Payday Loan Companies Facing a Dire Situation

Jacob Harper |

On Jan. 31 short-term lender and pawnbroker DFC Global (DLLR) tanked in the market, losing over 25 percent of its value. While DFC got hammered pretty solidly that day, they have nothing on their competitor Cash Store Financial ($CSFS). Cash Store has fallen 80 percent since Feb 2013, and has shed 40 percent in the last week alone. The downward spiral of the two short-term lenders highlights a trend in global financial institutions, with high interest rate-charging loan providers quickly losing favor in the marketplace.

DFC and Cash Store face problems on two fronts. One, a lack of profitability: a strengthening economy has seen the price of gold plummet, affecting a trade that thrives on the buying and selling of yellow metal.  Two, and more importantly, several major world economic powers have moved to severely limit the unethical lending practices of these types of institutions.

On Feb. 14 the Ontarian government put forth a proposal to deny the Cash Store and its subsidiary Instaloans licenses to open new stores in the province.  The government cited Cash Store’s consistent violations of lending laws, including charging excessive interest rates and failing to provide loans in a  timely fashion.

For their part, DFC faces increasing government crackdowns in the UK, as that country looks to tighten its restrictions on payday loan shops.  DFC was also hit hard by a poor 2014 second fiscal quarter report and dismal guidance, as the regulatory factors affecting their business look to get even more severe.

DFC and Cash Store's usefulness in the market has been consistently undermined as the global economy recovers. A strong economy strengthens the dollar, ratchets down the price of gold, and eases traditional bank’s willingness to lend, all bad signs for payday lenders.

On Feb 18 DFC Global rebounded, gaining 4.48 percent to hit $7.46 a share. Cash Store shed 21.88 percent to hit 50 cents a share. If Cash Store does not recover they could be delisted from NYSE and be forced to trade over-the-counter.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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