We all know Google’s corporate philosophy is “don’t be evil, ” but what does that really mean? Is it okay, for example, to be just a little evil, rather than bad to the bone? Or is it okay to enable evil in others? The latter case certainly represents the minimum coefficient of evil I see operating at the Googleplex now that I know the search giant is involved with the Online Lenders Alliance. You know, payday loans.
Payday loans are cash advances provided to consumers until their next pay cycle secured by post-dated checks with most advances not exceeding $500. These loans are for people who can’t find money any other way to buy milk for their kids. Very few get payday loans to buy Springsteen tickets. And with interest rates that often exceed 400 percent annually, you can see why I might think payday lenders are evil.
Get behind on a payday loan and most borrowers never catch-up.
The Online Lenders Alliance is a trade group comprised mainly of payday lenders, though it also involves call centers, collection agencies (natch), lead-generation companies, credit rating agencies (though not the ones you have heard of)… and Google, which had a booth last month at the OLA convention in Chicago.
The idea of Google having a trade show booth at all surprises me. Remember this is no-touch, algorithmically-driven Google, which generally doesn’t like to get involved in public events involving, well, people.
But Google was involved with the OLA and I have to wonder why? Were they there just to sell advertising? Certainly payday lenders have migrated en masse to the Internet and do a ton of business through Google ads. But that wouldn’t necessarily lead inevitably to a trade show booth. Auto parts vendors sell tons through Google, too, but I don’t see Google on the exhibitor list at the big Specialty Equipment Manufacturers Show (SEMA) in Las Vegas.
Maybe Google was there as an aggregator and seller (or even buyer) of consumer data. This type of Internet lead is an underwriter’s dream because once consumers develop an “I no longer care” attitude they supply more private data (including Social Security numbers) as well as more general data — up to 80 fields worth! Google might want to buy that sort of information to add to what they already know about our searching and other online habits.
Whatever Google’s motivation, it is pretty clear the company views payday loans as a special case. When I did a Google web search on the term “payday loans” for example, the search results placed the uniformly negative news items near the bottom of the results, below the fold as we used to say in the newspaper business. Similar web searches on the terms “mortgage loan” and “auto loan” put the news in each case near the top of the results, significantly above the fold where it was more likely to be seen.
Why would Google do that? Payday loans are despised by consumer advocacy groups, governments, and my Mom, alike. Nobody likes payday loans, except of course the companies that make billions providing and servicing them.
There are lots of big companies that benefit from payday loans. If you wonder where payday lenders get their money, for example, it is from the same banks where we have our checking accounts. The biggest backer of payday lenders is reportedly Wells Fargo.
But enough of this speculation! The best way to find out why Google was exhibiting at the OLA show would be to simply ask them, which one of my readers did as favor to all of us. And the answer he got from folks manning the Google booth was surprising — or at least it surprised me. He was told “the (payday loan) industry is ripe with inefficiencies, shady practices, and shady people. Coupled with overwhelming consumer demand, Google believes it can right these inefficiencies, provide better transparency, and ally with consumer protection agencies. ”
If I heard correctly, that means Google is thinking of entering the payday loan business.
I can’t tell, is that evil or not?
Like a lot of big tech companies, Google is sitting on a ton of cash — $30 billion — that is just dragging-down earnings because interest rates for non-payday-type investments are close to zero. That’s 10 times the total float of the entire payday loan industry! If Google took even half that money and started lending it online, it would drive payday interest rates sharply down to, say, 20 percent — still an order of magnitude better than an Apple earns on its stash of cash.
Earning 20 percent interest on $15 billion would increase Google’s profit by $3 billion per year for an increase of almost 30 percent.
The impact of Google entering the payday loan business would reverberate through the sub-prime lending industry, affecting many other types of loans and credit cards ruthlessly aimed at the the most vulnerable.
Maybe it is not so evil after all, but I’d say the jury is still out on that one.
I have long expected that we’d all be metaphorically signing-over our paychecks to Google. I just didn’t expect we’d be doing it literally, too.
It’s possible that Google will “do some good”, but only time will tell if they “do no evil”.
It’s pretty obvious that Google isn’t going to get into the payday loan business. Their interest is in information. Based on previous GOOG products, here’s my take on what they plan to do:
Create a marketplace where payday loan lenders are all listed, along with actual interest rates for each loan, with Google taking an affiliate commission whenever someone signs up for a loan via their marketplace.
By increasing transparency, Google can help drive down the rates in the payday loan business, thus actually helping consumers by steering them toward lower-cost payday loans and helping consumers understand the terms they are agreeing to.
To me, this makes the payday loan industry less evil and more transparent, and I actually think it’s a great idea for GOOG.
Disclaimer: No personal connection to Google; no inside knowledge.
-Erica
I would like for this to be true, but i’m not hopeful. Say I live paycheck to paycheck, and down the street is a store with a big “get money now” sign on it, and I need money. Am I going there, or am I going to the computer I don’t have to connect to the Internet I can’t afford, to see if there is a better deal somewhere, and then get in the car I probably don’t own to drive there for that deal.
Jobo,
Touche!
I don’t care who Google is or who they pretend to be. They are a business! –and businesses are inherently driven by the bottom line –Money. If there is money to be made, (according to Bob.. lots of money.) We’ll you better believe they are interested.
Usually the only thing that keeps businesses ethical are laws –but nowadays lawyers are increasingly cleaver about finding loop holes.
Now if it’s ethical or not. I would have to side on the NOT ethical side. PayDay loans are a trap. Plain and simple.
And what irony that a PayDay loan offer should appear on the banner ads for this page. Does this make Bob a little bit evil too?
Oh C’mon Cringe!
The Google mantra “Do No Evil” is as scam as old as the hills. Think I’m jivin’? How about Oral Roberts, Jimmy Swaggert, & Jim & Tammy Faye Baker? All bilked followers out of MILLIONS.
How? People believed they were noble in their cause and were acting in the name of God. Google is no different. “Do no evil” is nothing but a trojan horse to let Google in whatever door they choose and their slogan is nothing more than a marketing “Warm & Fuzzy”.
Don’t believe it for a minute. If you do, then go ahead and nominate Bill Gates for sainthood. Google is just as sickly greedy as Gates – but they have thousands of servers to spread (and control those against) their “gospel”.
Go ahead & try to prove me wrong.
Rog
Greed is GOOD! It’s not evil!!!
You forgot the /s tag.
Remember Pixar’s film, WALL-E ? Google is stealthily setting itself up to be B&L. Look out WAL-MART!
After the credit crunch i’ve had a few former colleagues and (no longer) friends who’ve gotten into this very business because (according to laws & practices in the EU) lending money (small short time credit) to individuals is not only more lucrative – it is (more importantly) safer. Individuals can’t just go into bankrupcy. Instead every loan shark’s “investment” is protected by law.
So if you’re sitting on a ton of cash it is SAFER to lend it to *anyone* because your pound of flesh will be guaranteed.
“If I heard correctly, that means Google is thinking of entering the payday loan business.”
That’s kind of a stretch. Imagine one day you’re out of luck and just need cash, fast. It would be much better to Google “payday loan” and be able to compare prices (from their advertisers or local search results), than walk over to the nearest gaudy yellow-signed shop with your paystub. By going to an expo, at least they can get a legitimate sampling of the industry (the best of the worst?), and have them advertise against the scum of the internet.
