In my article series about Broke, USA, journalist Gary Rivlin’s book on the alternative finance industry, I have described how Rivlin illustrates both the risks and rewards of investing in the industry.
On the one hand, businesses such as payday lenders, pawn shops, and rent-to-own companies have strong growth opportunities, high returns on capital, and pricing power. On the other hand, such companies are affected by government regulation that threatens to curtail their returns or even shut down their businesses. This regulation is, of course, in part because the alternative finance industry has a reputation for corporate misbehavior, such as lending practices that encourage borrowers to enter a debt spiral. Finally, the many strengths of the industry have also drawn many competitors, who threaten to erode the industry’s once high shareholder returns.