There's a saying popular among those in the business of making small-denomination, short-term loans against a person's next paycheck. A banker may want 100 customers worth $1 million, the payday lender likes to say, but we prefer 1 million customers each worth $100.
The pawnbroker, the subprime auto lender, and the rent-to-own operator might say the same. These and other merchants, part of what might be called the poverty business, thrive on an upside-down universe in which customers without money are good for the bottom line.
You'd figure, then, that these storefront lenders operating on the economic fringes would be making out like bandits with financial misery at a high. Yet to hear them tell it, they're struggling through hard economic times like most everyone else. Defaults are up, they claim. An economy with fewer jobs means less people with paychecks to borrow against.
Meanwhile, despite their protestations, somehow they're managing to continue to make fat profits off people with thin wallets.
At quick glance, the payday lenders might seem to be struggling. Just check out the stock of the country's largest payday chain, Advance America. Its share price is down nearly 30 percent compared to two years ago. That compares to a 19 percent drop in the Dow Jones Industrial Average over that same period. Stock prices of the other publicly traded companies making payday loans (hard to believe, but there are at least six others) have similarly suffered.
But dig a little deeper and you find that the payday industry's woes have little, if anything, to do with the health of the payday racket. The average size of a payday loan is up, according to public filings. So, too, is the average fee a customer pays for a loan. Maybe most significantly, the number of customers stopping by each store has been on the rise over the past couple of years. The payday lenders say they are losing customers on the bottom of the economic pyramid. But with credit harder to come by these days, more people are suddenly noticing the corner payday lender, at least in the 34 states where the laws allow operators to earn triple-digit returns on the money they put on the street.
"People who might have been able to take out a home equity loan in the past are now going to the payday lender," Larry Meyers, an investor in payday stores and a prolific pro-payday blogger, told me. "People who could borrow through their credit card -- that's not an option anymore for a lot of them."
Of course, high unemployment poses a concern for payday lenders. It's hard for someone to borrow against their next paycheck if they're no longer receiving one. But some of the big chains have maneuvered around that problem by offering payday loans against a customer's next unemployment check.
The bottom line: Advance America is earning more at each individual store today than it did in 2007. So, too, was Check Into Cash back, a 1,200-store chain, at least back in 2009, when its owner, Allan Jones, was still talking to me and before he started reading reviews of a book I wrote about payday and other lunchpail lenders.
"I had a real good January," Jones told me when I visited with him in the winter of 2009, smack dab in the middle of the worst times. "It's looking like I'm going to have a real good February, too."
So why the lousy stock prices? One reason is the payday industry's orgy of overbuilding. When Advance America went public in 2004, it was reporting a profit margin of 23 percent. By 2009, that figure was below 10 percent.
"As an industry, we just overbuilt," Billy Webster, co-founder of Advance America and today its board chairman, told me. By 2006, the industry had reached 24,000 stores -- more than the combined number of McDonalds and Burger Kings in the U.S. The real problem wasn't so much rival stores competing for the same customer, Webster said, as what he dubs "the multiple loan problem": it's too easy for a person to owe money to several stores at once.