Cash Connection: Are its Payday Lender Strategy and its Business Model Ethical?
Situation:
In 1986, Allen Franks, President of Cash Connection, opened his first check-cashing store in Shreveport, Louisiana. Not only did Cash Connection provide check cashing and payday advances, they also offered prepaid phone cards, bill payment services, and money orders—serving as Western Union agents to transfer funds for customers. In the early 1990s, payday advance services grew as a result of a strong customer demand and varying circumstances in the financial services marketplace. Recently, the payday loan industry is in a position of stagnation. Due to rapid growth early in its industry product life cycle and an increasingly regulating and rule-laden environment due to stricter government regulations, the industry’s growth has rapidly slowed and is in somewhat of a decline.

Complication:
The driving forces currently impacting the industry are the prevalence of laws regulating the lending industry, auditing processes to demonstrate compliance and limitations on the number of rollovers allowed and interest rate caps. The federal government has implemented the Truth in Lending Act (APR disclosure), Fair Debt Collection Practices Act (non-aggressive collection methods), The Federal Deposit Insurance Act (ability to charge nationwide interest rates of home state) and the Gramm-Leach-Bliley Act (privacy concerns) to address concern by consumer groups, not necessarily the consumers themselves (Gamble, 2011). Enforcing additional caps and restrictions will limit the fees that companies like Cash Connection can charge and will reduce the profits in the industry as a whole as the revenue stream continues to be squeezed. The rate ceiling, contrary to its intended purpose, prevents these low-income borrowers from establishing or re-establishing credit and restricts the availability of credit to less risky applicants (Lehman, 2003). Georgia and Maryland which have eliminated payday lending firms from conducting business in their states have both seen a significant increase in bounced checks and complaints regarding aggressive debt collectors Gamble, 2011).

Motivation:
Cash Connection uses a focus differentiation strategy. A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy (McGraw-Hill). Cash Connection’s utilized a focused differentiation strategy to distinguish itself from its competitor’s while adhering to increasing government regulations. Their primary goal was to provide short term credit, through payday advances, to anyone thereby supporting their expansion into cities that did not currently have a check-cashing facility. Payday advances are single payment loans rather than installment loans and the underwriting process for payday advances does not involve a credit investigation. “The average payday loan amount was $300 and the term was typically for 14 to 30 days” (Gamble, 2011). Franks sought to create a competitive edge by incorporating attributes and features (offering bill payment, prepaid phone cards, money orders, and wire fund transfer) that set his payday loan company apart from rivals in ways that buyers would consider his services more valuable. By 2010 this had become nearly impossible, as more than 22,000 payday advance locations existed within the U.S. more than double traditional banking facilities (Gamble, 2011).

The low cost of capital to open a payday loan company and potential of substantial profits through fees and interest chargers makes it appealing. However due to government restrictions it is making it harder and harder to enter into and make it in the industry. Cash Connection’s bargaining power is low when it comes to their customers. This is because customers have many different payday loan companies and other outlets they can use. This then enables them to be able to choose a specifically based on their preferences. The threat of substitution is increasing rapidly. Consumers having many choices for substitution such as overdraft protection, credit cards, and even banks now offer checking card advances. Banks that finance Cash Connection have a substantial amount of bargaining power. Banks are able to set up restrictions. There is high rivalry between established competitions. Adversaries are trying to improve their market positions. Competitors are all aggressively going after the market share.

Resolution:
Cash Connection should find new ways to differentiate itself from the fast-growing number of firms competing in the industry. One way to differentiate itself from the other firms would be to offer more attractive repayment solutions to repeat customers that pay on time. This would increase customer loyalty and also increase its reputation. This would also decrease the number of returned checks and ultimately increase Cash Connection’s bottom line. I recommend that Cash Connection should provide a checking account option for the customers who do not have a checking account that requires a minimum balance of five dollars. This way they do not have to turn away customers who do not have checking accounts and are able to reach a larger portion of the unbanked segment

Reference
Gamble, J.E., & Thompson, A. A., Jr. (2011). Essentials of Strategic Management: The Quest for Competitive Advantage (3rd ed.). New York: McGraw-Hill/Irwin

Lehman, T. (September, 2003). The Free Market: In defense of payday loans (Vol. 23) Retrieved from, http://mises.org/freemarket_detail.aspx?control=454

McGraw-Hill. (2011), Strategic Management, New York: McGraw-Hill Company