                        14.10%                            12.53%
                   Finance costs, 0.32%             Finance costs, 0.45%            14. The figures in the Enova prospectus were for the first half of the year
                                                                                    only. The purpose of a prospectus is, however, to accurately represent the
                   6m ended June 2010               6m ended June 2011              nature of the business to potential investors. Coupled with the fact that
                                                                                    there is no evidence of ‘seasonality’ in UK payday lending, this means it is
                                                                                    safe to assume that the structure of costs in the first half of the year did not
      Source: Enova Prospectus (2011).                                              diverge significantly from that in the second half of the year, as this would
                                                                                    have been noted in the prospectus.

Case study: continued

 DATA AND METHODOLOGY USED                                                        Second, Cash America and the other big lenders used
                                                                                  Google Adwords to acquire an undisclosed number of
 •   Cash America generated foreign online lending                                borrowers. Borrowers acquired in this way were even more
     revenues of £65,846,799 and gross profit of £3,585,668.                      expensive (with individual acquisition costs potentially
                                                                                  running into the hundreds of pounds) to acquire than those
 •   Number of first loans made = 151,000.15                                      acquired via lead purchase.

 •   Number of repeat loans made = 772,474.16                                     (Both lead purchase and the use of Google Adwords are
                                                                                  discussed in detail below under ‘Shared acquisition
 •   We divide the costs into three broad categories:                             strategies’.)

     –– Advertising and Marketing £12,645,149.                                    Lenders are known to be very keen to retain borrowers;
                                                                                  however, customer retention is significantly cheaper than
     –– Administration, Operations and Technology, and                            customer acquisition, particularly as lenders are very
        Financing £20,130,354.                                                    ‘tech-savvy’ and target existing customers via text
                                                                                  messaging and email at minimal cost. Further, as will
     –– Losses £29,485,628.                                                       become clear, because borrowers frequently cannot repay
                                                                                  on time and so roll over or refinance, they are effectively
 We now build a model of a payday lending business with                           retained without additional cost to the lender.
 the same characteristics. Ignoring losses for the time being
 (they are explored in much greater detail in Chapter 6) a                        Table 5.2 gives a breakdown of advertising and marketing
 simplified model of costs can be built in the following way:                     spend.

 ADVERTISING AND MARKETING                                                        Table 5.2: Advertising and marketing spend

 Assume that 80% of the model business’s advertising and                          Total advertising and marketing spend on customer        £10,116,119
 marketing spend was aimed at acquiring new customers.
                                                                                  Total advertising and marketing spend on customer        £2,529,030
 How reasonable is this assumption? The figure of 80% may                         retention
 seem extreme and, perhaps, arbitrary but it is consistent                        Number of customers acquired                                151,000
 with everything that is known about online payday lending                        Number of repeat loans made                                 772,474
 customer acquisition in the UK.
                                                                                  Advertising and marketing spend per customer acquired/       £66.99
                                                                                  first loan
 First, Cash America sources over half of its borrowers                           Advertising and marketing spend per repeat loan               £3.27
 (globally) via lead generators –third-party companies that
 specialise in sourcing prospective borrowers (Enova
                                                                                  ADMINISTRATION, OPERATIONS AND TECHNOLOGY
 Prospectus 2011). According to the OFT, successful sales
                                                                                  AND FINANCING COSTS
 lead cost £80 in 2010 (Office of Fair Trading 2010b: 87).
                                                                                  First loans are more expensive to make than repeat loans.
                                                                                  Additional work is required to process the borrower’s initial
                                                                                  application and a large number of initial applications are
 15. Cash America online added the following numbers of new customers in          processed but subsequently declined.
 2010: 138,000 UK; 9,000 Australia; 4,000 Canada.

 16. Includes 5,018 instalment loans. We understand the borrowers who             This additional work and expense can be represented in
 took out instalment loans were overwhelmingly existing customers, so
                                                                                  the model by assuming first loans cost twice as much to
 these loans are included in the category ‘repeat loans’. They represented a
 tiny fraction of the business in 2010, so their treatment has little impact on   make as repeat loans do. This is similar to the approach
 our model.                                                                       taken by Ernst & Young in their report The Cost of

PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                                                   19
Case study: continued

     Providing Payday Loans in Canada (2004); however, they                  Cash America normally charges between 20% and 29.5%. A
     applied this simplified methodology to all costs, whereas in            weighted average interest rate of 22.65% ensures the
     Table 5.3 it is used only for this sub-set of costs.                    model business’s total revenue matches Cash America’s
                                                                             reported revenue.
     Table 5.3: Administration, operations and technology
     and financing costs                                                     Cash America routinely offers a 25% discount on first time
                                                                             payday loans to new customers. We apply this discount to
     Total administration, operations and technology and       £20,130,354   all first-time loans extended by the model business
     financing costs
                                                                             (Table 5.6).
     Total Number of Loans made                                   923,474