I quick search on google.com for paydal loan and mortgage loan shows the news results in the same place on the page.
That wasn’t my experience yesterday. I didn’t go looking for that, by the way: it just appeared to my surprise. Maybe it was random, maybe a Google test (they run thousands every day), or maybe they read my column and changed it. Beats me.
I’d still like to read some more objective commentary on the Google-Oracle(Sun) lawsuit over Java and why Oracle is asking for such drastic measures (total cease and desist) rather than just the money. Other commentators have also been surprisingly and annoyingly silent on it.
Stick to the topic please, Joe. If you want me to write about something different please e-mail me.
…
No.
That’s what I would have said, too.
I’m not as convinced as you are that payday loans are evil. Do 400% interest rates sound unseemly? Absolutely. But what is the alternative? These people *need* money, and they need it now – without the availability of payday loans, they are even worse off. So unless we are willing to step in and provide cheaper loans, I’m not sure we should be so quick to condemn the lenders who are providing a useful service (and it’s clearly useful, because otherwise they wouldn’t be in business).
I don’t mean to be facetious, but drug dealers are in business, too. Does that make their service “useful?”
Why, as a matter of fact, their services are useful; legal, no, but useful, yes. Ask anyone with a dependency or habit, and they’ll gladly confirm this for you. “Useful” and “Ethical/Legal” are two different concepts.
Wow, Marcus. That’s a pretty bold statement. Yes, these folks “need” the money, and can’t get it other ways. Well, why is that? Because other people who would lend them the money know they will probably not ever be able to pay it back, and as unethical as some lenders may be, eventually they want the principal paid back.
The payday lenders do not care if it ever gets paid back, because they charge such outrageous interest rates that it doesn’t matter if it gets paid back – they make tons of money off of them before bankrupting them.
The entire payday industry is set up to never get paid back. There are virtually no payday lenders that will refuse you another payday loan if your current one is outstanding, and there no payday lenders will refuse to do a payday loan if you have one or multiple outstanding payday loans somewhere else.
This is all about wealth redistribution from people who aren’t very smart or capable with money to people who are very smart with money. It is usury, plain and simple.
Next up: debtor’s prisons and indentured servitude. You may think that’s impossible, but go back 30, 40, 100 years, and nobody would believe you would have been able to charge these kinds of interest rates, so anything is possible.
Google’s rationale that they are only interested in transparency and ending inefficiencies is laughable. These payday places are not in your upscale neighborhoods where people have computers and high-speed internet connections. These are in some of the poorest neighborhoods, and i highly doubt folks using these places are going to their computer to find the “best” rate with the most transparency. That’s ludicrous.
What is the most awful about these places is here in the Sacramento area, most of the payday places are located within walking distance of military bases. MILITARY BASES! These payday lenders are bankrupting our bleeping soldiers!
Good point, jobo. Folks who go for payday loans are not likely to do “informed consumer” searches for better rates. When you need 400 bucks quick, you don’t shop around. Furthermore, plenty of info was out there on the Internet re the hidden gouges in various “affordable” subprime mortgage products. But even when a much larger loan was involved, many people didn’t do the research.
Soldiers would be smart enough to use (presumably) their base’s machines, and talk to each other. Most other people can use the local library’s machines but yeah, there are a lot of people who are still alien to it all, and comparison shopping wouldn’t even occur to them. I suppose word could spread among a group if anyone did, though.
Jobo,
Actually not good point. Why don’t these guys have money they need when they need it? You can’t point to the employer as they are regulated by govnemetn to pay a minimum wage. Its people spending that gets them there. So who should “help” them in their time of need? Do you propose our goverment? That system proves to broaden the problems they try to solve.
Regarding debtors prison. That was the law of the country. There are STILL debtor prisons in the Mid-East. We have different laws. The debtor can (and does) take advantage of the lender by simply defaulting and going bankrupt. Our laws keep them out of prisons. The risk of default is why the rate is high.
Please go to Mises.org to brush up on your economics.
Payday Loans, Title Loans, Rent to Own, etc are not services for the poor. They are greedy heartless leaches setup to get rich off the desperate. That is evil. Legitimate yes, but evil nonetheless. Studies irrefutably show that the borrower paying back the loan is the exception and these billion dollar industries do not cooperate with the borrower. The collection agencies always, without accountability, break federal law and and threaten the borrower with lies. It is a nasty industry.
Time to bring back anti-usury laws.
who says they left? arizona just recently enforced the expiration of their payday loan franchise agreement (basically on the standing usury laws and because the az public voted down the statewide referendum to renew the agreement), and most of the companies have left the state. the ones left had to change to follow the usury laws already on the books.
Right Wingnut AZ!!!!!!!! I am honestly astonished. There may be a God.
Well, in most places they left. Usually due to lobbying by the people doing this kind of predatory lending.
Thankfully, AZ, you got it right. Amazing. But then, even a broken clock is right twice a day.
Payday loans are evil, pure and simple. They prey upon the fact that many people in this country do not make a livable wage. If Google really wants to do good they can provide 0% interest loans with their excess billions while striving for more worker rights. Sadly, I’m not holding my breath.
Hi, wagdog. I’ll take the lesser of two evils any day. When I had to get into the payday loan “trap” about 18 months ago, I tried looking for the best deal. All three places I went to offered the same “deal”. I could get $ 255.00, and would have to pay back $ 300.00 next payday (I was paid every other week). I’m just glad I did not miss a payment. I had to go through this for about six months. If Google, or anyone else could come up with a plan where people had to pay back less (hopefully a lot less), it would be an improvement.
The payday loan market is highly competitive and provides a needed service primarily for low-income people. I know. I’ve been there myself. Just let these folks try getting an instant loan from Chase or Citibank for $200 for one month. I knew what I was getting into, the usurial interest rates, etc. But at least any fraud or illegal activities can still be settled in a court of law. When you are facing possible repossession or eviction or foreclosure, payday loans are a much better alternative than dealing with the black market, where differences are settled by broken bones or worse.
I don’t see anyone in Google management putting up 50% of the company’s cash reserves in order to start a new line of business, whether it be moneylending, fixing the subprime lending business, or creating machines to tie shoelaces, for that matter. When was the last time executives of a publicly traded company – be they evil, noble, or amoral – were willing to gamble that great a portion of the corporation’s assets on a new venture, even for a 20% return ?
I agree with Erica, this is more likely an attempt to create a more just marketplace…
One thinks of the early scene in “CItizen Kane” where the idealistic young Kane jots down a manifesto for his newly-acquired newspaper. His friend, played by Joseph Cotten, asks to keep the scrap as a personal memento. And how far we have come from those founding ideals when that list is revisited a couple of decades later!
I’d rather that the founders of Google had writ “Do good”, rather than “Don’t be evil”, but perhaps the most realistic, and therefore best mantra might well be what every physician knows: “First, do no harm.”
A $200 payday loan at a cost of $20 is *way* better than bouncing a check. That’ll be $35 to the bank, plus whatever fee the receiver of the check wants, plus the credit hit.
The people who are (unfortunately) the market for payday loans are living from paycheck to paycheck. Any small emergency can put them in the red until the next paycheck comes in.
