Chicago 28-year-old made $70 million off cash loans, now he's buying slums
chicagobusiness.com
chicagobusiness.com
I interviewed at CashNetUSA last year. It was the second most-appealing job I've ever been offered (I interviewed for my current job, the most appealing, at the same time so I didn't end up working there). They had a great tech team, extremely smart and experienced guys. They employed 400 people (mostly call-center reps) and paid well (not sure how they're doing post-bust). They sponsored and hosted meetings for the Chicago Lisp User Group when we were active.
Site in RoR, they programmed their own call center using Asterisk, self-managed Linux infrastructure, quants generating real-time risk assessments for customers to determine individualized rates, etc.
I politely made myself unavailable. Maybe its because I spent a decade, the 90s, building financial apps at large banks and insurance companies. Like so many other IT guys, I know I had a hand in building some of the machinery that has destroyed America and those that trusted it.
But even if you had never worked on the inside of Wall St. firms, you should be able to spot a crack dealer when you see one (what do you think those call center reps were doing?). I don't care if they are using Linux and pay well. There is a reasons usury laws exist. The same reasons drug laws exist...usury and drugs both eat at the bottom of society and destroy it.
People who use these services frequently get dependent on them, and not out of necessity. That's a big part of why credit and loan industries have been growing so much for the past decade; people want fast cash once or twice and get stuck in the cycle.
Until recently a company in the debt collection industry I'm very familiar with was giving advances on paychecks to certain employees. The practice was recently stopped when the head of HR left and the result was basically analogous forcing people to get off a drug. It's not like they didn't have income, they just got locked into a cycle of dependency. The kicker: most of the employees in this company who were hooked on the paycheck advances are collectors themselves, dealing all day with other people dependent on debt.
Maybe his new real estate business is more respectable but it was made possible by his previous business.
Can anyone explain why we should look up to him? I understand that there might be a need for "payday loans" but it still looks like exploitation.
This is so against the current mindset of how purpose comes way before profit is even considered but this guy is apparently very good at making money. It's contrarian to the start up culture Google inflicted on all of us, but smart business is effective business. He is doing well even when times are very tough, he targeted potential growth and effectively switched from one business front to another.
maybe...
If there were some lower cost alternative, the borrower wouldn't take the payday loan. They would use the alternative.
Hence, if you are providing a product (without lying), I think you are doing the world a service. And the magnitude of the goodness you are doing is measured by your profit.
Borrowers are not always rational or informed. Most people go into debt because they spend beyond their means, not because they're leveraging short term capital. Payday lending is illegal in some states and a felony in Georgia. This guy made $70 million off poor people, pushing a large number of them further into debt, and you're calling that the measurement of his goodness?
B is the only one who is qualified to make decisions that only affect him. How can you possibly think that taking options away from B is a good idea? Options that you or I may think are stupid shouldn't be taken away from B, just because we don't see how they are useful to him.
I think that payday lending shouldn't be illegal - as long as an action doesn't involve any non-consenting parties (theft, violence, fraud, etc), it should be legal (in my view).
And then back on topic: Is there a significant moral difference between outright lies in advertising, and specifically marketing to a certain percentage of the market who you expect to miss-understand a technically truthful advert?
Like many issues, the real problem is the education system.
Perhaps if inner city public schools were more like schools and less like prisons we would not have significant parts of the population lacking rudimentary critical thinking skills, and we would not have to worry about entire segments of the financial system existing solely to exploit them.
Ok, so for example you support B's right to sell himself into slavery if he feel that that is the correct course of action?
We're talking about the kinds of dumbasses who take out payday loans. Arrogant or not, he probably does know what's better for the borrower than the borrower does himself.
As more people use credit for everyday purchases, fiscally responsible people get priced out of the market. The additional cash on hand drives prices up, because there's always some idiot who's willing to pay more now with a credit card or payday loan than he can afford to pay back later. He crowds out prudent buyers who only purchase goods if they have cash on hand. Eventually, it becomes rational for everyone to pay with money they don't have, because otherwise they're simply priced out of the market and have to do without.
