Is World Acceptance re-arranging the deck chairs on a sinking ship?
World is in a world of trouble. (Ha!) The baseline problem is that World is not generating enough business. Fewer people are walking into the door for the first time, and fewer existing borrowers are refinancing on their outstanding loans.
Volume of renewals dropped 6.5 percent on a year-over-year basis, and according to a comment in today's investor's call, the rate of decline is picking up in the current quarter. A drop in renewals is a problem.
"I believe that our renewals activity," said a World executive during today's call," we have done some things to encourage renewals, but our renewal volume is down on a year-to-year basis."
Doing well at collecting on old debts and provoking more customers to renew their existing loans are key drivers of World's business model. While they do not appear to have formulated a way to get more people to renew, they have a new idea for collections.
Historically, World has incented its branch managers to step up their yield on past-due accounts. In the past, one of the metrics used to determine monthly bonuses for branch managers was collection (or renewal) on accounts that were overdue. But the opportunity to earn an incentive ended at 90 days. At that moment, World charged-off the loan. But now the company has developed a different incentive structure which it thinks could lead to more resolutions. The difference turns on how it incents its retail managers on loan performance.
Now World says that the opportunity for bonuses will not end at 90 days. Instead, incentives will remain available on collections up until the moment when a borrower is six months late. While it is a certainty that a few of those 90-plus loans will be revived, the great majority will remain as moribund as ever. World will still provision, but loans that would have charged-off on September 30th will now remain until March 30th.
Putting past-due accounts into an accountant's 'no man's land" seems dubious. While the long view might be to see this change as something that only re-arranges how the company presents itself, the short-term view is the relevant benchmark. This is about tax season. World is hoping that it can delay some damage to their balance sheet for long enough until tax refunds arrive.
Other things of note
Automatic payroll deduction: World has been building a share of its loan business through relationships with labor unions in Mexico. I was initially surprised to hear that the labor movement was active in Mexico, but it turns out that unions have been a part of the Institutional Revolutionary Party (the "PRI") for a long time. While World did not give a name to the union (s) it has been working with, the Confederation of Mexican Workers (aligned with the PRI) would be the likely partner.
World has established a program whereby it can automatically deduct payments from payroll. At this moment, forty percent of outstanding debt in Mexico is being collected through the union payroll deduction method.
Not going to reduce rates to stimulate more lending:
"We have not really contemplated lowering our rates because of the customer we are serving. We have held that because of the charge-off rates in our model. We are constantly looking at rate structures where they are unregulated but when in states where they are regulated we try to charge in the higher end of the range...We are not a company that does risk-based pricing.”
Maybe the internet is a good idea....
Our primary source of marketing has been direct mail. Direct mail in all categories is not as effective as it used to be, because people don’t respond to direct mail as much as they used to. So we are going to use it to enhance efforts to attract new customers. New customers are the lifeblood of this business….our online effort will be to find customers near a branch, then to come into the branch. The initial inquiry on the system is not going to constitute a true application. I know a lot of competitors are getting a lot of accounts through these initiatives, so to some extent we are behind the time…you have to walk before you can run. This is our crawling stage.
Not going to take business from payday lenders:
Because payday lenders do not report to a bureau, it is hard for us to identify the individuals that are using that type of credit versus installment. I don’t think we will ever target payday customers because of our inability to do so.