     Number of first loans made                                   151,000    Table 5.6: Revenues including discounting of first-time
     Number of repeat loans made                                  772,474
                                                                             Revenue per first loan                                            £47.01
     Administration, operations and technology and financing        £37.47
     costs per first loan                                                    Discounted revenue per first loan                                 £35.26
     Administration, operations and technology and financing        £18.74
     cost per repeat loan                                                    Revenue per repeat loan                                           £78.35

                                                                             It is immediately striking that in our model the revenue per
                                                                             first loan, £35.26, is significantly lower than the cost per first
     Adding the two categories of costs together gives total
                                                                             loan, £104.46. The first loan is a ‘loss leader’ and it follows
     cost per loan (Table 5.4)
                                                                             that the model business is dependent on repeat lending
                                                                             for its profitability.
     Table 5.4: Total cost per loan

     Total cost per first loan                                    £104.46    BREAK-EVEN POINT
     Total cost per repeat loan                                    £22.01
                                                                             In fact, it is not until the borrower repays the third loan that
                                                                             the model business reaches the break-even point
     REVENUES                                                                (Table 5.7).

     The other side of the equation is, of course, revenues.                 Table 5.7: Breaking even
     Assume that the size of first-time loans is 60% of the size of
     repeat loans. How reasonable is this assumption? Lenders                                         Cost       Revenue    Profit/loss   Cumulative
     routinely restrict the size of first loans to new customers to
     mitigate losses due to defaults. Table 5.5 presents average             Loan 1             −£104.46           £35.26      −£69.21        −£69.21
     loan sizes.                                                             Loan 2              −£22.01           £78.35       £56.34        −£12.87

     Table 5.5: Average sizes of first time and repeat loans                 Loan 3              −£22.01           £78.35       £56.34         £43.48

     Average loan size                                            £321.41
                                                                             Note that this is a stylised model. It seems unlikely that new
     Average first loan size = 60% of repeat loan size            £207.55
                                                                             borrowers step straight up from a small first loan to a large
     Average repeat loan size                                     £345.92    second loan and perhaps not all borrowers receive the 25%

Whatever the exact pattern of loans         HOW TYPICAL IS CASH AMERICA’S                highest commission and the ‘last look
taken by each individual borrower it is     CUSTOMER ACQUISITION COST?                   lead’ pays the lowest commission in the
clear from the case study that high CAC                                                  ping tree. The lead generator works
means lenders cannot breakeven before       While each lender employs its own            with a network of ‘affiliates’ (eg online
borrowers have taken multiple loans. It     unique set of customer acquisition           loan brokers, email and SMS marketers)
therefore follows that profitability is     strategies some strategies are common        that run marketing campaigns to
dependent on repeat lending.                to all three large lenders, in particular:   increase the volume of leads.

