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Cash Connection - Ethically Sound

Categories: BankingBusinessEthics

Cash Connection Strategic Analysis Case Study October 24, 2011 Table of Contents Cash Connection Strategic Analysis Case Study3 Cash Connection’s Business Strategy3 Cash Connection SWOT Analysis4 Ethical or Unethical Industry5 Cash Connection’s Porter Fives Assessment7 Cash Connection Lending Key Success Factors9 Economic Characteristics and Driving Forces10 Industry Financials12 Recommendations13 Reference14 Table of Figures Figure 1: Cash Connection – SWOT analysis 4 Figure 2: Porter’s Five Forces Summary7 Figure 3: Payday Advance Market………………………………………………………….. Figure 4: Reasons Why Households Never Banked or Unbanked10 Figure 5: Cash Connection – Revenues (2007-2009)12 Cash Connection Strategic Analysis Case Study Cash Connection was started by Allen Franks in 1986, when he opened his first check-cashing store in Shreveport, Louisiana.

Throughout the mid to late 1990’s Cash Connection services grew as a result of robust consumer demand, traditional banks leaving the short-term credit market, sky-rocketing costs associated with defaults associated with short-term credit and regulatory changes that provided increased customer protection (Thompson, Peteraf, Gamble & Strickland, 2012).

Although small loans had been around for decades Cash Connection type services were likened to the billion dollar microcredit loans provided by the Grameen Bank of Bangladesh India.

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During 2007, the payday advance industry provided close to $44 billion in short term credit to customers, contributed $2. 9 billion in labor income, $6. 4 billion in total labor income impact and generated over $2. 6 billion in governmental taxes but ethical questions persist (Thompson, et. al, 2012). Cash Connection’s Business Strategy

Cash Connection’s utilized a focused differentiation strategy to distinguish itself from its competitor’s while adhering to increasing government regulations. Their primary goal was to provide short term credit, through payday advances, to anyone thereby supporting their expansion into cities that did not currently have a check-cashing facility.

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Payday advances are single payment loans rather than installment loans and the underwriting process for payday advances does not involve a credit investigation. The average payday loan amount was $300 and the term was typically for 14 to 30 days” (Thompson, et. al, 2012, pg. C-113). Franks sought to create a competitive edge by incorporating attributes and features (offering bill payment, prepaid phone cards, money orders, and wire fund transfer) that set his payday loan company apart from rivals in ways that buyers would consider his services more valuable. By 2010 this had become nearly impossible, as more than 22,000 payday advance locations existed within the U.

S. more than double traditional banking facilities (Thompson, et. al, 2012, pg. C-113). Cash Connection SWOT Analysis Figure 1. Cash Connection – SWOT Analysis. Cash Connection’s core strengths are in providing small amounts of uncollateralized short-term credit to high-risk borrowers and providing loans to sectors of the population in particular households that would not otherwise have access to credit of any kind (Lehman, 2003).

Cash Connections leveraged typically low capital requirements to rapidly expand into areas that did not already have payday loan facilities. Although payday advance competition is particularly strong, Cash Connection must target the groups that stated they would likely use cash advance services to improve their growth opportunities as well as spread the risks inherently associated with the industry across a larger customer base. Ethical or Unethical Industry As more financial institutions stopped providing short term credit loans the demand for these services rose.

Even though we might not like the idea of payday advance businesses, Cash Connection and others provide services to customers whom otherwise might not be able to get loans except through pawnshops, auto title lenders or other less desirable options. Cash Connection provided check-cashing, bill payment, prepaid phone cards, money orders, and wire funds transfers with many fees charged aligned to traditional banking service fees. “In addition to being a valuable source of credit for many consumers, the payday loan industry makes significant contributions to the U. S. nd state economies employing more than 50,000 Americans who earn $2 billion in wages and generating more than $2. 6 billion in federal, state, and local taxes “(About the payday industry, n. d. para. 2). Finally, a 2004 survey demonstrated that although consumers had other options the immediacy of Cash Connections and others was a better financial decision, 84% of customers who utilized payday loan services used it to cover an unexpected expense, 73% to avoid late charges on bills, 66% to avoid bouncing a check and associated NSF fees and 62% as an income bridge. More than three-quarters of customers were satisfied with the repayment schedule, the amount they could borrow and their ability to refinance or renew the loan if they chose to” (Thompson, et. al, 2012, pg. C-126). It appears that the payday advance industry as a whole has a negative image by preying on low income customers, charging excessive often illegal interest rates basically ignoring state regulations, practicing aggressive collection processes and exploiting legal loopholes (Payday Loan, n. d. ). The “service” to allow renewals or rolling over your loan amount without set limits crosses the imaginary ethical line.

