PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?

C. Profitability Analysis

Payday lending operations averaged a 7.63% profit margin on average revenue per store of just over $80,000. For the "Pure PDLs," average revenue per store was reduced to $63,233. A review of the source data indicates that there is a difference between pure payday lenders and pawn operators with respect to this ratio. The best-performing pure payday lender generated $6,000 less in revenues per store when compared to the lowest-ranking pawn operator.

This trend continues with average operating margins. For payday lenders, average operating margins indicate revenue before accounting for administrative or headquarters expenses. In essence, this is a measure of revenue after accounting for store operating costs. For pure payday lenders, average per-store operating margins (revenues less costs of store operations) are 24.64%. For those with pawn operations, the figure jumps to 31.99%. It is interesting to note that Flannery & Samolyk made similar findings: average operating profits at stores studied was calculated at 33.2%, very close to the 31.99% figure presented above.

Similarly, average profit margins also indicate that pawn operations contribute to firm profitability. Profit margins indicate the percentage of gross revenue that truly is profit for the firm-the percentage of gross revenue that remains after subtracting out all associated costs for the period. For pure payday lenders, the average profit margin was 3.57%. When including pawn operators, this figure more than doubles to 7.63%.

These figures indicate that payday lenders are not overly profitable organizations. Contrary to conventional wisdom, these firms fall far short of profits for mainstream commercial lenders. In addition, profit margins of payday lenders are far below those of Starbucks. The profit margins of Starbucks for the measured time period were just over 9%. This is almost 2% more than all payday lenders, and more than double the pure-payday lenders. These figures indicate that arguments against payday lending, couched in terms of preventing excessive profits, are unfounded. If companies should be limited to a certain profitability measure, citizens would be better off fighting Starbucks than their local payday lender.179

Comparing the profit margins of payday lenders to mainstream commercial lenders supports this perspective. The comparison lenders had a profit margin of 13.04%-much higher than even Starbucks. This was over three times the percentage for pure payday lenders, and almost twice as much when including hybrid operators. These profits are not being made by small, unknown or niche lenders. These are mainstream companies with widely-recognized names: Capital One, GE Capital, HSBC, Money Tree, and American Express Credit.180

D. Expense Analysis

These findings seem hard to understand in light of the service fees charged by payday lenders. According to the Flannery & Samolyk study's data, the average fee charged by payday lenders is $17.71 per $100 advanced.181 An analysis of expenses related to payday lending operations sheds some light on this problem. First, the industry's contention that operating expenses are high is bolstered by this study. Store expenses account for 75% and 68% of gross revenues for pure payday and hybrid payday operators, respectively. The same figure for Starbucks, a similar business model, is less than half of either of these, at 32%.