As the payday lending business contracts under heavy regulation, the key to surviving is a good hook.
That's especially true online, where consumers in increasing numbers are going in search of small-dollar, short-term loans. Providers are taking very different — and in at least one case, outlandish — approaches to attract these consumers.
At one extreme, Blue Global Media's lead generator LittlePayday.com has gone for shock value, hiring an adult-film actress as a spokeswoman. Another company, BillFloat Inc., has a more serious message, casting itself as a responsible alternative to payday loans for consumers who need cash to cover bill payments. (Neither company is a lender.) Their divergent tactics underscore the fierce competition in the microlending market and the importance of a resonant message.
"The lack of available credit just in general and the tightening of credit has pushed more people into the payday space, higher-income people," said David Burtzlaff, a consumer finance research analyst at Stephens Inc. "As those higher-income customers get pushed down, their preferred option is to just go online … in the privacy of their own home."
But even as demand grows for payday lenders' product, "where they can do business or how they can do business is being restricted or eliminated," said John Ulzheimer, president of consumer education at SmartCredit.com, a provider of credit and identity protection services.
Several states, including Ohio and Arizona, have passed laws restricting the amount of interest payday lenders can charge, leading many lenders to abandon doing business in those states. More scrutiny is on the horizon as the newly established Consumer Financial Protection Bureau will provide federal oversight of many check cashers and payday lenders for the first time.
Lenders are looking for the most promising leads at the lowest prices. "But now that there are a lot more people online, lead costs have gone through the roof" as lenders bid up the price of high-quality leads, Burtzlaff said. "There's a lot of competition in the lead-generation space, so how do you distinguish yourself?"
Many payday lenders rely on lead-generation services like LittlePayday, which launched Tuesday. Its website depicts Bridget Powers — known to her fans as Bridget the Midget — making a sales pitch in revealing outfits, and plays up the word "short" in normally bland financial phrases like "short-term loan."
Chris Kay, chief executive of Blue Global Media, said, "we wanted to do something a little crazy, to be honest with you, so we partnered with Bridget the Midget."
Payday lending is "a very competitive landscape," Kay added. "To be on the first page of Google for the searches for payday loans, these marketers have to know what they're doing."
Ulzheimer said some elements of LittlePayday's marketing, such as using a diminutive model to symbolize the loans' short terms, are more than just a gimmick.
"Responsible payday lenders make it very clear that you should borrow only a little bit of money from me for only a little bit of time," Ulzheimer said.
Kay said there is a deliberate tone of responsibility in LittlePayday's unconventional message.
"Just like a credit card or a mortgage or any other financial instrument, if you don't understand what you're getting into it can be dangerous, so we try to be mindful of that when we're marketing it," he said. "But at the same time, we want to have a little fun."
However, Mark Schwanhausser, a senior analyst at Javelin Strategy and Research, said there's "plenty of room for improvement from a consumer standpoint" in LittlePayday's disclosures. To the average consumer, he said, it isn't quite clear who is lending the money and that LittlePayday is a middleman.
Also, "there's nothing in here that I can find … that says 'Here are the typical kinds of rates you're going to be paying,' " Schwanhausser said. "If I'm talking about transparency and being up front with the consumer, that is a central thing to do."
BillFloat may have a better chance of attracting higher credit quality consumers, experts said. By touting its service as an alternative to payday loans, "BillFloat kind of cherry-picks the top echelon of consumers" who are underbanked or whose credit was tarnished during the recession, said Christine Pratt, a senior analyst at Aite Group LLC. "I see them almost as offering a concierge service."
Pratt said another thing BillFloat has going for it is its financial backing from the PayPal Inc. unit of eBay Inc. The relationship with PayPal has landed BillFloat on the websites of thousands of billers as a payment option alongside Visa Inc. and MasterCard Inc. cards.
"The best results have been achieved by partnering with our billers," said Ryan Gilbert, co-founder and CEO of BillFloat. "The billers promote BillFloat as a payment option."
The average bill payment ranges from $50 to $300. BillFloat uses the automated clearing house to collect payments directly from a consumer's bank account. The loans are funded by BillFloat's seven bank partners, which the company is also asking to help promote its service.
"Our key message to banks and licensed lenders is it offers an opportunity to participate in a small-dollar loan program," Gilbert said, adding that he can "show the bank that 'Here is a qualified consumer within your risk profile.' From a bank's perspective, it's a far less risky lending proposition."
Since it launched in July, more than 1,000 loans have been made through BillFloat's service. Currently, BillFloat offers only a 30-day loan option, but it expects to expand its services to include 60-day and 90-day options. It is also developing a larger (up to $2,500), longer-term (nine months and beyond) loan product that would be available to established customers to use for purposes other than bill payment.
