In Defense of the Little Guy

As provinces establish their applicable rate caps throughout Canada, one of the most vulnerable groups of lenders are the "mom and pop" operators with a small number of stores and often located in Canada's smaller communities. These lenders normally process a lower volume of loans because of the communities they are in and face higher costs for the same reason.

In Manitoba's Public Utility Board hearings last year, Deloitte, one of Canada's largest accounting firms, presented a cost study of 4 small to medium-sized lenders in that province. According to Deloitte, the average of cost for the lenders to issue a $100 loan was $26.87. Despite this evidence, the Manitoba Public Utility Board (PUB) set a maximum allowable rate of $17 per $100 on the first $500 and $15 per hundred on amounts between $500 and $1000.

In defense of their position, the PUB suggested that a business model should meet a certain (undefined) level of efficiency in order to earn the right to survive in Manitoba:

There is no public interest reason supporting inefficient payday lending, anymore than one might expect a pizza restaurant to survive by selling only eight pizzas a day – competition will address pizza market issues, but regulation is required for payday loans (in the absence of a “competitive” market), to ensure that the consumers of payday loans are served by efficient payday lenders.

The Board didn't examine the level of competition in the pizza industry. It didn't compare how many pizza restaurants there were in any given community and elaborate on how that particular number was suitable to call the market competitive. It surely wouldn't suggest that in small communities where there is only one pizza restaurant that regulations are required in lieu of competition.

While those Manitoba communities with only one pizza restaurant will continue to enjoy their pepperoni slices, the custodians of the "public interest" in Winnipeg have ensured that their only access to payday loans will be miles down the highway, in the nearest town that is big enough to attract Money Mart or The Cash Store.

I was prompted to write this piece about the mom and pop lenders who will be the victims of excessively low rate caps after receiving an e-mail today from one of those small lenders. While the inconvenience of having to drive great lengths to get access to emergency credit is one issue that is easy to identify (especially with the rising cost of fuel), it is often more difficult to capture the intangibles that are offered by smaller service providers. The following is an excerpt from the e-mail I received this morning (for privacy reasons I will keep the lender's name confidential):

Last week we ran into a problem, I was out of town and so I could not run to our client's bank to do a direct deposit. Than we had in one day two clients that each borrowed $500.00 so that took up our capacity to do e-mail transfers (we can do up to $1,000 of e-mail transfer in 24 hours, $3000 in 7 days & $7,000 in $30 days). Even if I had been in town, doing direct deposit the only way that I know how is to run to my bank, withdraw cash and than run to our client(s) bank to deposit directly into their account which really takes time and ties me to my office.

Without divulging any of your successful ways of doing business can you point me to a better or more efficient way of doing direct deposits or a method to increase our capacity of e-mail transfers.

So here is a guy who runs a small payday loan location who is willing to drive from bank to bank in order to deposit money for one of his customers who is out of town and can't make it in to a location. I can't think of the last time I received that kind of service from any company I have dealt with. I also haven't spent much time in a small town so maybe that is were I went wrong.

To all of the decision makers in Canadian provinces who feel that there is a public interest in putting these lenders out of business, I encourage you to go visit a few of them. Talk to them. See the type of service they offer first hand. You may feel better about allowing them to stay in business when you see that what they lack in efficiency, they make up for in good old fashioned customer service, something the public may in fact be interested in.