Traditionally, payday loans have been made through storefronts, but on Monday Cash America International Inc. announced a deal that would make it the first of the major publicly traded payday lenders to offer such loans online.
The Fort Worth payday lender, check casher, and pawn lender, which has 717 stores around the country, said Monday that it has agreed to pay $35 million in cash for Check Giant LLC, a Chicago online payday lender that does business as CashNetUSA.
Daniel Feehan, Cash America's president and chief executive, said on a conference call that CashNet is one of the top 10 to 15 lenders on the Internet, which he called "the fastest-growing segment of the short-term cash advance industry."
Consumers like online payday lending, because of its "convenience, ease-of-use, and relative anonymity," Mr. Feehan said. "The Internet appeals to a large number of people who might be reluctant to conduct business in a bricks-and-mortar location."
For Cash America, the most attractive thing about CashNet is that, unlike some other online payday lenders, it has licenses from each of the 27 states where it does business, he said.
CashNet "is one of the few companies that we have found operating in this space that has gone through the very rigorous process of getting licensed state by state and organizing their technology to deliver documents in accordance with state laws," Mr. Feehan said.
This setup is important in staving off any regulatory challenges, he said. "Long-term, that, in our view, is the only secure way to be in this business. I'm not going to suggest that the people operating offshore are going to be unseated anytime soon, but we have a hard time finding strong legal authority for people operating under the other models."
Daniel B. O'Sullivan, an analyst with Utendahl Capital Partners LP in New York, said that for payday lenders, "the margins are probably higher" with an online model, "because you don't have all these storefronts." However, "the potential for defaults would theoretically be higher, because it's probably [more] difficult" to gauge the borrower's risk "when they're not in front of you."
Thomas Bessant, Cash America's chief financial officer, said in an interview, "Anytime you're lending money, you're taking a risk, and obviously these are very high-risk customers, both in the stores and online."
In its home state of Texas, Cash America has compensated for the lack of "enabling legislation" for payday lending by operating under the lucrative credit services organization model. CashNet, which does not do business in Texas, would adopt that model there after it became part of Cash America.
The deal is expected to close within 60 days.
Under the CSO model in Texas, payday specialists can collect fees of as much as 20% for arranging a short-term loan from a third-party lender. Lenders started adopting the model last year because Texas legislators failed to pass enabling legislation. The lenders previously partnered with banks, but the Federal Deposit Insurance Corp. cracked down last summer on the number of successive loans that the banks could make to a borrower.
Mr. Feehan said Cash America also liked CashNet's "sophisticated proprietary scoring model that allows it to buy leads more efficiently than most lenders we have seen in the market."
Cash America would keep CashNet's 125 employees and its "young" management team, he said. He expects CashNet to "work on developing new products and services capable of being profitably delivered over their online platform."
Also Monday, Cash America lifted its earnings guidance for the second quarter, to a range of 30 to 31 cents a share. It previously expected to report earnings of 26 to 28 cents a share.
Cash America's stock surged 9% Monday.
Mr. O'Sullivan said the boost was "more attributable to the increased guidance" than the deal announcement. He noted that one of Cash America's competitors, EZ Corp., also boosted its earnings guidance last week and had a similar run up in its share price.
Both companies gave the same reason for raising expectations, he said: "Retail merchandise sales were better than expected on the pawn side." In particular, "higher gold prices" boosted profits from the sales of gold jewelry.
"If the retail environment is better for them, it usually means the economy is doing OK, and people have a few extra dollars in their pocket," Mr. O'Sullivan said. "These guys benefit too from tax refunds." Perhaps consumers "had a little extra money to spend."
