It might sound crazy, but the recent warning to pay-day and small credit lenders like Money3 Corporation Limited (ASX: MNY) and Cash Converters International Ltd (ASX: CCV) by the Australian Securities and Investment Commission (ASIC), will help to increase the attractiveness of the businesses for long-term investors.
Shares in Money3 were hammered following the ASIC announcement and the company's up-front admission that fee caps on loans below $1,000 could impact up to 20% of total revenue. But I believe this makes for an attractive buying opportunity for the fast growing company, especially because the review is positive for the industry, its customers and investors alike.
The warning
ASIC is trying to clean up circumstances of "irresponsible lending and unconscionable conduct" in the small-loans industry. Tighter lending rules were introduced in 2013, but ASIC issued an extra warning to lenders to improve practices around how they lend or risk further regulation.
Better for customers
ASIC is trying to protect vulnerable customers from exploitation which should align with Money3's goal to achieve positive outcomes for customers. A positive customer experience, argues Money3 Managing Director Robert Bryant, drives repeat business which is important for long-term growth.
I recently heard Mr Bryant speak at the Pie Funds Small Cap Conference in Auckland where he placed strong emphasis on the company's efforts to champion sustainable and responsible lending practices in the industry.
Better for investors
Satisfied customers and repeat business will drive revenue growth for investors, while shady and unethical operators will be pushed out of the industry leading to consolidation and the prospect of increased market share for Money3.
Although a 20% loss of revenue would be painful for investors, it is also possible that fee caps could grow the market by increasing affordability for customers and reducing loan defaults.
A cleaner industry lowers the risk of legal action against lenders which can be extremely costly. Money3 has brushed past regulators before, in 2012, when the company was questioned about advertising of its car lending business, but clear infringements can come at the cost of millions of dollars of fines.
Shares in Money3 will likely remain volatile over the next few weeks as the topic plays out in the media, but currently selling for just 14 times earnings with a 4% dividend yield, the volatility could make for an attractive opportunity to buy.
