Essays on the Industrial Organization of the Payday Lending Industry

Abstract

The payday lending industry has experienced incredible growth in the 2000's. In 1996, there were an estimated 2,000 branches operating nationally. However, in 2007, this figure increased exponentially to 24,000 branches; in 2010, the count slightly declined to 20,600. Loan volume also saw incredible growth: estimated loan volume in 2004 was $50 million and grew to an estimated $30 billion for storefront lenders alone. Increased competition from traditional banking institutions changed the landscape of the industry as well. In the same decade, states began adopting explicit policies regulating payday lenders with different levels of stringency. Some states chose to allow the practice of payday lending to exist. Some states prohibited lending explicitly or through indirect fee maximums. Varied within across states, these regulations were addressing the growing debate surrounding the use of this particular product. Opponents of payday loan use argue that the high APR associated with these loans are a form of price gouging by lenders, taking advantage of a disadvantaged population. Further, critics argue that payday loans trap users in a cycle of debt that, in the end, cost borrowers more in fees than the original balance of the loan. Conversely, proponents of the product cite high costs of lending as justification for high prices. The high risk of default, security and payroll fees contribute to higher per-loan costs. Lastly, the use of payday loans is safer when compared to realistic substitutes, such as late-payment fees, overdraft fees, and implicit consequences of late utility payments. The studies within this dissertation attempt to increase understanding of the payday lending industry by examining both sides of the market, firms and consumers. The first two chapters examine how firms within the industry react to and interact with policy environments that dictate market conduct. In the last chapter, I examine payday loan borrowers in order to better understand the mechanisms of demand for such a product. All three studies serve to contribute to the commentary as to how this industry serves borrowers and what policy actions are best in order to address potential issues pertaining to the payday lending industry.