Recommendations
Cash Connection is a payday lending institution looking to differentiate itself from its competitors and acquire a large portion of the payday lending industry in order to escape the ill-effects of the impending regulations imposed by the government. The payday lending industry is highly competitive and the task of gaining a large hold on the market is not an easy task. This is why the company seeks to develop a strategy that can efficiently achieve results that not only put Cash Connection on top of the market but also keep it there.
Cash Connection has proven that being the first store in a new market is typically the one most profitable, with secondary stores cannibalizing the first and decreasing over profitability of the group. Despite the fact that there are untapped markets, it would seem that expanding is not the best option right now. Cash Connection has shown a decline in profitability for the past few years that would make opening more stores impractical due the financial burdens they would place on the company. That doesn’t mean that expansion has to be counted out, it just cannot be the focus of the strategy as a whole. A strategy that increase the revenues generated by existing stores while taking customers away from competitors would provide the foundation for increasing the number of locations available for Cash Connection to do business. By repeating this cycle, Cash Connection should be able to gain an upper hand on the payday lending industry.
In order to further develop the strategy, there are many considerations that must be taken into account. First, there is a need to determine what Cash Connect can and cannot do. The company excels in quickly processing loans, allowing for convenience that many customers have come to enjoy. They also offer a mix of products and services. The problem with this is that almost every competing lending company has the same ability to offer quick loan processing and many services. This means that a customer at Cash Connection is very unlikely to recognize a difference in what they get at Cash Connection versus say, Cash Advance America. Since there is little difference in the products, there is also a low cost to switch between two rival companies. Taking these things into consideration, we arrive at the main focus of the strategy, differentiation. What this boils down to is giving the customer something that they cannot get by going to a competitor. Determining how to differentiate is based largely upon capitalizing on the opportunities that company has while minimizing risk due to threats posed by other external factors. Banks and credit unions may be willing to undertake partnerships with payday lenders in order to target certain “underbanked” individuals. This refers to people an account at a bank or with very little access to a bank or other financial institution.
A brief overview of the recommendations for Cash Connection is as follows: * Hold off on building new stores initially * Partner with major financial institutions * Provide incentives to encourage customer loyalty * Help to clean up the poor image of the payday lending industry * Consider partnering with other large lenders to solidify the market positions of major players * Expand only when necessary to gain market share while being mindful of the increased burdens of more stores
After taking the preceding facts into consideration, a few recommendations for the company start to make sense. The possibility of a partnership with a mainstream financial institution could be beneficial in many ways to the smaller payday lender and the bank or credit union. Referral services from the bank could help those who need credit, but are unable to meet the requirements of the bank. Taking this idea a step further, it may be logical to allow payday services in a bank, but run by an outside party. This would allow Cash Connection to expand with minimal costs to themselves, while also benefitting the banks they were in by exposing them to the other forms of lending available. However; the partnerships need not be limited to something of that nature. Some type of incentive may be offered to the customer by either party. This could include things such as lower rates at partnered banks, waived fees, cash bonuses, etc. There are some potential pitfalls for both sides. The poor image of payday lenders in the eyes of many citizens could be detrimental to a bank that was closely associated with one, though it cuts both ways as it could boost the reputation of Cash Connection should it ally with a well-respected bank or credit union. Another issue is the possibility of cannibalization by the credit union or bank should they offer things that are attractive enough to those who enter the payday lender for them to stop using the lender completely. Still, this could most likely be offset by the extra customers gained from referrals as payday lenders have been proven to need only a small customer base to maintain profitability.
The next big focus for the strategy should be the elimination of the weaknesses the company possesses. How does a company go about increasing the cost for a customer to switch? The answer is simple; make the customers loyal by providing something they gain by repeatedly visiting the lender. Despite the apparent simplicity of this solution, implementing something to achieve this goal is not as straight forward. These incentives are going to eat into profits that can ill-afford to be lost by Cash Connection in its given state if they are put into place incorrectly. Should they be managed properly, they can greatly increase the likelihood of a customer returning numerous times. Some people look for rewards almost obsessively and may even borrow numerous times to gain the rewards despite the fact that they do not actually need the cash. The system must not be put in place in a way that seems to trap customers, though. With the impending regulations looming, things of this nature may become a serious issue in the near future. Time limitations for the customers return should be kept to a minimum and instead rely on the appeal of the incentive to draw them back into the stores.
Payday lenders like Cash Connection suffer from a stigma that revolves are their seemingly predatory nature. Despite this, there are many facts that actually show how beneficial the lending institutions are to those who use them. This means that marketing and education campaigns can be used to show the good that these businesses can do for people. By using these facts to their advantage, Cash Connection should be able to entice more customers who were unlikely to try their services out before. Using volunteers to show lower income people ways to manage debt and their general expenses may also be ways to gain the trust of more and more potential customers. These things may also serve to help alleviate the regulation nightmare that seems to be looming. By showing that these companies are able to serve people rather than prey on them, the poor image they have can be replaced by one that serves to bring payday lending to people outside the demographic that it is most commonly associated with, that of the low income family. Again, this portion of the strategy is not without some issues. Costs are one thing that must be managed wisely while the profits are down, as they are now. Cash Connection would do well to try and paint itself as a hero while making sure the competition benefits as little as possible from this strategy. It is true that reworking the image of the industry may require cooperation among several rivals. This may not be a bad thing however. Should a few of the larger, more well-established companies decide to revamp the image of the industry to makes themselves out to be leaders in innovation and reform, they may be able to solidify their positions, thus increasing the difficulty a new entrant may have when trying to gain a piece of the market.
Cash Connection would do well to follow these recommendations in order to help ensure future profitability. By focusing on profit first and then worrying about expansion toward the end of the process, they can create a business model that can almost certainly guarantee success. These recommendations serve to not only help boost their profit but also to improve the perception of their industry in the eyes of the consumer.

