Accepting a Job in the Payday Loan Industry

Matthew Simmons was agonizing about whether or not to accept a management job in the

payday loan industry. Matthew had graduated from a college business program and had

received three job offers, the best of which in terms of salary was as a management trainee

with a payday loan company.

Payday loans are small, unsecured loans against the customer's next paycheque. This type of

lending began in the mid-I 990s and today has about two million customers in Canada. There

are more than 1.7 million storefronts and online platforms, some of which are open seven days

a week, 24 hours a day. It is estimated that the industry does about $2 billion a year in business.

The operation of these stores has become an informal banking system for a segment of the

population. The loans are made and covered by a postdated cheque cashed on the next payday.

The average loan is about $280 and made for 10 days. The service offered is convenient, but

high interest rates are charged and fees are levied. It is even alleged by some consumer

advocates that the payday loan business is illegal and a form of loan-sharking. The industry

responds that their lending practices are better than the alternatives available to some in

society who would have to resort to using pawnshops or unscrupulous lenders.

The payday loan industry is responding to a consumer need for short-term, unsecured loans.

The chartered banks and credit unions are unwilling and/or unable to provide the service. In

fact, it is argued that the banks have encouraged the industry by closing so many branches. The

banks say they have overdraft and credit card loans available. Some critics have determined

that the payday loan stores are increasingly being set up near banks.

Some consider the industry to be a scam against poor and financially illiterate consumers that

traps many into a never-ending spiral of debt. Industry observers counter that there is a

business case for the payday loans. First of all, there is a huge demand, suggesting a need.

Flexibility is provided to consumers in managing their financial affairs and other services are

provided, such as cheque cashing and money transfer. The loans may be used to pay off other

loans with even higher interest rates, such as those on some credit cards. The high interest

rates and fees are justified as there is a high default rate, and there are high administrative

costs involved with small loans. The industry is mostly unregulated as there are jurisdictional

complications, with the federal government being responsible for interest rates and the

provinces for consumer protection.

An industry association, the Canadian Payday Loan Association (CPLA), is attempting to clean

up the industry's reputation and supports regulation by government. Its mandate is "to work

with governments toward a national regulatory framework that will allow for a viable industry

and protect consumers." Of the 1,77 1,400 retail outlets in Canada, about 957,760 are CPLA

members. The members must adhere to a "Code of Best Business Practices" that covers such

things as rollovers (businesses are not allowed to grant another loan to pay off a previous one),

collection practices, privacy protection, advertising, and responding to consumer complaints.

From a career perspective, the payday loan industry appeared promising to Matthew. The

company was expanding rapidly by adding locations in smaller communities and adding

financial services such as insurance, mortgage referrals, foreign exchange, and tax preparation.

Matthew's offer stated that he would start with a six-week training course followed by an

intern period in a branch under the supervision of a manager. There was a good possibility of

being a branch manager in less than a year and a division manager a few years afterwards.

Questions

I. What fundamentals of capitalism are relevant to this case?

2. Which stakeholders benefit from the payday loan industry, and which ones are harmed?

3. What are the economic, social, and ethical implications or issues in the industry?

4. Should Matthew take the job?