Of course, not all borrowers take three     •   Lead purchase.                           The lead (ie prospective borrower)
loans. Some take a single loan, repay it                                                 submits one loan application via an
and walk away. These borrowers are          •   Additional work involved in              affiliate’s website. Their details are
using payday in the way lenders claim it        processing the borrower’s initial        passed across the ‘tree’ of lenders until
is designed to be used, to overcome an          application.                             one of the lenders accepts (or else
exceptional and very short term cash                                                     presumably the application is rejected).
shortfall. Unfortunately, due to high       •   Processing initial applications which    The most common ways in which
CAC each borrower who walks away                are subsequently declined.               lenders pay for these services seem to
after a single loan leaves the lender out                                                be pay per lead (eg for each application
of pocket; in order for lenders to make a   •   Use of Google Adwords.                   that is submitted) or pay per sale (ie
profit (which they do) another borrower                                                  when a loan is made).” (Bristol 2013: 41)
must be take more than three loans to       First, these shared acquisition
make up the difference. In fact, the        strategies are discussed in detail and       Due to high rejection (on the part of the
more people who use payday as               then specific details of spending and        lender) and high refusal (on the part of
advertised, the worse things must be        strategies employed by             the borrower) rates ‘pay per sale’ prices
for the unfortunate sub-set of repeat       and Dollar Financial are discussed.          are much higher than ‘pay per lead’
borrowers.                                                                               prices. The OFT believes that ‘a
                                            SHARED ACQUISITION STRATEGIES                successful lead will generate a payment
Just as the CAC of £94 (computed as                                                      of around £80 (regardless of the sum
the total cost of a first loan, £104.46,    Lead purchase                                borrowed by the borrower) from the
plus the discount on first loans, £11.75,   Lenders routinely purchase the details       payday lender to the lead generator’
minus the total cost of a repeat loan,      of prospective borrowers, called ‘leads’,    (Office of Fair Trading 2010b: 87).
£22.01) is an average, so is the number     from third-party companies that
of loans needed to recoup it an             specialise in sourcing prospective           This is absolutely consistent with the
average. Behind the average of three        borrowers, called ‘lead generators’, or      CAC modelled in the Customer
loans lies a distribution.                  ‘lead providers’. Lead generators run        Acquisition Cost case study. Crucially,
                                            websites where prospective borrowers         the ‘sales lead’ cost of £80 is paid
Furthermore, because three loans are        fill in their details (borrowers are often   regardless of the amount of the loan.
required just to reach the break-even       unaware that they are not dealing            The price of £80 is a lot of money to pay
point, this represents a baseline           directly with the lender). The lead          to acquire someone looking to borrow a
scenario. A good online business model      generator then acts as a credit broker,      small amount for a very short time. If
has an expected CLV many times              passing each borrower’s details to a         anything, lead prices are now even higher.
greater than CAC. In order to make          lender or lenders.                           One of Dollar Financial’s executives
profits, our model business requires                                                     stated that ‘The (UK) internet lending
borrowers to take more than three loans     According to the report by the Personal      market has become highly competitive
each on average.                            Finance Research Centre, University of       with many providers bidding up new
                                            Bristol (2013), in order to generate the     customer leads to cover shortfalls in
                                            highest revenues,“lead generators may        revenue stemming from limitations on
                                            develop a ‘ping tree’, which is a panel of   rollovers’ (DFC Global Corp 2013d).
                                            online lenders that are ranked in order      Where borrowers are acquired via lead
                                            of how much commission they pay for          purchase, profitability is absolutely
                                            each lead. The ‘first look lead’ pays the    dependent on repeat borrowing.

  PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                        21
In the US consumer advocates have                   According to the OFT, in 2010 Cash             verify some applicants’ bank account
already noted that high lead purchase               America purchased 20% of all payday            details manually. It seems reasonable to
costs make lenders reliant on repeat                leads sold in the UK, as did Dollar            assume that such verification is more
lending to break even. According to                 Financial (including Month End                 frequently required for first-time
Jean Ann Fox, Director of Consumer                  Money17), while purchased            applicants than for returning borrowers.
Protection at the Consumer Federation               10%.
of America: ‘the use of lead generators                                                            In December 2011 Cash America
makes it an even higher priority for                Lenders are competing with each other          launched a ‘Pay per call’ programme
payday lenders to push borrowers into               for leads; it is therefore reasonable to       (Nemechek 2011) (in addition to its ‘Pay
multiple loans. “The price structure for            assume that they face similar costs per        per click’ marketing efforts), as they
marketing payday loans online makes                 lead. High CAC is endemic in online            receive a significant number of
loan flipping economically essential for            payday lending in the UK (and                  enquiries by telephone. Again, it is
lenders to make a profit,” she says.                internationally).                              reasonable to assume that a
“Payday lenders pay up to $125 per                                                                 disproportionate number of first-time
qualified lead, which requires several              Additional processing time                     applicants require telephone
loan renewals just to recoup the cost of            While lenders have been able to                assistance.
acquiring the borrower”’ (Sandman 2012).            automate much of the application
                                                    process, credit- checking, income and          Applications that are subsequently
Cash America sources over half of its               identity verification, etc, they still spend   declined
borrowers (globally) via lead generators,           more time on the average first-time   rejects over 60% of
relying on just seven companies to                  application by a new borrower than they        applicants (UK Government 2011);18 the
provide 81% of leads (Enova Prospectus              do on repeat applications by existing          CFA say their members routinely reject
2011). They are not alone, all three of             borrowers. Even, which               over 90% of applicants. According to
the big lenders purchased significant               prides itself on its automated lending         one Dollar Financial executive talking
numbers of leads in 2010 (Figure 5.5).              process, employs a ‘verification team’ to      about the UK online payday lending
                                                                                                   business, ‘we only…approve, I should
                                                                                                   say, about 15% of the applications we
Figure 5.5: Share of leads purchased                                                               get and then the customer only accepts
                                                                                                   that funding and puts a loan on the
                                                                                                   books for us for maybe 25% of that’
                                                                                                   (DFC Global Corp 2013a). This implies
                                      Other                Cash America                            that just 3.75% of applications are
                                      (20%)                (20%)                                   actually converted into loans.