Exhibit 1: Dominant Economic Features

As of 2010, industry analysts estimated that there were more than 22,000 payday advance locations across the United States. Payday advances extended about $40 billion in short-term credit each year to millions of middle class households that experienced cash shortfalls between paydays. Analysts also estimated that about 5% of the U.S. population had taken out at least one payday loan at some time. While the industry trade organization reported that more than 10% of the population said they were somewhat or very likely to obtain a payday advance. This indicates that there were substantial potential growth opportunities in this industry.
For the industry, the major customers ‘annual salary payment is between $25,000 and $50,000. Among them, 94% has a high school diploma or better and more than half of the customers have a college degree. Those customers are very stable working class consisting of young families which have children.
There are three major competitors for payday loan industry: Banks’ overdraft protection on the checking account, Credit unions, and Credit cards. They deal with different situations for customers who have cash shortage issues charging fees correspondingly. Payday loan industries have advantage over these competitors in some aspects, and it needs to focus on that to keep their own consumer group.
For the payday loans industry, a barrier to entry was the level of industry competition in the area. A company’s cost structure and service relative to other lending companies mainly determines the competitive advantage of it. Although risk of the business is high, the potential to recognize substantial profits through fees and interest charges, strong consumer demand and low start-up cost still make the industry attractive to enter in certain areas.

TAKE-AWAY:
Payday loan industry is a growing market with substantial unrealized profit. Competition in the market is strong since that substitutes have their own dominant competitive advantages.