An example might make this more concrete. Say that there is a limited supply of some highly-demanded good - say, cupcakes. In economic equilibrium, the price of a cupcake may be $2, and there is enough supply for 25% of the population to have one. This being a functioning market, the cupcakes go to the people who most deserve to have them, "deserve" being a function both of means (how much money they have to spend, a proxy for how much they've contributed back to the economy) and of desires (what fraction they're willing to part with to get that cupcake).
Now say that one person discovers a payday loan shop. He suddenly has much more cash on hand, because he can get a full advance halfway through the pay period. So he gets a cupcake even though he couldn't normally have afforded one, and then has to pay back more in the future. This is still legit though: maybe he just really wanted that cupcake, and is willing to take the future hit to income to have it now.
Imagine now that 25% of the population has discovered the magic of pre-approved credit offers, and suddenly have lots of cash on hand. They bid up the price of cupcakes to $10, and suddenly these profligate folks get all the cupcakes. The fiscally responsible folks who make a decent income but refuse to go into debt have been completely priced out of the market, so their only choices are to join the debtors, or do without. So the number of debtors grows even more, people start needing to take on debt just to survive, and folks have no intention nor ability of ever paying this back.
This is happening in several areas of our economy right now.
There are a limited number of houses. They go to the highest bidder. Therefore, if some idiot pays 0% down on an interest-only options-ARM, he can get more cash on a given income/savings level, and outbid the prudent folks who insist on paying 20% down. This is why it has been essentially impossible to buy a house lately (well, up to 2008) if you have any intention of not being foreclosed upon.
There are a limited number of spots in colleges. There is also massive financial aid available. When families take out loans to send their students to college, they can pay higher prices. Colleges raise their tuition to compensate. It then becomes impossible for people to attend college without taking out loans. (Except for certain elite schools that give outright grants for everyone on financial aid.)
There is a limited amount of food. When large numbers of lower-income people have more immediate cash, thanks to payday loans, grocers can raise their prices accordingly. Other people in the neighborhood are faced with the choice of either taking out loans themselves or going hungry.
I've read a few economic histories that suggest that these debt-inflation cycles hit countries every 80-200 years, and that the end result is necessarily that the money supply spirals out of control. People need to borrow to live, and yet the borrowing fuels further increases in the cost of living. They almost always end in war, which serves as a giant reset button by bankrupting everybody equally. ;-) WW2 was fueled by the debt spiral of Weimar Germany, where they physically couldn't repay their WW1 reparations. The American Revolution was fueled by the Stamp Act ("No taxation without representation"), which was to cover rising indebtness of British war debts. The French revolution was caused the bankruptcy of the French royals.
I'm fairly certain this happens with credit cards: plenty of people max out one credit card to pay off another. And wasn't there another poster in this thread who suggested people were taking out payday loans to pay off late fees on bills? That's basically just letting your debt compound.
The additional debt load is effectively an increase in the money supply, which we know causes inflation. So yeah, I dunno if there's a direct connection, but it seems plausible.
http://www.blacklistednews.com/view.asp?ID=6397
> Total U.S. credit card debt reached almost $800 billion in November 2007
In contrast, the US GDP is about $14 trillion, so credit cards probably have some inflationary effect (GDP isn't the right statistic, what's needed is some measure of the total money supply, but I'm not sure how that's done.)
It would seem that the market has a way of righting itself over time. The people who would take out loans and drive the prices up eventually run out of credit (it's a financial capacitor, not a perpetual money source), and then they not only have to compete on the higher priced market they created -- they have the burden of the additional interest, as well. They then can not even buy as much as before and are relatively disadvantaged in the market -- pushing prices back down, perhaps even below the origin. This is more or less playing out in the housing market right now -- home prices : income ratios are returning to their post-WW2 origin.
As far as the other points, I feel there are too many counfounding issues (particularly with the warring nations example) to really comment on.
Yes, but it seems that many people are not going to wait that long.
An externality only occurs if cupcakes introduced a harm or benefit to third parties that was not factored into the cupcake price. For instance, cupcakes might cause pollution (e.g. discarded cupcake wrappers) which would cause a negative externality because there's no "cupcake tax" to fund pollution cleanup. Conversely, cupcakes might cause an increase in the number of happy people in the world, which would be a positive externality.
