I began to explore new solutions for payday lending in this op-ed in the American Banker. The response (at least based on my Twitter feed) has been outspoken, with many perspectives for and against. I thought I’d use the opportunity to go into further depth on my blog.

Google Self-Governance on Ad Words for Payday Lenders

In theory, online payday loans, bereft of brick-and-mortar costs such as rent, labor, and more limited risk management tools should be less expensive than traditional corner-store payday loan providers. Not so.  The cost of getting customers online, primarily through online ads, is huge, in part because there are so many “lead generation” agents and unregulated off-shore or tribal lenders bidding for the same ad words. Ultimately, this makes online loans typically more expensive.

For example, the Pew Trust estimates storefront payday loan costs at $10 per $100 (261% APR) to $20 per $100 (521% APR), depending on state regulations, for a typical 14-day loan. Online payday loans cost significantly more – an average of $25 per $100 online (652% APR). Online loans cost so much because ad words like “payday loan” are extremely expensive, with prices bid up by a mix of lenders and lead generator.

In the big picture, online distribution for good, services, and loans is supposed to bring costs down for consumers through “dis-intermediation.” But what we see in some markets (like payday) is a new class of opportunistic “intermediators” getting in the way of customers who are trying to connect directly with lenders. Unfortunately, payday is a commodity market, where there aren’t strong brand signals that help customers to determine which offerings are the best. This opens the door for lead generation agents to needlessly make a quick buck “referring” customers, or unregulated lenders to drive up already high costs for everyone.

An anatomy of who is buying adwords for “payday loan” on Google. A year ago it was half non-regulated lenders. Today it’s better – 3 out of 8.

The average cost per click (CPC) for “payday” on Google AdWords is $6.52. That adds up fast when you realize that only a small percentage of the people who click on your ad probably end up buying it.  If one in ten apply, you start $65 in the hole.  If it’s one in 20, it’s $130.

So what can be done to bring down online payday loan costs? The fastest way would be for Google to regulate its own ad word sales: by weeding out unregulated lenders and non-lenders, such as lead-generators, and only selling ad words to fully compliant lenders. Although it would mean fewer ad dollars for Google, prices for low-income Americans trying to access payday loans could come down substantially.

And there’s precedent.  In 2010, Google agreed to limit pharma adwords to entities vetted by the National Association Boards of Pharmacy “VIPPS” program, along with a set of digital tools to watch for rogue Viagra ads and the like.

What do you say, Google?  What was that about doing no harm?