Payday Lenders Face Greater Oversight

Typical customers are "underbanked," meaning they do not have easy access to a bank account or credit card, are not well-educated about financial services or tend not to trust big corporate entities like Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC). Often, they are low-income, minority or immigrant consumers, or some combination of the three.

As a result, the payday industry is vilified and praised almost equally in academic circles -- it's either providing a needed service to the community or leeching the blood from hapless and destitute customers. But in any case, it appears beloved by those it claims to serve.

At least 10 million U.S. households access payday services each year, according to research performed in 2006. There are anywhere from 20,000 to 25,000 payday lending centers -- far more locations in the U.S. than there are McDonald's (MCD) restaurants, one consumer-advocacy group notes. An industry survey found that, while payday customers would prefer cheaper credit, they pay up for convenience, familiarity, simplicity and customer service.

In other words, the fees are high, but they're not hidden, and they're easy to understand.

The industry says it earns just $1.37 in pre-tax profit for every $100 extended to borrowers, due largely to the high cost of operations and bad debt. Still, it takes in $15.26 in revenue from each customer to reap that profit - yielding an average APR of roughly 390%.

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