To successfully conclude that payday loans introduce a negative externality, we need to point to a specific harm to third parties beyond higher or lower prices. For instance, one might assert that payday loan customers who rely on payday loans are more likely to resort to drug use or crime, which then harms society. However, that isn't the argument presented here.
Also, in your other examples, there are repeated mentions to a fixed supply ("a limited number of houses", "a limited number of spots in colleges", "a limited amount of food".) Economic theory would suggest that higher prices would result in higher supply. For instance, when the price of cupcakes go up from $2, bakers will respond by producing more cupcakes and the supply of cupcakes will increase. This will lower the price of cupcakes from $10 to (say) $3. Granted, $3 is higher than $2, but that's just the market equilibrium price when payday-loan users are allowed to have inter-temporal credit.
They are excessively high loans. Do they help change the overall economic disposition of the customer? No, customers are usually repeat business either weekly or biweekly.
I've never heard of this guy before today, but I'd venture to defend an honest loan agency.
Simply, loans are only profitable for lenders if they get back more money than they lend out. As a lender there are two ways you can recover the money you lend -- you get your money back in the negotiated payments or you can accept a security (the lien on a car or house) and repossess/foreclose on it if the terms for repayment are not made. Because there's some chance that the security would be insufficient to cover the debt (house is trashed or loses value, or car is neglected/destroyed), the difference is made up in interest, calculated by the probability of failure (represented by credit score) and the financial exposure if failure occurs (this fed into the feedback cycle where banks were basically giving money away, assuming houses were always going to appreciate). Any remaining delta is operational expense (salary for the lady behind the counter, rent for the buildings) or profit for the lender (presumably where the "exploitation" is).
Paycheck loans are not securitized, in that there's no asset the lender can recover if the paycheck draw doesn't clear -- this means it's down to interest. Paycheck loan shops (AFAIK) don't check your credit, and their very existence (withdraw repayment on payday) assumes that the customer has bad spending habits (otherwise the customer could get more favorable terms from credit cards) -- high probability of failure to pay * high exposure = high interest rate.
But how high is too high? I honestly don't understand the modern notion of usury. It looks like any other business exchange to me: if you need the service and nobody will provide it for less, the prevailing rate is that high, even if it feels like a screw. If it truly is a screw there are generally other businesses who want to get in on it and capture some of the profits. To the extent that this guy was profitable, it was down to either a lack of competition (this can be a bit of a tautology, but he did have competitors, including the one that eventually bought his business), reduced cost structure (yes -- online only), or better actuarial discipline (perhaps marketing to people likely to pay -- unsure in this case).
The article doesn't talk about how much money he made from the operation of the business itself, rather it was focused on the $70m proceeds from the sale of the business. They seem like two different sources of income to me: if the valuation was way off he exploited Cash America instead of his customers.
In summary, I feel that it's not exploitative: while paycheck loan houses have high interest rates and often a poor clientele, they serve an underserved market (as evidenced by the popularity and profitability), and are often a loan of last resort for certain people. They don't operate any other businesses that eventually coerce you into using their loan services. They're certainly a better choice than the criminal "loan shark" element that some people suggest they replace.
The argument is to save people from their own poor judgment.
Not too long ago, I would have opposed this philosophy. Now, I'm not so sure. We allowed people to trust their own judgment, particularly people in the finance industry, and they obliterated our entire financial system. On a smaller scale, consumers did similar things with credit card debt and houses they could not afford. Neither side (consumers or the finance industry) could have caused all this damage without the willing consent of the other.
So, the argument that we need to sometimes constrain the choices people have in order to save them from themselves, and ultimately to save people making good choices from the consequences of people making poor ones, seems more reasonable now.
Usury laws date back thousands of years. Its hardly a modern notion. They exist because its well understood that all forms of high interest add to wealth distribution problems. Which in turn causes all sort of other problems in society.
