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)

Special Dividends And A Looser Credit Agreement May Signal A Turnaround At QC Holdings

I recently wrote an article for SeekingAlpha about alternative finance company QC Holdings (QCCO). The company has seen its revenues and earnings fall significantly since 2008, which has caused its stock price to plunge nearly 80%.

That said, the company may be going through a turnaround. It has declared special dividends two quarters in a row after not being able to pay dividends for a year. This shows that management is confident in the company's future--or at least confident that they don't need to hold onto more cash to deal with future problems. The company's credit agreement, which controls the terms of its loans, has also become less restrictive. This mean that the company's bankers are less worried about its financial situation. Given than QC Holdings' management and bankers are probably the people who understand the company's prospects best, this is a strong endorsement of the company's future.

Anyway, the article can be found here. It was chosen for SeekingAlpha's Pro program, meaning that it will only be available to non-paying members for a month, so I hope you'll check it out soon!

Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Part 5 - Final Thoughts

In my article series about Broke,USA, journalist Gary Rivlin’s book on the alternative finance industry, I have written about the competitive advantages of an industry that lends money to those with few alternatives. However, I have also written about the risks of investing in such an industry, such as regulation, corporate misbehavior, and competition.

In doing so, some themes have come up again and again. Such themes have been, in my mind, valuable not only for alternative finance investors, but also for investors in general. They include the importance of pricing power and the threat of competition. They also include the strength of the pawnbroking model as well as the value of analyzing a company through its relationships with its lenders.

That said, one area of the alternative finance business which I have not discussed but which Rivlin goes into in much detail is the subprime mortgage business. I have intentionally not discussed that business, since much has already been written about it and its effects on the global economy in the past few years. That said, Rivlin’s book does have some interesting insights on subprime mortgage lending and how it relates to the broader alternative finance business, insights which I feel are useful for investors. (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. 2: Regulation

In my previous article, “Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Pt. 1: Competitive Advantages,” I described how one can learn about the alternative finance business by reading Broke,USA, Gary Rivlin’s book on the industry. In that article, I noted that the book shows how the strengths of such companies as payday lenders, pawn shops, and rent-to-own stores include high returns on investment, pricing power, and growth opportunities.

That said, it would be wrong to focus on only the industry’s competitive advantages. This is an industry that, after all, focuses on making high interest loans to lower and middle class people. As a result, an investor in this industry faces many risks, the most prominent of which is regulation.

Regulation is the best known risk to the alternative finance industry because it can totally eliminate some parts of the industry, especially payday lending. As Billy Webster, the founder of America’s largest payday lending chain, Advance America Cash Advance, says in Broke, USA, “it’s hard to invest in the future earnings of a company if you don’t know if it’s going to have a future.”

And yet, Broke, USA also shows how regulation is not necessarily the threat to the alternative finance industry that some would believe.  (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)