I stumbled across this review of the industry put out by Credit Suisse dating from March 2015. Looking back, it was a prescient assessment, and is still worth a read.
CS wrote it before Westpac pulled the plug on funding payday lenders in August 2015.
On the Centrepay access issue, Centrepay could choose to make an example of TGA using the pretext of the ASIC findings, but such a decision would have to be "reasonable". One based on prejudice would be challengeable. But more importantly, Centrepay would have to weigh up whether by such a decision, they would simply be handing the field to even less attractive and less visible actors.
The regulators face the same dilemma. If they ban these financial arrangements altogether, or drive them out of existence with excessive regulation, that guarantees that the activity will be driven underground into the hands of card carrying criminals.
It's a tough choice.
Cheers
Focus on CentrePay customers could impact TGA significantly: Consumer advocates are also focusing on a key part of the consumer leasing business model, where customers have repayments taken out of their Government benefits through a bill paying facility called CentrePay, operated by the Government. There is pressure to have either this banned for household goods or have the use of it restricted to essential goods, with entertainment and technology items removed. TGA's Radio Rentals business (86% of TGA's EBITDA) obtains ~50% of its revenue from CentrePay customers, with about 50% of that estimated to be for entertainment and technology items. Thus any tightening of CentrePay arrangements could have a significant impact on TGA's business. FXL does not target CentrePay customers, so we believe it would not be affected.
Timing of any change may be slow: Changes in this industry come about either through regulatory change or through activism directly on industry participants. We view regulatory change as possible though slow, requiring lengthy consultation to ensure unintended consequences do not arise. Only one review, scheduled to commence in mid-year 2015 is slated for the payday lending industry. Several past reviews, such as a review on CentrePay in 2013, have had no action under the current Government. However, we have seen two instances of one term Governments in Victoria and Queensland recently, so a change of Federal Government could be as close away as the next 18 months. We have seen a rise in direct shareholder activism through AGM resolutions, as well as the rise in direct engagement between asset owners and listed companies. This type of activism may lead to some of the less impactful changes occurring. However, we believe any of the more significant changes, such as changes to CentrePay or removing the regulatory arbitrage between consumer lending and consumer leasing, would require legislative changes and a change of Government.
Regulatory arbitrage may drive tougher regulation on goods leasing: You probably thought there was little difference in regulations for someone buying a household good through a credit option from a mainstream store such as HVN, versus obtaining the same good through a rental agreement for a similar term (say four years of repayments). After all, you are committed to regular payments for say four years in both cases, you face repossession or financial penalties if you renege or don’t pay, and you are paying back the value of the good plus a hefty premium to cover interest costs. However, buying through credit at HVN is regulated by the tougher Consumer Credit Enhancement regulations. Obtaining the good through a rental company is regulated in a more light handed way by the Consumer Leasing regulations, which do not require disclosure on the total cost of the goods and the interest rate or any caps on fees and interest rates. Consumer advocates believe that this regulatory arbitrage needs to be closed. Any changes here may have a mild to significant impact on the business models of consumer leasing companies such as Radio Rentals, owned by TGA. We do not see any impact on FXL, due to the client space it targets, and its current disclosure.
Financial exclusion in Australia
16.9% of the Australian population financially excluded – 3 million Australians: For the past four years, National Australia Bank (NAB) has produced a report in financial exclusion on Australia. Financial exclusions measures the access to basic financial services such as a transaction account, a moderate amount of credit (e.g. credit card) and general insurance (basic car and house/contents insurance). The most recent report (2014) for the 2013 calendar found that 16.9% of Australians (3.040mn) were either fully or severely financially excluded (refer Figure 2). Under NAB's definition severe financial exclusion occurs when someone does not have access to two of the three basic financial services (e.g. modest amounts of credit or basic insurance).
https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&source_id=csplusresearchcp&document_id=1045133451&serialid=NNmZeTS8v2IoV8CRaH92nBhyw6SyJ394f5YSDhlqHWI=