                                                                                                   There are costs associated with the
                             Wonga                                                                 approval process. Running a credit
                              (20%)                                                                check, for example, appears to cost
                                                                Dollar Financial
                                                                (20%)                              around £2 (UK Government 2013: 39).
                                                                                                   The costs associated with the approval
                     Wage Day Advance
                                                                                                   of applicants who do not take a loan
                                                    Pounds Till Payday                             must be borne by those who do: this is
                                                    (15%)                                          part of their CAC.

 Source: OFT Decision to approve Dollar Financial’s acquisition of Month End Money
 (Office of Fair Trading 2011a).

                                                    17. Month End Money was acquired by Dollar     18. statistics downloaded July
                                                    Financial in April 2011.                       2012 and January 2013.

Google Adwords                                 Refer a friend scheme                        practices, were they to be performed by
The use of Google Adwords is probably encourages existing                a paid agent) when this kind of ‘refer a
the most expensive customer                    borrowers to introduce new borrowers         friend’ scheme is allowed.
acquisition strategy lenders employ.           to them via the ‘Refer a Friend scheme’.
Google allows advertisers to pay to                                                         Discounting routinely
have their link appear at the top of the       How does the ‘Refer a Friend’                distributes discount codes, offering to
results page generated whenever                scheme’ work?                                waive the £5.50 transmission fee on
someone searches for their chosen              ‘We give each of our                         first-time loans to new customers.
‘adword’. Advertisers pay for the
prominent positioning of their link on a
                                               customers a unique “refer a                  Total advertising and marketing spend
‘pay-per-click’ (PPC) basis. The adword        friend” code. You can find                   is likely to be significantly higher than
‘payday’ sells for over £20 per click, ie in   yours by logging into the My                 the advertising budget estimated by AC
order to appear in one of the top three        Account section in our                       Nielsen MMS, as this figure does not
spots on the ‘payday’ results page,                                                         include internal marketing and
lenders must pay over £20 for every            website. If you know someone                 advertising headcount or lead purchase
click on their link (Sommerlad 2014).          who wants to take a loan with                costs and is therefore not directly
                                               us, you can give them your                   comparable with Cash America’s total
Not all clicks convert into loan                                                            advertising and marketing spend
                                               code to enter in the
applications and lenders routinely                                                          detailed above.
reject 90% of applications, so the costs       “promocode” box under the
of PPC advertising quickly mount up.           sliders, when they apply. If this            Dollar Financial
Even if a loan was generated for every         is their first                     Dollar Financial reports advertising and
10 clicks on a lender’s link, this would                                                    marketing expense at the global level,
imply an external CAC of £200 for loans
                                               application, we will remove                  ie consolidated across all business lines
generated in this way.                         our £5.50 transfer fee from                  in all countries. However, there was a
                                               their loan balance. If your                  significant increase in global advertising                                      friend’s loan is for £50 or more             and marketing expense (Figure 5.6)
It is no secret that run very                                                     after their acquisition of the Month End
high profile (and expensive) advertising       and meets our refer a friend                 Money UK online payday lending
campaigns. Their advertising spend was         criteria…we will send £20 cash               business in April 2011.
estimated by the agency AC Nielsen             straight to your registered
MMS to be £16m in 2011 (Gentleman                                                           March 2010 – March 2011 Total global
                                               bank account as a thank you
2012) and included, ‘sponsorship of all                                                     Advertising Spend £14.4m.
three CSI series and The Mentalist on          for introducing a new
Channel 5, using the Rawhide theme             customer to us’.                             March 2011 – March 2012 Total global
tune for its commercial radio ads, and                                                      Advertising Spend £31.3m.
plastering buses throughout London.            (WONGA.COM WEBSITE N.D., 3)
The company sponsors Blackpool and                                                          Global advertising spend for the 12
Heart of Midlothian football teams and         This equates to an external CAC of           months after MEM was acquired was
advertises on football clubs’ websites’        £25.50 not including the internal            £16.9m higher than for the previous 12
(Neate 2012). In 2012,               headcount cost of administering the          months. This significant change in
signed a deal with Newcastle United            scheme.                                      spending generated some interest from
reported to be worth £24m over four                                                         investment analysts covering Dollar
years (Conn 2012). As well as television       Payment can even be offset against a         Financial’s stock.
and online advertising and sports              referrer’s existing arrears. It is easy to
sponsorship, acquires                imagine a borrower in an extremely
customers through a variety of                 difficult situation exploiting their
channels, including ‘refer a friend’           knowledge of another person’s situation
programmes, discounting of first loans,        (ie straying into what would be
affiliate marketing and lead purchase.         considered ‘aggressive’ commercial

  PAYDAY LENDING: FIXING A BROKEN MARKET                                                                                           23
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