Clearly there is a need for that service. And many lenders do charge way too much. But what is the fair amount? What is the right price that does not gouge but also keeps the lender’s doors open? 36% APR? Not even close.
A two week, $200 loan at 36% Annually brings in $2.77 cents in fees. Before he can even make the loan the lender’s got to spend about $1.40 to run a credit check. And of course many of the people won’t pass that check, but he’s still out the $1.40. If even 50% don’t pass he’s lost money before he even gets started. And he hasn’t yet tried to pay the employee salaries or the rent.
But for the sake of argument let’s pretend that the lender has no operating costs at all. Zero. Now that 36% must be a gold mine, right?
Well some of those loans will default. Even with the best information, way more than 10% will default. But maybe this lender is so amazing good at judging who to lend to that he keeps it down to only a 5% default rate.
So 19 times he pockets $2.77, for a tidy $52.63. But on the 20th one he loses $200.
This is on the “usurious” rate of 36%, and the lender is losing money so fast he might as well set it on fire to keep warm.
How about 100%? Now he grosses $146 before losing that $200.
And this is still in the fantasy land where he has no operating cost.
Judging a two-week loan by the APR is flat-out wrong. Because there’s a cost to provide it each time, It’s a service that requires a fee, just like a thousand other services.
Geez, using you data, then nobody would ever start a payday lending operation? Why put up with that hassle? Sounds like you can’t make any money and are on the verge of collapse with every customer.
Yet, the payday loan industry is HUGE, and ridiculously profitable. Allan Jones, owner of “Check into Cash” has a net worth of $500M, built in just 17 years. Somehow, he managed to avoid this house of horrors you describe. And he isn’t even the richest of the payday-ers
Methinks your numbers are out of whack.
He was illustrating that APR rates that sound usuary really are not when it comes to very short term loans.
The arithmetic is simple and easy to follow. The rates I used are not the rates that are actually charged. *Nobody* makes payday loans at 36% APR, or even 200% APR. The reason is simple – it can’t be done.
If you think you can do it, open up some stores. Just be sure to set some money aside to live on for when you go broke.
APR is a simple and easy and completely wrong way to measure the fees required to operate.
Without a doubt many operators do take advantage of their customers and charge way more than is necessary. But completely removing the option from people struggling to get by is obviously not the answer, and demonstrably so – in states where no payday loans exist both personal bankruptcies and cascading bounced checks are much more common.
It’s easy to glance at a number and condemn an entire industry. Digging deeper requires more effort, but the answer turns out to be quit a bit different from the “obvious” one.
and…game. set. match.
Great analysis.
Instead of looking at one metric, perhaps we should do real diligence instead of just saying, as PP pointed out, 36% APR!!! One guy (out of thousands) made millions. Yeah, so?
Is it “sad” we live in a world to where people have to get these things? Yep, and I can name 100 other sad things in the world too. Fact is, some people need them.
Fact is some people get taken advantage of.
I would say payday loan are pretty popular with the people borrowing the money.
Sure. And loaning money for a $500K house to a person making $40k a year was really popular with the borrower of the money for the house and the mortgage broker earning the bonus on the loan.
Then, 2008 happened.
Care to revise your BS statement?
Yes, I’m in agreement – payday loans are bad. Besides the obvious pitfalls it’s a well known practice of people defrauding Social Security (here in the UK where I have direct experience) to pick up a government cheque “loose” it on the way to the post office to cash it, request and get a replacement, only for it to be found said peeps took the original to the nearest payday-type lender and cashed it there. As the company sits on the money for the agreed time and cut no one knows until it’s banked. Of course the lender is oblivious to this and in no way party to anything deliberate and it seems guilt of the “peep” is hard to prove. Yes, the original cheque is blocked using the Post Office computer system but that doesn’t reach other organisations beyond their own does it?
I would have thought this form of lending was one any caring company would steer clear of!
So in order to not be evil, Google has to become a bank?
This is fun. Why stop there? In order to not be evil, Google must:
– Become an electric car manufacturer
– Give $30B to PETA
– Finance the relocation of all Jews from Israel to southern Florida so the Palestinians can live in peace
– Use their money to manufacture pharmaceuticals and give HIV/AIDS drugs to needy African countries
– Buy every child in the world under the age of 8 a lollypop
– Give $30B to Obama to distribute to the unemployed
– Buy surplus Navy destroyers and give them to SeaShepard so they can properly blow Japanese sailing vessels out of the water
– Purchase a lifetime drug rehab pass for Lindsay Lohan
– Build a cultural center at ground zero
– Buy deep water oil wells and plug them all
Unless Google does these things, I declare that they are a bunch of greedy SOBs!
LOL!!! Montgomery is my new hero!
Where is personal responsibility in this discussion? You say people taking payday loans are being exploited – so you are certain these people are less intelligent than you and can’t make their own decisions. How nice it would be for us all then for you to rule the world and make great decisions for each of us.
Wagdog says payday loan takers are not being paid a livable wage. Whose fault is that? Everyone needs to manage their money, regardless of how much they have. I’m sure a 3d world person would look at someone taking a payday loan and say they are “rich” – just as the payday loan taker looks up at others in our society and say they are “rich”. The 3d worlder would look at the payday loan taker and say “he has so much money, how can he say he can’t live on that much money!”
What pomposity on this board to indict an entire industry just because you think their customers are saps.
Dawg, it’s not pompous. Look, it’s pretty simple. People need the money, and absent anything else, they’ve gravitated to this industry, which is, by any definition, usurious in its behavior.
Now, this could happen elsewhere, but it doesn’t. For example, take student loans. This is a case of people needing money to continue (or start) their education, with no hope of paying the money back, for some or several years. An industry could easily develop which says “we’ll give you X dollars, but since there is such a risk you won’t finish and thus default, and since we won’t get the principal back in a really long time, we need to charge a large interest rate, and we need to see payments while you are in school.”
However, the government doesn’t allow this. The government has said, in effect “education is important, we can’t control the costs as some sort of central planning organization (other liberals like myself would disagree), so we will set up a contract where you as the lender give them this money now with no monthly repayment, your risk of default is insured, and since you are insured against default, you can only make a small percentage that we dictate.” This system has its problems, but it generally works pretty well. I’m only sitting here being able to type this because of that system. It allowed me to attend a very, very good school which has led to a great career, and a nice wage, and ultimately, a good revenue generator to city, state, and federal government due to my taxes
Using your ‘personal responsibility’ argument however, you could easily say that my family wasn’t responsible enough to save money for my college, so it’s my own fault, and should have gone to a lesser school (or none at all).
The problem with the payday industry is that a large number of people who are forced to use it (as there is no government insured type of set up like for student loans) end up being ruined. And, in being financially ruined, they take up public resources, such as courts (bankruptcy proceedings), social services (welfare, food stamps, etc.), and if they have kids, probably even the departments of child welfare. In the end, YOU as a taxpayer are paying for the end results of this “lack of personal responsibility” while an few folks become millionaires off of it.
Wouldn’t it be better to not let that happen? Don’t you want more folks who come into a dire situation (like, say, they live paycheck to paycheck and then their refrigerator dies) to be able to avoid a long term debt spiral that ultimately leads to them being on the public dole?