Exhibit 2: The Five Forces Model
STRONG
ANALYSIS: * Rivalry:
The competition of the payday loan industry is high since that the profitability of company performance is based on both its own and its competitors’ performance. * Substitutes:
Substitutes are relatively strong. Overdraft protection on checking accounts with average fee about $30 is the biggest substitute of payday loan. Credit Unions are able to offer borrowers relatively low-risk loans with a higher interest rate and lower fees. Credit Cards, pawnshops and auto title loan companies are also important substitutes to the industry. * New Entrance:
Entering the industry is relatively easy since that the start-up costs are about $130,000 for an individual location. However, barriers to enter comprise of the increasing government regulations and the risks posed by lending money to consumer. * Suppliers:
Suppliers are relatively weak in this industry because of the high riskiness. Suppliers do not have a lot of bargaining power over the payday loan industry. * Buyers:
Buyer power in the industry is moderate. Most Payday lending companies serve the middle class segment of consumers in working class population. These customers yield bargaining power over the Payday loan industry because they have options when they need quick cash, including credit cards, bank loans, and pawn shops.

STRONG
MODERATE
WEAK

TAKE-AWAY:
The payday loan industry should focus on how to survive with changing of governmental regulations, economic status as well as emerging substitutes of short-term loans.

Exhibit 3: Drivers of Change

Three main drivers of change to affect payday loan industry and competitive conditions are: 1. Regulatory influences and government policy changes

Several federal laws regulate the payday loan industry, such as Truth in Lending Act, Fair Debt Collection Practices Act, The Federal Deposit Insurance Act, and Gramm-Leach-Bliley Act. Government regulations contain the possibility of stopping predatory lending. For example, some states limit the amount of possible rollovers and two states (Georgia and Maryland) forbid the practice of payday lending all together.

2. Steady customer demand for small short-term loans and immediate gratification:

The current economic conditions make the payday loan industry attractive to those customers who need short-term loans and immediate gratification. Those customers tend to choose a payday loan’s services for the reasons that it could help them cover unexpected expenses, avoid late charges on a bill and they allow consumers to get the money they desperately as soon as they need it.

3. Competition from credit cards with high interest rates:

Many consumers intend to avoid the high rates associated with credit cards as well as the high banking fees associated with short-term borrowing. Therefore, payday loans are attractive to those customers for benefit of low rates of prepaid checks. Moreover, the borrowing processes of the payday loans are easier than those of banking or credit union.

TAKE-AWAY:

Cash connections should consider these drivers of changes to better adapt to the market conditions. The advantages of cash connections should be maximized to better off more consumers in order to improve profitability.

Exhibit 4: Strategic Group Map

Overdraft Protection
Broad

| Payday loan | | Credit Unions

| Credit cards | | Narrow | | |
Competitive Strategy
Differentiation
Low Cost

TAKE-AWAY:
Banks’ Overdraft protection on the checking account was the closest substitute for payday loans followed by Credit unions. Credit Unions are able to offer consumers higher interest rates and lower fees than banks do. The problem is that their service is not right for payday loan borrowers. Credit cards have a slightly lower late fee than payday loan advance service but with limited market share.

Exhibit 5: Key Success Factors

1. First to market advantage

Cash Connection built retail locations in areas where there were not already payday lenders of competitor or store. By doing so, Cash Connection avoid the fierce competition in those area of competitor store exits for the reason that additional payday loan store opened in an area is less productive compared with opening one in a new area. Since that a payday lender needs only a small consumer base to be successful in certain area, this strategy gave them opportunities to build their own customer loyalty and increase the market share.

2. Meet consumer demand of short-term loans

A large group of people are not able to get short-term loans in current society because of the financial regulations and increased consumer protections by banks and credit unions. Cash Connection provides variety of services such as payday lending and check-cashing services to those people with immediate need of cash. In addition, Cash Connection stores also offer bill payment services, prepaid phone cards, money orders, and Western Union transfers. By doing so, customers would possibly purchase other services when they stop in store with other needs.

3. Low relative cost of borrowing and easier process

Payday loan services have competitive advantage of low cost. The costs incurred by consumers from substitutes of payday loan such as overdraft fees, late payment penalties, and bounced check charges are higher than the cost of borrowing from a payday lender. Additionally, the process of borrowing from payday loan companies like Cash Connection is much easier than those who use Credit Unions and bounce checks, which makes Cash Connection serve better to customers who need immediate cash.