I find the debate about payday loans much more interesting than the debate of whether or not he should feel guilty for profiting. I don't know the regulations involved with payday loans but I assume they are very strict (and they should be stricter).
Its up to the payday company to figure out how to be profitable...and most are.
You might think "Boy, I hope I never get into a financial situation where taking out a payday loan is my best option!" And I'd agree with you 100%.
When you extend that thinking to "Boy, if I were ever in such a dire situation, I wish that someone would take my best option [which we just agreed above was a payday loan] completely off the table such that I'd have to choose some even worse option than that!" is where you've departed from what I consider rational, logical thinking.
If a payday loan is the best option for some overall disadvantaged consumers, why would one want to outlaw their best option, leaving them even more disadvantaged?
All in all, they're really the bottom of the barrel in terms of business ethics. Worse than crooks. I find it hard to believe that a payday loan company could be competitive without using all the shady tactics in the book, unless they did something radically different. There's no indication in the article that this one did something different, so it's fair to assume that this payday loan company was much like all the others.
I have some distant acquaintances that are horrible with money. In the last year they have been behind on their car and mortgage payments, the woman has been steadily employed but the man doesn't work any more than he absolutely has to. That said, on payday they buy PS2/PS3s and games, and are at the pawn shop on a monthly basis hocking them again (this cycle has happened 2-3x that I'm aware of, and I hear things third-hand). It's cultural for them to not trust banks, so they "keep" cash. These people place no value whatsoever on their credit score, and they seem totally unconcerned about using the tools at their disposal, despite the financial implications.
The husband went out of town a while back with a shady family member "to work". The shady family member had been in recent trouble (kept within the neighborhood -- they don't call the police) for home burglary and assault/robbery. There wasn't any hard evidence but there was the unstated concern that the "work" might not have been on the up-and-up.
Is it wrong to offer a paycheck loan service to people like this? There's certainly no way to draw causation here, but there's non-zero correlation. For people that choose to live this way how is it even ethically wrong? It's what they want and they're not concerned about the downside (living a little tighter next week), and they'd blow right past the boarded up paycheck loan shop to get to the neighborhood loan shark if that was the next best option.
Personally I'm of the mind that safe, legal, regulated access to loans for people who otherwise could not get them are a valuable service. Even if they're as unpleasant as needle programs for druggies.
I would agree with this, if it wasn't for the aforementioned shady tactics...
Taking your needle program analogy, it would be extremely unethical if the needle program was paid for by the dealers and they used that opportunity to sell you more drugs, chat with you to find out if you're thinking of quitting, and offer you some free heroin if you are.
Similarly, short-term loan shops often employ strong-arm tactics to ensure they do receive payment. I.e., if you don't pay back, they'll send a couple of burly men to stand in your doorway until you do (as far as I know there's no evidence of them actually using violence, but the message is fairly clear).
So, to me, it seems payday loan shops are closer to the mafia/drug dealer side of things than to the needle program side.
However, regulating these companies to death puts you right back at the start again...
And yes, from the sound of it, it is a complex, multi-faceted problem.
Did you really need an entire industry that charges high interest to solve that problem?
If such companies did not exist, what would happen? Electricity would get cut off right? Then what? It would happen to enough people in your community and together they would go to their local leaders and find solutions. Solutions that would not involve the creation of payday companies.
Apply this set set of thinking to other scenarios: car payment (car gets repo'd if you don't pay today), your out of weed (gotta get high man), need to pay the babysitter so I can go to my minimum pay job. Try being poor for a while, its quite stressful.
Every problem you can think of, by providing high interest loans to briefly avoid it, only causes these problems to get worse.
I'm sure people do use payday loans to go score weed to be happy and temporarily reduce the stress of their situation. IMO, they are better off for having that choice than not, and it's not my place or yours to force them to choose in way that we think is "more wise."
It is government's (society's) place to put limits on people's behavior. That is the primary purpose of such systems.
If you're asking government to act as your agent to put limits on behavior for my benefit, why not mind your own affairs and let me mind mine?
I don't claim that all commerce is allowed. I do claim that government ideally gets its power from the people's consent, rather than the other way around.