The problem with the argument that begins and ends with the phrase “personal responsibility” is that it works great in theory, but sucks horribly in practice.
Wanting to avoid your fellow man being put into financial ruin does not make you a communist – it in fact, makes you a better capitalist, as the person you help now will eventually buy stuff when he gets back on his feet.
That is not what I meant by personal responsibility.
It seems you are saying that payday loans are causing my fellow man’s ruin. That’s what I’m disputing.
The person at the payday loans counter is not in trouble due to the existence of the payday loans industry. He is in trouble because of his own inability to live within his means (whatever those means are).
It seems to me that fixing this problem involves increasing personal responsibility (living within your means) rather than bashing an industry that does in fact help some people (see the comments on this page for examples).
Others on this page say the person at the payday loans counter doesn’t make enough to live. But, for everyone who thinks they don’t have enough money, there is someone who makes less who thinks that person has a lot. You can’t just cry “the system doesn’t pay me enough” as an excuse to not live within your means.
You’re advocating simple Darwinism; most of the Right Wingnuts (fat and happy as they are, they like to do that) take this approach. The problem with it is that societies which go that route sooner or later (and in most cases, sooner) end up in anarchy. You dumb, fat, and happy rich folk really, really don’t want to live in a Darwinist environment, you’re not physically capable of it. If we get a truly open fascist (BushII was in the closet) government, it may for a while, be able to kill off the insurgents with tanks and drones, but once the insurgency takes deep root (and it will, the poor will have nothing to lose) you’re toast. You can’t get out of your own way.
But Dawg, this was kind of my point… define “living within your means”… It is a slippery slope. Were my parents not living within their means by not being able to save up the money to send me to a decent school? Should I be punished for that by having no recourse other than to go to some kind of predatory lender? Or not going to college at all and working in a blue collar job that is shifted overseas to cheaper labor? In the case of student loans, as a society we’ve said no. And, in my and many, many cases, that kind of investment… that government guarantee… that big brother mentality, creates individuals who make quite a bit of money and contribute back via taxes. I’m not sure, but if I were to guess, I bet I paid 5x more in taxes just last year vs. all the government grants, Stafford Loans, etc. that I took out 20 years ago.
Unfortunately, we seem as a society to have said yes if the problem you are facing is a car repair, broken appliance, etc. We also (until the present administration) have said that about health care. Your car broke down and you can’t get to work? Sorry, pay this gigantic fee or be fired. Refrigerator broke? Pay this gigantic fee or instead spend it piecemeal by eating out all the time. It’s stupid.
Libertarian philosophy sounds good, and makes the people who spout it feel good. It doesn’t work.
I also don’t want to lump all borrowers of payday loans as irresponsible. There are many examples here of people who used it as a bridge when they had no other recourse. Lots of people pay loan sharks back, too, though, so the rate of payback isn’t the issue.
I’m not against even the idea of payday loans. I just think the absolute unregulated practice of it is terrible. Cases of ruin due to it are extremely easy to find and are hardly rare, and a lot of that ruin can be laid out that, with these extreme interest rates and fees, it almost doesn’t matter if the principal on the loan gets paid back… there are way too many cases of the interest and fees greatly outweighing the initial principal. That, I’m sorry, is just wrong. It used to be called usury and was condemned. Now, sadly, it seems to be celebrated by a large chunk of decision makers.
If you’re getting a payday loan, you’re certainly in trouble. But how much trouble would you be in if you didn’t have them as an option? You might want to check out this article Bob:
http://reason.com/archives/2009/09/25/payday-of-reckoning/print
OK, I’ve done a lot of rant replies on this so far, so here is my opinion on what Google is doing.
I think Google has gotten into this payday analysis thing the wrong way. It sounds to me like they approached this problem from the geek-algorithm side and not the user-experience side. And I think they got there based upon their answer of “inefficiencies” in the market.
I don’t think any of the engineers or marketers on this project have ever used or needed to use a payday loan. Instead, they sat in an ivory tower (not saying that to be mean to them) and looked at the problem from a dispassionate distance, and said to themselves that it didn’t appear that the industry worked “well”.
They didn’t think that payday loan operations were efficiently searching for customers or comparing themselves to their competitors, and the customers weren’t receiving the proper information to make an informed, educated choice.
I argue, on the other hand, that the payday lenders don’t need to shop for customers, and there is such a high demand for this type of service that they really don’t need to measure themselves against competition. The pie is big enough for everybody. Additionally, I argue that the market of people who really need this service do not have the time (due to their work schedule), educational experience, and, in many cases, the ability to adequately budget their finances such that they could sit back and, say, shop for the best possible service. Clearly, some can, but I submit that this is not the majority of the customer base.
As such, I don’t think Google will be able to create a marketplace here. There is no incentive for the payday providers to use it, and a limited number of payday users who would know to take advantage of it.
You can’t create a market out of nothing, not matter how much data you have at your disposal. People have to want to use it. If I am a payday lender, am I better off using Google, or putting up a big Neon sign, for example.
Now, obviously, Google is full of smart people and I’m just a schmuck rambling on a really good blog, so what do I know, but this seems reasonable
Agree with you, and I think this is the most plausible comment so far.
It wouldn’t be the first time Google has launched a new app and then found out later that they approached it in completely the wrong way and that nobody used it. Other than a few core apps (Search, GMail, Android), they have been spectacularly unsuccessful.
The idea that Google would actually become a payday lender seems contrary to their entire philosophy, which is to use data to fill a role as a paid intermediary between business and consumer.
But, they will learn from their mistakes and come back for another try later on, and probably do a whole lot better.
Also, I’m not sure I agree that it won’t work because payday borrowers don’t have computers or Internet. Look at what is going on with cellphones and smartphones, and directions in fnance+phone — paying for things with your phone, etc. It’s only a matter of time before the whole thing is electronic and money is delivered straight to your phone.
Sure, a data plan or a smartphone isn’t a good use of money if you’re destitute, but nor is driving across town to fill up on gas for a few cents cheaper or buying your groceries from a convenience store… and payday borrowers certainly shouldn’t be stereotyped with the notion that they have a good sense of value for money 🙂
If the payday loan industry is so lucrative, seems to me it should be ripe for some entrepreneurship. How about some micro loan co-ops owned by members of the community it serves? And not just micro loans, but check cashing and other banking services. The big banks are convincing states to issue unemployment and other government benefits in the form of debit cards so the banks can collect more fees. ATM services could be another offering.
[…] I, Cringely » Blog Archive » Google’s Pound of Flesh – Cringely on technolog… – Speculation that Google wants to use its $30b cash to enter payday loan business:<br /> <br /> "When I did a Google web search on the term “payday loans” for example, the search results placed the uniformly negative news items near the bottom of the results, below the fold as we used to say in the newspaper business. Similar web searches on the terms “mortgage loan” and “auto loan” put the news in each case near the top of the results, significantly above the fold where it was more likely to be seen.<br /> Why would Google do that? Payday loans are despised by consumer advocacy groups, governments, and my Mom, alike. Nobody likes payday loans, except of course the companies that make billions providing and servicing them." […]
[…] I, Cringely » Blog Archive » Google’s Pound of Flesh – Cringely on technology Speculation that Google wants to use its $30b cash to enter payday loan business: […]
[…] I, Cringely » Blog Archive » Google’s Pound of Flesh – Cringely on technology Speculation that Google wants to use its $30b cash to enter payday loan business: […]
Most of the comments posted by Cringley’s readers here are so typical of our culture. They are all derived from an incorrect philosophy – the belief that man’s nature is deterministic, i.e. that man does not have free will.