Customers who lack the knowledge to manage their money, may have language barriers or do not have other viable financial options all too easily become trapped in a vicious cycle. Other ethical concerns are the ridiculously high annual percentage rate (APR) charged on outstanding amounts, creating a new loan to avoid the appearance of “rolling over” debt, and “touch-and-go” practices that pay-off the old loan with a new loan ballooned to cover the old debt. Many customers find themselves paying towards the interest and not making a dent in the principal amount (Thompson, et. l, 2012). Global Payday Loan is just one example of a company being levied fines for unethical behavior. “State law prohibits payday loans with interest rates exceeding 36 percent a year and origination fees that exceeded $30. Global also violated laws by renewing a payday loan for a term of less than 31 days and renewing an existing loan more than twice” (Hunsberger, 2011, para. 5). A new unethical practice for payday loan firms is to conduct business from tribal lands to avoid regulations that apply across the U. S. or other business entities (Heath & Hudson, 2011). Cash Connection’s Porter Fives Assessment Porter’s Five Forces| Threat to Cash Connection’s Profitability| Internal Rivalry – competitiveness| Very Strong| New entrants | Very Strong| Substitute products| Very Strong| Supplier bargaining power| Strong| Buyer bargaining power| Weak to Moderate| Figure 2. Porter’s Five Forces Summary. Rivalry in the payday lender industry is intensively competitive with both local and national chain lending facilities actively vying for customers.

Cash Advance America, Check & Go, and Check America are national level rivals, while Goodwill’s GoodChoice , standard banks, credit unions and credit cards are all considered local rivals each competing with Cash Connection on the basis of product differentiation, customer service, cost of service and immediacy, with fees most often the deciding factor. Rivalry is stronger when buyers cost to switch brands is low, products are weakly differentiated, competitors are numerous, and rivals have diverse objectives or strategies (Thompson, et. al, 2012).

The ability for new entrants to impact Cash Connection’s profitability is rated very strong. Barriers that restrict new entrants from entry into the payday advance industry are low. It takes a relatively small amount of capital to launch a new location, existing facilities unable to contest new entrants, there is limited customer loyalty to a particular payday location and the demand for short term credit continues to increase as evidenced by Figure 3 – Payday Advance Market. The Payday Advance Market| | | | Figure 3. Payday Advance Market. Retrieved on October 13, from http://www. advantagecashadvance. com/market_analysis. tml Cash Connection’s profitability is at risk because of the overabundance of available substitution products for their main services – short term credit loans, bill payment and check cashing. Banks provide overdraft services, credit cards offer minimum payments, credit unions offer employees pay advances and even Goodwill offers a payday loan style product called Good Choices, while also offering money management help (Sullivan, 2010). Many of these products do not offer the immediacy that Cash Connection provides but are considered adequate substitutes based on competitive pricing, low buyer switching costs and easy access for consumers.

While cash is typically available from many lending institutions the economic crisis has caused most banks to increase their lending fees, credit background checks and collateral needed for businesses. Even though substitutes exist for buyers, for Cash Connection their commodity is cash and there is no substitute. Finally, the supplier industry (banks) is more concentrated than the industry it sells to (payday advances) leading to a stronger supplier impact on Cash Connection’s profitability (Thompson, et. al, 2012).

Although buyer costs of switching to competing products is low and products are not differentiated, customers do not individually have power to negotiate price concessions with regards to their individual loans (Thompson, et. al, 2012). The majority of the population that utilizes payday loan services have numerous competing companies to choose from thereby, enabling them to choose based on their individual preferences. For example: location, hours, customer service, fixed costs, APR’s etc. can all be taken into account when consumers are choosing or switching providers.

For these reasons bargaining power of buyers is rated as weak to moderate. Overall, Porter’s Five Forces Model indicates that Cash Connection should be extremely concerned about their ability to sustain long term profitability. Based on these ratings, Cash Connection needs to revamp their strategic business model to sustain any profitability or market share in the payday advance industry. Cash Connection Lending Key Success Factors The factors that affect Cash Connection and the industry to prosper are directly linked to why customers utilize their services availability, convenience and price (Figure 4).