You can get a bad checking account with high monthly fees, check writing fees, ATM fees, etc. I'm pretty sure you have to submit to a credit check or have additional deposits to get a free account.
While these bad checking accounts are probably less expensive overall, it's more difficult to judge the costs, especially for financially unsophisticated customers. One big fat fee from the payday lenders probably seems smaller than N smaller fees where N is unpredictable.
Not to mention there are cultural and demographical biases against banks and credit cards. When I was in China I knew many people who did not trust banks. They either did not want how much banks/government to really know how much money they had or weren't sure their interests would be looked after if something were to happen.
Wait, you're now arguing that the "loan sharks" are useful and helpful, after denigrating them elsethread?
In any case, I agree that you can cash a check at the bank it is drawn on, and that it can be difficult. Because my newly opened account had an eight day clearing time, I needed to cash my checks and trot over to my bank to deposit cash quite a bit last year (small employer had no direct deposit). It was comical what lengths they went to to try to avoid giving me cash.
"Are you a customer with us? [No.] Oh, I'm sorry." (But I didn't go away).
"Oh, you'll need two IDs." (Okay, here you go).
"Oh, we don't have that much money on hand." (It wasn't very much, especially for a bank).
"Oh, I'll have to get my manager." (in a vaguely threatening-maybe-you-should-just-leave manner).
"If you open an account with us, we can cash this." (But of course they could even if I didn't).
"We can't give out that much cash. Can you come back tomorrow?" (No).
"I guess we could do a cashier's check for half of that [said doubtfully]. Would you like to open an account with the remainder?"
Etc. The first few times, I was polite and firm, and eventually they recognized me when I came in and I didn't get any hassle. But lots of people wouldn't know that "We can't" doesn't mean they can't.
They are only useful and helpful in the absence of forcing banks to act like decent members of society. Fix that problem (which is very easy if you focus on corruption between corporations and elected officials) and you remove the need for the loan sharks.
Note: this goes for most states, not just the lovely one Chicago is in.
http://www.cashnetusa.com/how-it-works.html
I agree that payday lending probably can't be done that much cheaper. Competition does tend to keep profits low for most businesses. However, if the only loans which can profitably be made in a given market are extortionate, then I don't think that loans should be made in that market.
It's business, sure, and I do live with the fact that the world is full of businesses which profit by taking advantage of others, but I don't have to respect the kind of person who starts such a business.
That's not usually what it is. People use it once or twice and get addicted.
I'm not saying these services shouldn't exist (I'm personally heavily invested in the collections industry), but the parts of the credit/loan industry that target these markets are very analogous to drug dealing because they primarily profit off of people stuck in the cycle. Also importantly, the companies have all the power, they have the law on their side and can navigate the court system.
They don't go to a payday loan to cash a check. They go there to get a LOAN. It's a cash-advance so they can pay some bill out of desperation, like their rent or something like that.
Wal-mart cashes a check for $3.
I don't have any good data to back this up, but my guess is that Bank of America, Wells Fargo, etc., rip off way more poor people than this company.
$2 atm fees, $35 overdraft fees, monthly fees unless you have high minimum balances, all the "0%" interest credit cards you can handle (until bankruptcy), and my personal favorite---"keep the change", a debit card card that deposits the change into a savings account to help you save more! What they don't mention is that the savings account pays significantly less interest than the inflation rate and that the average consumer spends over 10% more when using a card than cash holding all else equal. You get to "keep the change" while bank of America keeps the 2% merchant fees on debit card transactions...
If your poor, the big banks don't care about you at all. They'd rather take all you have then kick you to the curb. Now if you have money, the banks are great. But I wouldn't attack this business because even if may be an expensive deal, at least they care about the low income market.
peter [at] pchristensen [dot] com
No one involved in any form of usury has high moral standards. The cash loan business only exists because state politician were paid off to build loopholes around existing state usury laws. Who do you think pays off these politicians to create such a loophole? Someone that doesn't make money off the industry? I seriously doubt it.
The most salient adjective that you can think of is "Jew" ?
WT* ?