Firstly, no one has forced borrowers who borrow money from these payday loan companies to do so. If they believed that they were being charged an exorbitant interest rate, they can always choose not to take the loan.
Secondly, has anyone asked these borrowers why they ended up in a situation where they needed to take a payday loan in the first place, i.e. why they couldn’t live within their means? Perhaps they should have budgeted properly and cut down on non-essential items so that they wouldn’t have to take a loan?
And if the response to that is the borrower may have had an unexpected expense that they couldn’t have foreseen, hasn’t anyone heard of the concept of regularly saving a portion of your income and setting it aside precisely for such unexpected expenses?
Now I don’t judge these borrowers – I believe that each person has the right to make his own choices and it’s not for me to decide what another person does with his money. What no one has the right to do though is to escape the potential negative consequences of his choices.
These borrowers decided, out of their own free will, that the present satisfaction/enjoyment etc. that they would get out of the products and services that they would manage to acquire by spending their entire income every month (instead of saving some of it) outweighs the risk that they would have an unexpected emergency in the future which might put them in a crunch.
More power to them. They made a decision, and it’s theirs to live with. If that unexpected emergency does materialize, it’s up to them to decide how they want to deal with it.
If they decide that the way to deal with it is to take a payday loan, we should be celebrating the fact that they live in a society that allowed them the choice of getting the loan at whatever interest rate was mutually acceptable to both lender and borrower, instead of bemoaning how the “evil” lender is exploiting the poor borrower who just couldn’t help it and didn’t know any better.
Payday lenders are not evil – they are simply businesses that provide a useful service to their customers and make a profit while doing so – just the way capitalism is supposed to work.
Sure Jason, that makes sense. My car broke down, so I can’t get to work. But then again, those payday people are charging too much, so I will instead not go to work and be fired. That’ll teach those payday people for being so out of touch with what I really need! I’ll convince all my neighbors who use that service to instead be fired when the same thing happens to them. That will cause the payday people to then change their terms of service eventually, right?
Your notion of free will is beautiful… in an ivory tower. Try dealing with reality for a bit.
Jobo – firstly, did you even read what I wrote in my post? Here’s a paragraph that might have skipped your attention:
“And if the response to that is the borrower may have had an unexpected expense that they couldn’t have foreseen, hasn’t anyone heard of the concept of regularly saving a portion of your income and setting it aside precisely for such unexpected expenses?”
Secondly, your response is rather silly and instead of helping your argument, simply serves to prove my point that payday lenders are providing a useful service. If your hypothetical worker would have lost his job without the payday loan, doesn’t that simply prove that payday lenders are providing a useful service for their customers?
The reason they need to charge such high interest rates is simply because, as Mark pointed out, they live in the real world where some of their borrowers are likely to default on their loans. In addition, there are fixed costs associated with processing each loan that need to be paid for as well. Without charging such rates, they’d be out of business.
If the government now caps the interest rate to something way below the market rate, these payday lenders will simply go out of business, as the Reason Magazine article referred to by Patrick Melody clearly explains.
And in that case, your hypothetical worker whose car has broken down would now lose his job.
The notion that man has free will is not something concocted in an ivory tower – as you can see, denying man’s free will amounts to a denial of how the real world works.
Jobo, if the payday lenders wouldn’t lend them money then who would? Obviously, the banks won’t. So, as far as I can tell, they would either go to loan sharks or payday lenders. Even if you ban payday lenders, the loan sharks will still exist. They know where to situate themselves even better than payday lenders because they have their finger on the pulse of the communities in which they operate.
Payday lenders, to me, are the finance equivalent of legalizing prostitution or drugs. The arguments for those usually amount to, “well, if it’s legalized then at least we can regulate and tax it”… and here we are. An unsavoury business (loansharking) that has been somewhat civilized. If we didn’t have payday lenders, people would be asking for a sanctioned alternative to loansharking. We have it now.
If you go further to the left of the political spectrum, you will find people who say that the banks should be forced to lend to these people at a capped interest rate. Who would invest in such a business, and where would the incentive to keep your financial house in order come from?
I don’t see a way around these businesses.
“The way around these businesses” is not the point. Some regulation is. These businesses are not “providing a service” out of the good of their heart. This is the fastest, most profitable, consumer finance business there is right now. The CEOs of these companies are making obscene profits.
The point above about people “saving a bit of their income” is laughable. Could some people do it and don’t? Yes. Most people can’t. And that’s why they are in this situation.
Payday loans, as a concept, are fine. The way they work in reality, however, is not fine. It is immoral. It is usury. An industry like this can only be set up when usury laws are usurped and removed from the books, or overlooked, due to lobbying.
And, no, they aren’t the only problems. When i was a kid, bouncing a $20 check was like, a $5 fee. Now it is something like $40, for the same reason (lack of, or ignoring, regulations), even though the actual cost of processing a bad check is way lower than it used to be. Interest rates on credit cards used to be in the teens, now they routinely top 30%, and are “post applied” to your existing balance, which also never used to happen.
The financial system in this country is a leech, slowly draining money from those who would otherwise spend it and use it to grow into the middle class, and filling up the coffers of those who couldn’t spend it fast enough, no matter how hard they tried.
The idea of getting a short term “bridge” type loan? Good. The current market set up to do such a thing? “Bad”. I’ve posted elsewhere on this forum that using the arguments you are using about payday lenders, then frankly, we should end the student loan market, controlled/monitored/regulated heavily, by federal and state governments, because frankly, if you were not “smart enough” to put aside portions of your savings to put your kids in school, then, frankly, it’s your own, and therefore their, fault. If you want to go to school, then, well, pay 400% APR for it or go work at Wal-Mart.
Jobo – I don’t wish to continue this debate with you any further because I don’t think it will serve any purpose.
Suffice it to say that the statements you are making are all derived from a fundamental error of judgement that is made by a lot of people – including most politicians and a number of highly-regarded professional economists. So I don’t necessarily blame you for making such errors.
And that error is the inability to see beyond the first-order consequences of the policy proposals that you are making and not looking at the second-order consequences of such proposals, i.e. the error is the inability to understand the law of unintended consequences.
As I mentioned elsewhere on this thread, you might want to check out a book called Economics in One Lesson by Henry Hazlitt. It’s available free of cost here:
http://prawo.uni.wroc.pl/~kwasnicki/EkonLit/Economics%20In%20One%20Lesson.pdf
If you do take the time to read this book, it may help you rethink your world-view.
Thanks.
Jobo, I think you have some good points (especially about bank fees vs. cost to provide the service) but I guess we’re not going to resolve anything here.
But I do think student loans are a different issue because there is some reasonable expectation that the money is used to fund something durable that will pay back in future (education), whereas payday lending may just be used to buy groceries that are gone before the loan is called. Do they even ask or care what you intend to use the money for?