Many of Cash Connections target market had faced severe credit restraints, poor credit histories and had bounced one or more checks in the previous five years. Customers are willing to pay the fees to post-date the check, which is a convenience that no other financial institute provides. Although credit cards allows a cash advancement the fees as discussed earlier are even greater assuming the customer can avail themselves of a credit card. Figure 4. Reasons why households never banked or unbanked. Economic Characteristics and Driving Forces

Community Financial Service Association of America estimates that the payday lending industry has penetrated only half of its potential market which provides an opportunity for Cash Connection to gain market share and increase profitability within the $40 billion industry that typically targets middle income providers of average education with “steady” income. The continued economic downturn, however, including a significant increase in unemployment rates, means that while demand for short-term credit is on the rise, it does not translate to more money advanced as new or existing borrowers may not qualify.

The driving forces currently impacting the industry are the prevalence of laws regulating the lending industry, auditing processes to demonstrate compliance and limitations on the number of rollovers allowed and interest rate caps. The federal government has implemented the Truth in Lending Act (APR disclosure), Fair Debt Collection Practices Act (non aggressive collection methods), The Federal Deposit Insurance Act (ability to charge nationwide interest rates of home state) and the Gramm-Leach-Bliley Act (privacy concerns) to address concern by consumer groups, not necessarily the consumers themselves (Thompson, et. l, 2012). Enforcing additional caps and restrictions will limit the fees that companies like Cash Connection can charge and will reduce the profits in the industry as a whole as the revenue stream continues to be squeezed. The rate ceiling, contrary to its intended purpose, prevents these low-income borrowers from establishing or re-establishing credit and restricts the availability of credit to less risky applicants (Lehman, 2003).

Georgia and Maryland which have eliminated payday lending firms from conducting business in their states have both seen a significant increase in bounced checks and complaints regarding aggressive debt collectors (Thompson, et. al, 2012). Industry Financials According to an analyst with Stephens Inc. , an independent financial services research firm, “the industry has been suffering in the financial crisis. While you may think that in tougher times people are more inclined to borrow, these companies are not seeing any kind of growth” (About…, n. d. ).

This is evidenced by Cash Connections statement of operations below. The financial crisis, including its high unemployment rate combined with increased legislation of payday lenders has led to the dramatic 80% decline in net income, 9. 1% reduction in total revenue and 11% increase in total operating expense. “A September 2009 independent analysis by Ernst & Young, LLP found that “on a pre-tax and pre-interest basis, multi-line payday advance lenders earn an average profit of $1. 37 per $100 of loan principal issued – that represents a modest margin of 9. 1 percent, before taxes” (About…. , n. . ). With declining sales and increasing operational costs Cash Connections must make immediate strategic adjustments. Figure 5. Cash Connection Revenues. (2007-2009). Recommendations For a company’s competitive strategy to succeed in delivering good performance and the intended edge over their rivals, it has to have a good foundation of appropriate resources, knowledge and competitive capabilities (Thompson, et. al, 2012). Recommendations to increase Cash Connections capabilities are centered on the “P’s” of marketing: process, people, productivity (around paydays), promotion, product and price.

The employees of any service organization must be properly trained to ensure customer’s expectations are met (Kerin, Hartley, & Rudelius, 2011). Ensure appropriate training of counter and support personal to make every experience from a customer’s perspective consistent taking into consideration they are already in a difficult situation. In order to ensure training is effective I recommend developing a process contact map to assess the value chain points and assess if steps are missing, unnecessary, or inadequate and if needed revamp the process and then train the personnel on the streamlined process, thereby increasing productivity.

Implement improved technology systems that provide customer information to each Cash Connection location and allows targeted marketing to customers within the central database. Cash Connection needs to promote the products and services they do provide more effectively for example, most banks have gotten out of the license plate renewal service this untapped market could produce significant revenue. Provide additional services such as financial counseling. By offering financial counseling, Cash Connection can promote the responsible use of credit while striving to educate consumers on financial choices that are available to them.

Finally following the Council for Fair Lending Cash Connection will promote social responsibility and ethical business practices (Thompson, et. al, 2012). By differentiating their services Cash Connection will be able to tap into the 5% of the population that stated they would use a payday advance service that currently doesn’t use our assistance. Reference About the payday industry. (n. d. ). Retrieved on October 10, 2011, from Community Financial Service Association of America Web Site: http://cfsaa. com/about-the-payday-industry. aspx Heath, D. Hudson, M. (February 7, 2011). Fights over tribal payday lenders show challenges of financial reform. Retrieved from, http://www. iwatchnews. org/2011/02/07/2151/fights-over-tribal-payday-lenders-show-challenges-financial-reform Hunsberger, A. (July 13, 2011). Oregon fines online payday lender $90,000 for violating state laws, charging interest of more than 357%. Retrieved from, http://www. oregonlive. com/business/index. ssf/2011/07/oregon_orders_payday_lender_to. html Kerin, R. , Hartley, S. , & Rudelius, W. (2011). Marketing

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