Mitchell Schnurman has been writing about business news in North Texas for more than 25 years and has been a columnist since 2001. He joined The Dallas Morning News in 2012 after working at the Fort Worth Star-Telegram and Dallas Times Herald. He championed the lifting of the Wright Amendment, supported the American Airlines-US Airways merger and often weighs in on tax breaks for developers.
Education: Bachelor's of Journalism, University of Missouri-Columbia.
Published: 21 July 2014 09:08 PM
Updated: 21 July 2014 10:02 PM
A decade ago, Cash America International collected $21 million from payday loans. Last year, those fees totaled $878 million, and now include loans that are sold online, in foreign countries, and backed by car titles.
Sounds like a great business — to get out of.
Despite the remarkable growth, Cash America is poised to spin off most of its consumer loan operation by the end of the year. The Fort Worth company wants to refocus on pawnshops, the old-school segment that made Cash America a high flier on Wall Street.
A nearby rival, First Cash Financial Services in Arlington, has been de-emphasizing payday loans for several years. The pawnbroker said payday fees generate about 5 percent of revenue today, down from a peak of about 20 percent.
The retrenchments come as regulators are cracking down on payday lenders in the U.S. and abroad, and even in some Texas cities. Tough municipal restrictions have cut into profits and revenue, and prompted Cash America to close 36 storefronts in the state.
Payday loans are controversial because they often trap the working poor in a cycle of debt. Sold as a short-term fix, most loans are rolled over many times and fees pile up. In Texas, an average payday loan of $300 costs $701 in fees and interest, the highest costs in the country.
Fourteen states and Washington ban the loans entirely. The Consumer Financial Protection Bureau, a new federal watchdog, slapped $5 million fines on Cash America last November and Ace Cash Express of Irving this month. (The companies must pay millions more in customer refunds.) The bureau also is preparing new rules for payday loans, which could limit rollovers and tie payments to borrowers’ income.
In the United Kingdom, the Financial Conduct Authority is overhauling the payday industry, and an interest rate cap is expected early next year. Cheque Centre, which has 451 branches in the U.K. exited the payday business this spring. The Financial Times reported that at least one third of the country’s payday lenders have not applied to operate under the new regulatory regime.
This affects Cash America, because British customers generate almost half the revenue at its potential spin-off, known as Enova International.
“These regulators have enormous sway over
the industries Enova operates in,” wrote credit analyst Shakir Taylor of Standard and Poor’s.
S&P touted the unit’s liquidity and strong growth in revenue and profit. But it raised flags about charge-off rates (as high as 30 percent for payday loans) and the push by regulators. S&P expects “extensive scrutiny and a restrictive regulatory framework” over the next year and a half, and that could constrain growth, Taylor wrote.
Enova handles Cash America’s e-commerce segment. It accounted for 87 percent of consumer loan fees last year, or $765 million. The retail services segment brought in the rest, but it primarily makes pawn loans and sells pawned merchandise.
In late May, Enova sold $500 million in senior notes, agreeing to pay almost 10 percent in annual interest. Proceeds from the offer went to Cash America for intercompany debt and a cash dividend.
Cash America has tried to separate Enova before. It filed the paperwork for an initial public offering but yanked the deal in 2012, amid a tepid market.
If it elects a spin-off, Cash America plans to retain a stake of about 20 percent, probably for two years or less, CEO Daniel Feehan told analysts in April. The company isn’t ruling out other options, such as a sale, but one way or another, a split seems likely.
“Separating the businesses makes sense for us today, for a whole variety of reasons,” Feehan said in April.
Future of Enova
Cash America’s stock price declined in each of the last two calendar years, a rarity in its history as a public company. Feehan acknowledged that management lost focus on the pawn business, shifting attention to consumer loans — and their regulatory risk.
In early April, the company reported strong quarterly earnings and announced the potential Enova spin-off. The stock price shot up almost 15 percent in two days and remains up by double digits for the year.
Separating Enova should lift some of the payday stigma attached to Cash America. And it would give Enova a chance to excel on its own.
Enova has plans to expand into Brazil and China, fast-growing markets with fewer regulatory threats. Even in the U.S. and U.K. regulators don’t want to end the business; they just want to protect consumers from the worst abuses.
Enova has been making major adjustments. Five years ago, payday loans accounted for 93 percent of its revenue, according to S&P. In the first quarter, revenue was almost evenly divided among payday loans and more traditional installment loans and lines of credit.
In a recent letter to shareholders, Feehan said strapped consumers will continue to search for solutions.
“We intend to be their provider of choice,” Feehan said.
Even if that’s a separate, stand-alone company.
Follow Mitchell Schnurman on Twitter at @mitchschnurman.
Category: Payday loans