Not being a financial expert I have a question: if payday lenders make so much money (“Nobody likes payday loans, except of course the companies that make billions providing and servicing them.”) why would they need backers (“The biggest backer of payday lenders is reportedly Wells Fargo.”)? How much money do you need to make before you no longer need backing?
The joke is that Google’s “don’t be evil” is supposed to differentiate it from the crowd. The implication is that “being evil” and presumably “doing evil” is considered normal in the commercial world.
We should not be tolerating evil in any part of society as evil is by definition anti-social.
P.S. Cringely seems to have a very high tolerance level for commercial evil.
IMO, “don’t be evil” seems to mean that you should not get your hands dirty doing dirty work, but instead facilitate the dirty work by providing opportunities and tools. Don’t be evil, but facilitate the evil of others in such a generic sense that you can’t possibly be directly blamed.
Kind of like China’s foreign policy.
I think we are over-analyzing it, though. It was a flippant tagline invented when the company was young and had an uncertain future and no investors. Sort of like “Moore’s Law”, it has been blown way out of proportion with respect to what it was meant to accomplish. We shouldn’t hold them to it.
Great post! I started following your blog about a month ago and I like your honesty. Good example to emulate.
The most recent Planet Money podcast speaks exactly to this issue: https://www.npr.org/blogs/money/2010/09/28/130194702/the-tuesday-podcast-what-s-better-for-helping-poor-people—-greed-or-charity
Bob, consider this: What do you suppose would happen to the people who apply for payday loans if there was no such thing as payday lenders? As you said, they would literally not have enough money for milk and bread. So they would starve. In light of that realization, I don’t understand how anyone could conclude that payday lenders are doing evil.
You’re made the assertion that the interest rates charged by payday lenders are too high. The fact of that matter is that there are plenty of lenders who will lend on demand for much lower interest rates. Namely, credit card companies do it. No one in their right mind would choose to borrow money at a 400% interest rate when they could use a credit card at 20% instead. So, from this, we must conclude that people who apply for payday loans are unable to qualify for credit cards. Given that, we may also conclude that payday borrowers have bad credit, which means they’re people who have a history of borrowing money and never paying it back.
If you’re a lender lending to people who have a history of never paying their debts, you only have two options: charge ridiculously high interest rates, or go bankrupt. In fact, simple common sense dictates that every single payday lender who ever charged low interest rates either has already gone out of business or will soon.
The payday loan industry operates the way it does because it must operate that way in order to function. They don’t get to decide which version of reality they get to occupy. They have to live in the real world. And in the real world, people who have bad credit will default on loans more often than not, and the only way to compensate for that is to charge them high interest rates. The only other option is to let them starve.
So please stop referring to people with bad credit as “vulnerable”. I prefer to use the more descriptive term: “irresponsible”. Their plight is the result of their own choices. They lay in the bed they made.
Mark – well said. Bob, and most of the commenters here who blindly support the assertion that payday lenders are evil, lack a basic understanding of economics.
They therefore end up supporting some government regulation or the other in order to fix what they perceive to be a problem, not realizing that such government regulations almost invariably end up hurting the very people they were designed to protect, as the Reason Magazine article that was referred to by Patrick Melody clearly explains.
Just the way minimum wage acts create unemployment in society and end up hurting the very people they were supposedly designed to protect – minorities and less-skilled workers.
Bob – and everyone here who believes that payday lenders are evil – please read Henry Hazlitt’s Economics in One Lesson. It will open your eyes – I promise. It’s freely available here:
http://prawo.uni.wroc.pl/~kwasnicki/EkonLit/Economics%20In%20One%20Lesson.pdf
I think Bob’s logic makes sense. What Google brings to bear is scale and efficiency. Compared to an individual payday lender franchise that has to charge xx% interest to keep their doors open, Google could charge x% … almost on a nonprofit basis … and still get a greater return on their cash than other banking products.
Rather than all those storefronts, why couldn’t they install a Google ATM to dispense cash OR simply electronically transfer funds to the customer’s banking account AND withdraw a predetermined monthly from that same account? They could virtually eliminate labor costs, at least for some segment of the market.
Seems reasonable to me, and not evil.
I’m wondering why Google got into payday loans and not credit cards. They can charge their 20% interest and also get reams of user information like location, spending habits, ect. Or maybe that market is saturated and the payday loan angle is a more stealthy way of getting a foot into banking services in general? Could this lead to a Bank of Google in our futures? If Google’s primary MO is to make inefficient practices more efficient then the banking industry looks pretty ripe for that.
Good point. How many gmail users would immediately open a beta google bank account?
Google Payday is a pretty catchy app title 🙂
[…] Google’s Pound of Flesh Robert Cringley (hat tip reader John M) […]
Wow. Fascinating article and interesting speculation abt. possible use of Google funds. What an utterly startling response by the google staffers. True or not. Who knows.
I’ve never used a payday loan. It seems to me to be a horrendous business. Feed off the least well off with the highest rates and fees imaginable. If I’m not mistaken laws have put in place to restrict payday loans to people in service at no more than 32% (don’t recall if those are state or federal limits)
32% hm, generals, members of congress, corporate executives, well off people, etc. don’t get hit w/ 32% interest fees.
boy is there a disconnect with charging extraordinarily high fees to enlisted members of public service in the armed forces, often praised and extolled as our most exalted hero’s….and then through a b/s set of laws “helping them” by limiting the lending rates to 32% when no financially better off American would ever in their right minds pay. Meanwhile the other less well off folks who use pay day loans don’t get that “protection”. They get to pay higher fees.
IMHO Its bottom fishing at its filthiest.
I’ve read that there are credit union opportunities for short term loans that offer dramatically more favorable loan rates.
So…..does Google want to move some of its billions of excess cash into this crappy little business????
The whole thing is wierd beyond wierd.
Google could put money into this industry, It could market itself at the top of its market dominant search engine, secure a dominant place in the industry, Probably generate loans at dramatically lower rates, provide a structure with lower costs than the competitors…look and act like a hero (and actually cut costs) to the financial underclass…..and do so because of its amazing power and virtual monopolistic position in search on the web.
The whole thing is simply mind boggling. Great story.
GREAT post. Brin and PAge admitted as much at the outset:
“Currently, the predominant business model for commercial search engines is advertising. The goals of the advertising business model do not always correspond to providing quality search to users. For example, in our prototype search engine one of the top results for cellular phone is “The Effect of Cellular Phone Use Upon Driver Attention”, a study which explains in great detail the distractions and risk associated with conversing on a cell phone while driving. This search result came up first because of its high importance as judged by the PageRank algorithm, an approximation of citation importance on the web [Page, 98]. It is clear that a search engine which was taking money for showing cellular phone ads would have difficulty justifying the page that our system returned to its paying advertisers. For this type of reason and historical experience with other media [Bagdikian 83], we expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers. ”
I address exactly this issue in my latest article:
https://www.law.northwestern.edu/lawreview/v104/n1/105/LR104n1Pasquale.pdf
I’ve only just noticed that the Google Ads propagating this page here in the UK are money lenders – two of the three being Payday Loan companies!!!!
Now I only vaguely understand the heuristics of these ad servings but I see this as a great example of how, well to put it bluntly, shallow and superficial the algorithms must be! They don’t seem like the work of PhD’d experts.