TAKE-AWAY:
Cash Connection has key success factors of first entering the market. And it has its own service to meet consumer demand with relatively low cost. Cash Connection should continue its strategy based on these factors.

Exhibit 6: Competitive Strength Assessment | | Cash Connection | Bank | Credit Union | Key Success Factor | Weight | Strength Rating | Weighted Score | Strength Rating | Weighted Score | Strength Rating | Weighted Score | First to market | 0.10 | 10 | 1 | 8 | 0.8 | 6 | 0.6 | Convenient access | 0.10 | 10 | 1 | 8 | 0.8 | 8 | 0.8 | Variety of services | 0.20 | 10 | 2 | 8 | 1.6 | 7 | 1.4 | Relative cost of borrowing | 0.30 | 10 | 3 | 5 | 1.5 | 7 | 2.1 | Alternative sources of financing | 0.30 | 10 | 3 | 5 | 1.5 | 6 | 1.8 | Overall weighted strength rating | 1.00 | | 10 | | 6.2 | | 6.7 |

In Cash Connection’s five key success factors, they hold an advantage over other financial institutions in the marketplace. For “First to market”, Cash Connection is able to locate a store in almost any city within almost any state. Banks and credit unions are subject to stiffer regulations of where they may operate. For “Convenient access”, Cash Connection stores can be located almost anywhere, from a stand-alone building on a corner to a strip-mall. Banks and credit unions tend to need larger facilities that require stand-alone buildings. In “Variety of services”, Cash Connection can provide a number of useful services to their target customer base, whereas banks and credit unions are more restricted. Finally, in “Relative cost of borrowing” and “Alternative sources of financing”, Cash Connection (and other payday lenders) hold a decided advantage over banks and credit unions in supplying small consumer loans to customers.

Exhibit 7: Financial Analysis | 2009 | 2008 | 2007 | Total Revenues | $5,768,805 | $6,238,860 | $6,348,544 | Operating Expenses | $5,569,912 | $5,488,623 | $5,017,173 | Operating Income | $198,893 | $795,237 | $1,331,371 | Operating Profit Margin | 3.45% | 12.75% | 20.97% | Net Income | $271,961 | $342,689 | $1,336,617 | Net Profit Margin | 4.71% | 5.49% | 21.05% | Internal Cash Flow | $271,961 | $424,420 | $1,396,776 |

TAKE-AWAY:
From 2007 through 2009, Cash Connection’s financial performance is in a down turn with net income from 1.3 million in 2007 to 0.2 million in 2009. Revenues declined and operating expenses increase sharply especially from 2008 to 2009. There was a 0.6 million difference in operation income between 2008 and 2009. Moreover, Cash Connection has huge decline in cash flows in recent years. Based on the characteristics of services provided by Cash Connection, amount of cash on hand is extremely important factor of effective operating. A disallows it from utilizing their previous strategy of opening new retail stores in new and prime locations.

Exhibit 8: SWOT Analysis Strengths * Able to process loans quickly * Offer a range of services Weaknesses * Low switching costs * Lack of product differentiation Opportunities * Large gap in small consumer loan financing options * Partnerships with banks and credit unions to target “underbanked” Threats * Increased financial regulation and consumer protections * Implementations of a financial “czar”

SWOT Analysis Cash Connection’s strengths lie in its ability to process loans quickly and without credit checks. They also have a nice product mix, so consumers have multiple reasons to come to one of their stores. Their weaknesses stem from that their products are the same as the competition, and the only cost to a Cash Connection customer to, say go to Cash Advance America, would be the time and gas money to drive there. Cash Connection’s largest opportunity lies in the growing and underserved small-consumer loan realm. They could also promote partnerships with local financial institutions to further educate their clients, and bring them up from an “underbanked” status to a less-likely-to-default middle-class consumer. Their largest threat comes from the additional costs of audits and following regulations that will follow the implementations of a financial services “czar” by the federal government.