Revisiting My Articles On The Alternative Finance Industry - 5 Years Later

Five years ago, I wrote a series of Seeking Alpha articles about the alternative finance industry, which provides financial services to customers who have trouble accessing them from traditional sources. This series was inspired by Gary Rivlin's book about the industry, Broke, USA. In those articles, I considered topics relevant to an investor in the industry, such as competition, regulation, and future growth.

Much has changed in the industry since then. Some products, such as payday lending, have become less popular, while others have grown. The regulatory climate has changed. Thus, I wanted to revisit my original articles to see if their conclusions were born out by subsequent events. (Read More)

Understanding The Alternative Finance Sector Through Gary Rivlin's 'Broke, USA': Part 4 - Competition And The Price Of Gold

In my two most recent articles reviewing Broke,USA, Gary Rivlin’s book on the alternative finance industry, I have written about what are probably the best known threats to the industry: regulation and corporate misbehavior. I believe that many of those who refuse to invest in the alternative finance industry refuse because of those risks. They fear that government regulation, such as interest rate caps, will end the industry’s high returns. They are unnerved by the industry’s risk of misbehavior. Such misbehavior includes not only obviously illegal activities, such as fraud and illegal collections practices, but also questionable if legal activities, such as lending in ways that encourage borrowers to enter a debt spiral.

However, I believe that it is often not the obvious risks that are the most important to an investor’s returns, but rather the ones that people are unaware of. As I wrote in my article about regulation, alternative finance companies have consistently found ways to work around regulation. Even persistent accusations of misbehavior have not kept companies in the industry from outperforming the overall stock market year after year.

Rather, I believe it is the risk of competition, one that I feel many investors have failed to consider, which may be the most dangerous to the alternative finance industry’s returns. (Read More)

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)