Do no evil? I suppose that depends. Just don’t let “Ads by Google” define it for you……
Every time I read a great post I do three things:1.Share it with my close friends.2.save it in all of the best social bookmarking websites.3.Make sure to return to the website where I first read the post.After reading this article I’m seriously concidering going ahead and doing all three!
Robert,
This is the second of recent articles whereby your liberal views of economy show, and they are flawed.
On this article you state: “Nobody likes payday loans, except of course the companies that make billions providing and servicing them.” This statement is factually wrong as the consumer who enters these loans “like” these loans as they need the money and there is no other company stepping up to service this need. You may feel the high interest rate is “evil”, but I would believe that that it reflects the risk/reward in such a loan. In the short run these returns may seem obscene, however in the long run I am certain that that many of the companies will loose money and go out of business, so the “real” return over time is likely in line with most investments.
You may feel these loans a predatory as they target groups of “poor” people. Then Jaguar and Ferrari are predatory as well as it targets the rich. Then the Ford Escape is predatory to the poor. The truth is predatory may be a correct statement, but it’s using that word conjures thoughts of “badness” when in effect both companies are providing a service that people want and need (would you prefer these people don’t get fed? Should the government step in with another inefficiently managed program using our tax money? No, the market always finds the best and most efficient solutions available at the time and will continue to hone and reinvent such solutions over time as history has proven free markets do).
As a note the “Motivating Miss Daisy” is the other misplaced liberal concept. In general, when our government interferes with a market, the market becomes distorted. Why should Tech companies be given an advantage over any other equipment manufacturer that needs to develop and re-develop products for its changing markets? Frankly it’s the distortions of markets by our “not so free” market (due to huge government interference) that has put the economy where it is right now. Business cycles are natural, but in the last 20 years our government have fought the business cycle and have largely won (in the short term view) by creating bubble after bubble. That has created the debt that will undoubtedly collapse on top of how. The only real questions are when and how bad will be the eventual deleveraging? In the long run the government interference will assuredly prove to be more destructive than constructive.
Hi Pat – RXC didn’t use the term predatory, you brought it up in your reply. And then you accuse the use of the word to be connotated with ‘badness’. I don’t see how that’s a good way to argue that RXC has liberal views of the economy. If we were really playing the semantics game – liberal would imply laissez faire and therefore a less regulatory marketplace. (If we are keeping track; score: 2-0, me).
Also – payday loans are not liked by consumers. That’s like saying I like having a digital rectal exam because I want to know if I have prostate cancer. It may be a choice, but its not a preference, which is what like implies. (3-0). Is government intervention the only way that the market can become distorted? What about monopolies, or duopolies, or oligopolies? What about safe practices in the workplace – by your statement even that is somehow interfering with the market. What about the markets that are created by the government – in your example tech firms – which lets be honest, over the past 70 years owe quite a debt to government funded research. I am a biotechnology post-doc and let me tell you, there is no market without the government. I think you should maybe be more specific in your comments about the articles at hand, rather than using them as a platform to espouse your unrelated views. And further, maybe you should take a better look at some of the issues and possibly adjust your views accordingly. Do I want ‘the government’ to “interfere” in my daily life? Not if it impacts me negatively, but looking at the bigger picture, even from a Hobbesian standpoint, let alone a Keynesian one, l would rather the gov’t as it is, over a whole lot else.
Hey RXC – speaking of my expertise – what about an article on the looming patent cliff for drugs and drug companies. Within the next 10 years over 80% of the drugs that drive the drug company profits will lose patent protection (another gov’t interference?, psych, Pat! you don’t have tuberculosis (i assume) so thats 5-0, me). RXC – any thoughts?
Thanks for contributing a little common sense. We need government to protect us from local and foreign criminials and some regulation is needed to discourage activities clearly against the public interest. But doing that is a far cry from trying to “manage” every detail of the economy regardless of loss of the pepole’s right to vote with their own hard earned money.
Does anyone know if there is some sort of “non-specific comment generator” software that can be automatically added to blogs for the purpose of adding a clickable link to many blogs simultaneously w/o having to read or even be aware of any of them?
If you put an “I” in front of “don’t be evil”, the grammar makes no sense. A personal mantra or motto isn’t necessarily about yourself or what you strive for, but what you believe about the world. In this case Google is scolding others to not be evil. It says nothing about What Google may or may not do in any situation. Google may very well believe that a small evil may be unavoidable for a greater good, in their opinion. Their track record seems to say so.
Hi Bob-
Just wanted to mention that your facts are a little off with respect to payday lenders. I have been forced to use one of these services in some months back – yes, to put food on the table and gas in the tank. Your numbers are a little off. Most lenders will lend you more than $500 unsecured, many times without a credit check, or without signing anything. My transaction was online. The effective interest rates are astronomical.
I received the sum of $300 for one week, for a fee of $75. That’s translates to an effective annual interest rate of 1300%.
j.
A laughable polemic, Cringe.
Look at the structure of this piece of Obamaic social engineering.
The more things change, the more they remain the same: find a scapegoat.
1397 — Jewish moneylenders are encouraged to settle in Florence
1437 — Cosimo de Medici, the Elder, grants the first formal charter to the Jews of Florence for moneylending
1442 — Pope Eugenius IV issues an edict prohibiting: building of synagogues, money-lending for interest, holding public office, testifying against Christians. Jews respond by meeting in Tivoli and Ravenna, with no success; causes them to move to other areas of Italy
1462 — Establishment of “Monti di pieta,” pity funds, by Franciscans to offer interest-free loans in direct competition with Jewish money-lenders; Jews lose business, and are therefore subject to expulsion
Iniitially I found every part of this article fascinating: that Google which is remarkably close mouthed would attend a convention of payday lenders and that their representatives would suggest they might enter the industry. That concept itself is startling. Google, with its control of search could enter any industry, place its entity on the top of search results for that industry and reap the benefits that go with high rankings.
That concept alone is astounding and scary.
But when comments such as those by Pat Sucher defend the PayDAy Loan industry and place it in the context of being superior to that of the welfare of people and strength and health of the economy one sees just how bizarre and misplaced the arguments of the extreme right are…and how they have been harmful to the economy as a whole.
Significant research has pointed to examples where payday loans get returns of several hundred percent or the horrendous example of a $300 loan being connected to a $75 fee and paid back in a week: That is an effective interest rate of well over 1,000 percent.
The jaguar buyers referred by Pat Sucher never pay 300, 400, or over 1,000 percent. Not even close. The only reason these payday loans approach these rates are because the borrowers are poor….and there is no promity to a “Perfect Market”.
A perfect market is something that is theoretically defensable in economic terms and in theory. Its supposed to lead to efficiency.
There are no perfect markets in reality…and in fact government actions in various markets that are far from perfect are often the actions that move the market closer to perfection…and closer to better efficiency.
If there were a perfect market for short term loans both borrowers and lenders would have EQUAL INFORMATION…and the loans would be indistinguishable (fungible).
That might mean that the person who needs a short term loan would easily see and be approached by hundreds of lenders. The mere fact of competition would drive down lending rates…and the absurd rates that soar into the hundreds of percent would never exist.
That would be a market near perfection and worthy of non intervention by the government. It doesn’t exist.
