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Profitability of payday lending companies revealed

Twenty pound note, ten pound note and pound coins Print publication

28/02/2014

Walker Morris Regulatory Team provide an overview of the Competition Commission’s working paper on the profitability of payday lending companies. The working paper has been produced as part of the Commission’s extensive investigation into the payday lending market, which began in June 2013 and is to continue for two years.

Covers

Financial years in the period December 2008 – June 2013.

Revenue and costs; returns; and benchmarks for profitability.

Observations

Interest income declined as a percentage of overall income from 90% in 2008 to 83% in 2012.

The drop in interest income was balanced by an increase in fees / charges for rollover and funds transfer.

Growth was strong over the period for the major lenders, ranging between 40% and 100% per year but slowing. A 40% growth shown for major lenders in 2012.

Profitability was variable across lenders, ranging from 15% to 100% for those profitable, but some lenders unprofitable.

The three largest lenders (Wonga, Dollar and CashEuronet) accounted for just under 70% of the total revenue for lenders in 2012.

Revenue growth was higher for online businesses over the period, ranging from 40% to 130% between 2009 and 2012. For high-street operators, the range was 30% to 40%.

The proportion of revenue accounted for by online channel rose to 80% for major lenders, compared with 50% in 2007 / 2008.

Views on future revenue growth prospects among lenders are mixed, with the regulatory system likely to impact.

Lending to existing customers is high and reached “very significant levels” in the last reported year.

Operating Costs

The most significant cost is doubtful debt. Debt expense (that is, provision for debt that may not be recovered) represented approximately 45% of total costs for all lenders in both 2011 and 2012.

The second biggest cost is customer acquisition. Commissions paid, plus advertising and marketing, amounted to 16% of total costs.

Default costs (as measured by the principal loan loss rate) fell in 2012 for most of the major lenders.

Growth

Both raw and adjusted figures for 2012 show considerable reduction in growth compared with historic rates.

WM Comment

The paper shows a high level of growth over the last five years, with particularly large increases in the online sector. Profits for major lenders have been good, with the top three parties (Wonga, Dollar and CashEuronet) controlling just under 70% of the revenues.

The biggest operating cost is doubtful debt, followed by customer acquisition costs in second place.

In terms of growth prospects, the market is slowing. The change in the regulatory system, with transfer to the Financial Conduct Authority from 1 April 2014, is a key factor in terms of the future shape of the market.

A full copy of the working paper is available from the Competition Commission’s website.

For more advice, contact the Walker Morris Regulatory Team.

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