I'm not someone who sees racism and anti-Semitism under every rock and leaf... but, seriously, WT* ?
I, for one, enjoy Hacker News more when commenters use phrases like "28 year old entrepreneur" and "40 year old physicist" and enjoy it less when the phrases are "28 year old Jew" and "40 year old Black".
"Whenever the private sector introduces an innovation that makes the poor better off than they would have been without it, or that offers benefits or terms that no one else is prepared to offer them, someone—in the name of helping the poor—will call for curbing or abolishing it."
There's lots of research, on the other hand, that because the interest rates are so high, people fall very easily into an endless cycle of debt, using Pay Day Loan B to pay off Pay Day Loan A.
http://www.linkedin.com/ppl/webprofile?action=vmi&id=659...
He also appears as a manager in some of the SEC documentation.
http://searchwww.sec.gov/EDGARFSClient/jsp/EDGAR_Query_Resul...
David Shorr is 45 according to pipl.com
While Mr. Goldstein was a founder, he wasn't the only founder, and he had some more senior, connected talent to help him.
Mr. Goldstein had spent a summer during college at the Chicago Board of Trade interning with David Shorr, one of his mother's patients. Mr. Shorr left the trading floor in 2003 because of an injury and was looking for a new venture. He hit on the payday loan business — "You borrow money at one rate and you lend it out at a higher rate," Mr. Shorr says — and e-mailed Mr. Goldstein to get his thoughts. "Al sent me an e-mail back with bullet points, action items, and I realized my first action item had to be to get him," Mr. Shorr says. He offered Mr. Goldstein a 75% pay cut but also the chance to build a business from scratch. Mr. Goldstein jumped.
I constantly see mentions of boy geniuses in the popular press. He's undoubtedly bright, but it's his access to connections and money, and in particular Mr. Shorr, that made the difference between a mom and pop payday check cashing operation and growing to sell a business after two years. Readers of HN should recognize that it's not through his brilliance alone.
If you still want to do finance, see this link from HBS for ideas on how to build a nontoxic, sustainable form of it:
http://blogs.harvardbusiness.org/haque/2009/04/manifesto.htm...
Depending on the situation, they can charge over 1,000% interest. If payday loans were to charge 30% interest they'd still be able to cover the people that wouldn't pay.
It's a dumb saying but "don't be evil" springs to mind. Taking money off of the backs of the people that can least afford it isn't capitalism, it's greed.
A person needs money to feed their children and will be broke 3 days before payday. That person can either (a) not get any money at all, or (b) borrow it at a high rate of interest. What, exactly is wrong with option (b)? Don't add extra details like hidden gotchas, loopholes, what happened to a friend of your sister's etc. What is wrong with the situation exactly as I proposed it and why do you find it unethical?
Likewise, if I decide to snap up a property in distress and rent it out, why is there a (as you put it) "serious problem here?" Why is it better to just let the property rot? Again, answer to the facts instead of letting your bias add conditions I haven't specified.
I'm serious: I'm approaching this with an open mind. Tell me why I'm wrong.
Payday loans tempt the weak with options that help in the (very) short run, but harm in the long run.
The very existence of payday loans encourages self-destructive habits among the poor. Why budget carefully when you can just get a payday loan and kick the can down the road to next month?
And since many payday loan customers get these loans every month, the loans are really just an additional monthly bill for poor people.
There's a segment of the population who habitually make bad decisions. I've known enough of them to understand that they usually know they're making bad decisions, but they either don't care or don't have an alternative. Here's the important part:
You can't fix people
Some people will use payday loans to get themselves deeper in debt; most of them will use them as a temporary crutch to get out of a hole. Don't screw the latter over in your fervor to "help" (and I use that term loosely!) the former.
If you look at pictures of US presidents in Japanese newspapers, they look slightly Japanese. The photos haven't been edited; the editors just select pictures that look right to them.
The commenter was clearly referring to this:
> If you look at pictures of US presidents in Japanese newspapers, they look slightly Japanese
(I think this thread's the first time I've seen Lebowski quotes infiltrate Hacker News, and I don't know if that's a bad thing or an awesome thing.)