Instead people who have problems getting enough money for food and housing are faced with virtually no choices and an industry actually inoculated from government oversight to prey on poor people at whatever rates they want to use.
In older days, often made famous by movies this used to be called loan sharking wherein the Mafia would make a loan to a person with low income. If they didn’t pay back the loan the Mafia would break their arms or worse. Lots of movie examples today.
We’ve come a long way: The mafia has been defanged and now payday loan companies are allowed to do the same to people with little income.
If I can buy a house at a fixed rate interest rate of 5-6% and a poorer person has to borrow money for a week or 2 or 3 at rates that can soar to several hundred percent or more than its obvious that the market is out of whack and needs to be adjusted.
There are plenty of markets that are remarkably far from perfect. Whenever they are far from perfect there is nothing justifiable about defending them on face value. When far from perfect they are not efficient. That means there is nothing great about them or worthy of protecting.
That doesn’t mean the government needs to get involved in every market that is imperfect…and it doesn’t.
But it should protect those that need protection the most. In fact there are state regulations and federal regulations that address and limit the loan rates on payday loans.
Similarly there could be other effective financial industry responses to the need for small amounts of short term loans. Micro loans have proliferated into third world nations and made their way into the US. Credit unions provide such loans.
The endless right wing commentary that lauds “market” and attacks government for interacting with markets leaves out the first lesson of economics 101; the definition of perfect markets.
In reality there are no perfect markets…and with that there are no markets that are immutably and uniquely always the most efficient economic entities in existance.
Go back, Pat Sucher. Please take economics 101 again..or possibly for a first time.
Dave – you have made 2 major assertions in your post, both of which are unsubstantiated, and at least one of which is demonstrably incorrect.
Your first assertion is that the payday loan market is substantially imperfect.
Your second assertion is that government intervention in imperfect markets can make those markets more efficient.
Let’s take the first assertion. For your assertion to hold true, you would have to first prove that payday loan companies are making super-normal profits (i.e. profits in excess of the normal risk-adjusted rate of return on capital) and you would have to then prove that such super-normal profits are not coming down over time because of competitive forces.
Do you have any proof that payday loan companies make super-normal profits? Note that the mere fact that payday loan companies charge high interest rates does NOT prove that they make super-normal profits, since in order to calculate their profits, you would need to find out their cost of capital, their default rate and all the costs that they incur in processing and servicing these very short-term loans.
You have provided no proof that payday loan companies make super-normal profits. On the contrary, the evidence that we do have with us indicates that payday loan companies DON’T make such super-normal profits.
Please refer to the Reason magazine article that was first pointed out on this thread by Patrick Melody (http://reason.com/archives/2009/09/25/payday-of-reckoning/print).
Here are some statistics from this article:
Payday loan companies typically charge $15 per $100 on a 7 or 14 day loan, plus $20 in fees. So if you took at $100 loan from them, you’d pay $135 after a week.
Their average default rate is 10%.
The cost of originating each loan for them is $12 (note that this is the cost of originating the loan – it does not cover other costs like servicing loans, overhead costs etc.)
So if a payday loan company lends $100 for a week to 10 borrowers, their cash outflow is $1000. If 9 out of those 10 people pay the $135 after a week, their cash inflow is 9 x $135 = $1215.
Subtract the $12 that it costs them to originate the loan (i.e. $120) from this, and you are left with $1095, which means that their net inflow on those 10 loans after a week is $95, i.e. $9.50 per $100 loan.
That’s a substantial reduction from the $35 per $100 loan that everyone on this thread seems to be so worried about.
Note that you would now need to subtract other costs from this $95 (their cost of capital, overhead costs, costs involved in servicing loans etc.).
While the Reason article does not tell us what these costs are, the figures that they do give amply illustrate that the misgivings about this industry are grossly misplaced.
Secondly, do you have any proof that such super-normal profits, if they do exist (which as I have demonstrated is highly unlikely), are not coming down over time because of competitive forces?
If payday loan companies were indeed making super-normal profits, wouldn’t you expect other entrepreneurs to enter this industry in droves and thus drive down rates below what they are now?
Furthermore, your assertion that most customers of the payday loan industry are poor is grossly incorrect. I again refer you to the Reason magazine article. 70% – 80% of payday loan borrowers earn above $25,000 per year.
The U.S. poverty line for a family of 4 is $21,756 (http://en.wikipedia.org/wiki/Poverty_threshold#National_poverty_lines).
Therefore, well more than 70% of payday loan borrowers are NOT poor – they are simply financially irresponsible enough to not have an extra $100 – $200 or so with them when they need it.
Now let me address your next major assertion – that government intervention in an imperfect market can make it more efficient.
This pretty much flies in the face of both economic theory and our cumulative experience over the last 100 – 150 years. Government intervention in the free market, far from solving the problem, invariably has one of 2 consequences (or both):
a) It makes the problem worse
b) It creates even more serious problems elsewhere in the economy.
For the theory behind why government intervention in a democractic political setup invariably doesn’t solve the problem that supposedly needs to be fixed, please refer to this link:
https://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_19/PThy_Chap_19.html
And for the practical demonstration of government intervention at work, I refer you back to the Reason magazine article, where setting the maximum interest rate at 36% in Virginia made payday lenders leave the state altogether.
Now who did this government intervention benefit? Certainly, it hurt the “evil” payday lenders that you love to hate. But did it help any of the “poor” you supposedly claim to speak for? By removing their ability to get payday loans, you have simply done one of 2 possible things for them:
i) They’ll now be driven towards loan-sharks who will charge them an even higher rate of interest in the absence of competition from these payday lenders. And their loan recovery methods would be slightly less pleasant than that of a legal business.
ii) They will simply have to do without the loan and if the loan was supposed to pay for a necessity, they will have to do without that necessity.
Doesn’t sound like this particular government intervention has helped the “poor” borrowers too much, does it?
Another point – 36% is a pretty high rate of return (in the absence of any risks, costs etc.). Most people would kill to get that kind of return on their money. Even Warren Buffet can’t make 36% per year. So why do you think the payday lenders left the market in a hurry even though they could charge as much as 36%?
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Beautiful blonde girl lying on the carpet, talking on the phone while smiling at me in front of her MacBook, showing me how wonderful PayDay loans really are… It’s true, she’s with me now as I type this, over on the left-hand side. Served by “Ads By Google”
This ubiquity, this unsuitable offering and unsubtle algorithm is starting to rankle with me now…
Is this what the big G were doing at the trade fair? Offering their sledge-hammer type advertising for the industry involved?
At least if their offerings were appropriate they’d get sympathy, but these examples clearly are not. Have they perhaps lost sight of the ball now they are so all-conquering?
… right-hand side obviously … See, I’m mesmerised! 🙁
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You said that on September 30th.
this sound like crazy…
Maybe someone can clarify something for me. I’m just not getting it!
https://www.slate.com/id/2270044/
“Legal Usury
The skeevy business of payday loans.
By Timothy NoahPosted Tuesday, Oct. 5, 2010, at 6:53 PM ET”
Trying to get any kind of loan when you have a bad credit record is very hard. It seems more and more people are giving up and getting payday loans. I find myself wondering if the guys on Wall Street are responsible for the mess.
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