Consumer finance regroups: Promise to be good?
Last month the consumer finance company Promise started closing some of its retail outlets, specifically those that still feature human beings. Thirty percent of the company’s staff will be laid off by the end of the year. Promise is currently the biggest of the consumer lending companies that were making so much money at the beginning of the last decade, with 1,361 unstaffed branches and 148 staffed. It was also the first to announce the closing of branches, though according to an article in the Asahi Shimbun all consumer finance companies are following suit. Acom started whittling away at its 118 branches last September and will have only 45 by March. Aiful will have reduced its original 96 stores to 28 by the end of February. And Takefuji will have reduced its 180 outlets to 100 by the end of the year.
Several years ago the consumer finance industry was hit with multiple lawsuits from customers who said the companies were charging too much interest. Courts agreed and awarded large settlements, and in 2006 the government changed regulations to get rid of the so-called gray area that allowed for such exorbitant interest rates. In June, the Money Lending Business Law will start to be enforced, greatly restricting loan extensions. Almost all of the consumer loan companies declared bankruptcy after 2006 and have had to reorganize in order to stay alive. In most cases they’ve gotten back on their feet thanks to their partnerships with major banks, many of which predated their bankruptcies.
So if you see fewer signs for these companies lately, that’s why, but they’re making a comeback and still charging pretty high rates. They’ve even started advertising again though not quite at the same pitch they were famous for around the turn of the millennium, when they practically owned the airwaves after 10 p.m. Now they’re pushing more cautious, responsible borrowing habits. In one Takefuji ad a young man runs into a florist and says he wants to fill his girlfriend’s apartment with flowers, and the salesperson gives him a small bouquet in a basket, saying that this “size” fits his situation better. In other words, calm down or you’ll end up in the doghouse.
But, of course, consumer credit companies rely on people getting into debt for their profits. Before the bankruptcies there was a system the industry called “cascade.” A person who needed case would first go to his or her bank for a “card loan” since the interest was fairly low, between 8 and 12 percent. If the bank refused, he could then go to the bank’s own consumer finance unit (SMBC’s @ Loan, former Tokyo Mitsubishi’s DC Cash One, former Sanwa’s Mobit, to name three) for a slightly higher interest loan, between 15 and 18 percent; and if they refused they would refer the person to whichever consumer loan company – Promise, Acom, Takefuji, Aiful – the bank had hooked up with, for interest rates between 18 and 25.5 percent.
That system is still being used, though in many cases the middle finance company has been eliminated. Promise, for example, works with SMBC and has basically replaced @ Loan, which Promise absorbed. As part of the restructuring and in line with the new law, Promise will be stricter about the criteria used for granting loans. Upper limits for loan amounts will be no more than one-third the borrower’s annual income, and the borrower will have to provide more documents to prove his credit-worthiness. But Promise’s goal is to eliminate all face-to-face loan contract services by March 2013, though it is planning to establish 20 new regional “bases” for face-to-face loan “counseling.” According to the Asahi, at present 60 percent of all consumer loan customers make contracts using ATMs and 20 percent use the Internet. Only 8 percent do so after discussing their situation face-to-face with lenders. Essentially, the industry wants to make everything even more automated and impersonal in order to save money.