Friday, January 31, 2014

Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Pt. 1: Competitive Advantages

Broke, USA by Gary Rivlin is a book about the alternative financing industry. This industry, which focuses on lending money to lower and middle income individuals, includes payday lenders, tax preparation companies, and pawn shops.

It is easy to tar this industry, which Rivlin calls "Poverty, Inc," with the same stigma as the subprime lending industry that got the US into so much trouble during the 2000s. Both industries serve many of the same customers, and both appear in the book.

That said, from an investing perspective what is interesting is the difference in performance between the two industries. Unlike most subprime mortgage lenders, companies such as payday lenders and pawn shops passed the 2008 financial crisis with flying colors. In turn, though, such companies face unique risks that their mortgage lending brethren do not. Broke, USA shows us both the competitive advantages and risks of this sector.

Before we begin, though, it is worth noting that Broke, USA was written to criticize the alternative financing industry. Its heroes are those who campaign against payday loan operators and tax refund lenders. Thus, there is a certain irony in mining such a book for investment ideas in the industry it criticizes-an irony which some may not be comfortable with.

That said, it is because of the very success of this industry that a book such as Broke, USA exists. Without the various characteristics that have made payday lenders, rent to own stores, and pawn shops so profitable, (Read More)

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