Synopsis
The Payday Lenders industry is, unfortunately, a type of predatory business model. They exist to offer consumers the ability to get cash prior to receiving their paycheck if they are in dire need. While it is a worthwhile and admirable option to provide for consumers, the business model takes advantage of them with high-interest rates, unfair contract terms, and targets susceptible low-income individuals (Barth, 2015).
I will apply Michael Porter’s Industry Analysis framework entitled five forces to the Payday Lenders industry.
Internal Rivalry
The market has a high saturation of lenders that closely provide the same service, and Internal Rivalry would be categorized as high. Nationwide, there were nearly 29,000 payday lenders in 2014, and roughly 97,000 conventional banks (Barth, 2015). While banks do not meet the "ideal consumer" for the payday lender industry, many of the consumers within the margins can utilize banks instead of payday lending stores.
Entry
Classified as moderate because the cost to enter the market is low but the innate risk of the business is high. In the United States, 13 States prohibit payday lenders, and 35 states place a maximum on the rate that can be applied to loans, creating additional difficulties for new businesses (Barth, 2015). Payday lender businesses are in middle or low-income areas (Barth, 2015), which are most likely already saturated and create a high barrier of entry to be able to create a store and sustain enough consumers to drive a profit.
Substitute and complementary products
Threats from substitutes are low as loans from regulated banks (Wells Fargo, Bank of America, Chase, etc) are interested in credit-worthy individuals with a low risk of default. Assistance loans from family and friends are not likely as they would also be in similar financial situations. There are no complementary services, so the threat is low.
Supplier power
The threat from supplier powers are incredibly nonexistent as any business within the payday lender industry can set their own terms and are not subject to bargaining power forces relating to products, price, quality of service, or rates.
Buyer power
Individuals are the ones with the buying power and their bargaining power is very low. Since these individuals are unable to access regular banks, due to poor credit, for example, they have little to no ability to negotiate contract terms or find alternative solutions. Businesses within the payday lenders industry are the individual’s last option. Due to these circumstances, payday lenders are able to charge interest rates in the
Resources
Barth, J., Hilliard, J., & Jahera, J. (2015). Banks and Payday Lenders: Friends or Foes? International Advances in Economic Research, 21(2), 139–153. https://doi-org.xxproxy.smumn.edu/10.1007/s11294-015-9518-z
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