Move to the Web from Brick and Mortar


As we all know, whether we want to admit it or not, online payday lenders are cannibalizing the market share of the traditional brick and mortar lenders.
Loans transacted on the Internet are increasing at an estimated rate of 15 percent to 20 percent a year, according to payday lending consultant Jer Ayles-Ayler of Newport Beach, Calif. Ayles-Ayler started multiple brick and mortar locations throughout the California area back in the late 1990s. As the Internet blossomed, he embraced the online payday model.
Not only did Ayles-Ayler embrace it, he mastered it and did very well. He did so well that he retired from active management and now works as a consultant to the industry.
You may be wondering how to make the change when all you have ever known is brick and mortar. Ayles-Ayler advises getting involved with various organizations and associations of lenders.
Attend the conferences and you will be amazed at the overwhelming amount of information you will receive. There will be a plethora of industry professionals, vendors and online lenders present who will be happy to answer your questions and assist you in moving to the online model. Knowledge is power in online lending.
Working Your Advantage
According to Ayles-Ayler, the greatest obstacle for new online entrants is the ability to generate Web traffic and quality leads.
If you are a brick and mortar operator, you have a greater chance of succeeding in the online space than someone without the advantage of a brick and mortar location that is jumping directly into online payday lending.
You have the advantage of a physical location with a physical advertising space that people notice, whether they want to or not.
You can harvest this advantage. Ayles-Ayler says that one of the most powerful tools in the arsenal of brick and mortar operators is their established customer base.
It is imperative to make your current customer base aware that, in addition to the retail location, you will also be launching or has launched an online lending site.
Various incentives could be offered to encourage customers to make their next loan online. There could also be some type of referral or VIP program for existing customers and their friends and family.
It’s important to note that online lenders are choosing to lend into most of the 50 states under a variety of licensing models.
This includes the choice-of-law model, the state licensing model, the sovereign nation model and the offshore model. We will leave the legal ramifications of this to the attorneys, but note that the opportunity to lend into all 50 states is an amazing opportunity not afforded to the brick and mortar operators.
Tax Angles
What are the tax implications of incorporating the online model? Let me start by stating that more and more of the online lenders we work with are choosing to operate internationally. Many refer to this as the offshore model.
The offshore model encompasses many complex tax compliance and reporting matters that will be discussed in future articles.  For now, we will focus strictly on the tax implications of operating a domestic online lending entity.
Generally speaking, a domestic entity refers to an entity that is formed in the United States. The tax implications for an online domestic entity are not too dissimilar from a domestic brick and mortar location. Usually it is recommended that an online lender set up a domestic limited liability company.
Team Work Vital
Your accountant should work in conjunction with your attorney when planning the structure of your online lender, as your risk tolerance will dictate this structure.
It is important to note that your online entity will be taxed in the same manner as your brick and mortar entity is taxed for federal tax purposes.
Legal fees, though hefty, are certainly necessary and the treatment of these fees for tax purposes is very important.
Many new entrants face large penalties from the IRS for the incorrect treatment of these costs.
Legal and accounting costs necessary to organize the partnership and to facilitate the filings of the necessary legal documents are referred to as organizational costs. Organizational costs are generally capital expenditures. Capital expenditures are not deductible in full in the year incurred, but are amortized over a 15 year life.
However, currently you can deduct up to $5,000 of organizational costs in the current year and you must amortize the remainder of these costs over 15 years.
The $5,000 immediate expense is reduced dollar for dollar when organizational costs exceed $50,000.
Please note that under certain limited circumstances these costs may fit the definition of business expansion costs and thus result in a full and immediate deduction. It is important to consult your tax advisor regarding your specific situation.
1099s Protect Deductions
Also, it is important to note that fees paid in excess of $600 to an attorney must be reported on a form1099-MISC.
There are no exceptions. It is strongly recommended that you issue 1099s to any and all service providers as this solidifies your deductions in the eyes of the IRS.
The 1099s are easy to prepare and are well worth it. I recently attended an IRS audit of a client who claimed in excess of $300,000 in professional fees. He failed to issue a 1099 and failed to keep copies of cancelled checks and bank statements.
The IRS subsequently denied the entire deduction. Had a 1099 been issued he would have saved more than $100,000 in taxes, interest and penalties.
The costs incurred for various IT, computer equipment and software packages can be fully expensed under the Sec. 179 or Bonus depreciation provisions of the Internal Revenue Code. (See Cheklist magazine, Summer 2011, “IRS: Once in A Lifetime Opportunity” for an expanded discussion of the deprecation provisions and planning opportunities for 2011).
Investigation Expenses
Finally, where is that tax planning nugget you have been waiting for? A little known deduction, often overlooked by many professionals, is something known as an investigation expense. Investigation expenses are basically the expenses incurred in investigating the potential for a new business. If your investigation results in a new business formation, you can deduct those expenses.
Under a special provision in the tax code, you are eligible to elect to deduct up to $10,000 of these expenses as start-up expenses in 2010 ($5,000 in years thereafter) with the remainder being amortized over 180 months. The $10,000 cap is reduced dollar for dollar once start-up expenses exceed $60,000.

Thomas Duffy is a CPA with Kutchins, Robbins and Diamond. Contact him at (847) 240-1040, ext.181

FiSCA Eyes Cordray CFPB Appointment


FiSCA Chairman Joseph Coleman (pictured) gave Cheklist an overview of 2011 from the association’s perspective. In the first part of a two-part series, Coleman discusses the Consumer Financial Protection Bureau, which launched on July 21, 2011.

Cheklist Magazine: Would it be fair to say that the CFPB was the main focus, or one of the top priorities, of FiSCA in 2011?
Joseph Coleman: Yes. CFPB is one of FiSCA’s top priorities at the moment. Clearly, the agency has the potential to significantly impact our industry and so the Association is working hard to establish a solid working relationship with key personnel there.

Has FiSCA had any contact with the CFPB since it has been up and running?
Yes. We initiated outreach this January and have had several productive meetings with senior staff there, including with Elizabeth Warren, Peggy Twohig and several others.

How surprised was FiSCA that Richard Cordray was named to lead the CFPB rather than Elizabeth Warren?
I don’t think “surprised” is the right word. The longer the president waited before naming his choice for director, the more speculation there was as to whom might be selected.

How familiar is FiSCA with Richard Cordray?
Individual members worked with Mr. Cordray in his previous role as attorney general for the State of Ohio. However, FiSCA has not had direct interactions with him to this point.

Does Cordray’s appointment change FiSCA’s approach at all?
No. We have been dealing with  numerous officials at the bureau prior to his appointment and will continue to do so on a moving-
forward basis.

What is FiSCA’s feeling about CFPB so far? What does FiSCA expect from the CFPB? Obviously, it is still early and the CFPB will focus on more pressing problems, but are there any inklings about the alternative financial services industry?
With regard to our view toward the bureau, quite simply it’s a fact of life, and we are dealing with it accordingly. At this point, it is too early to say what the bureau’s initial priorities will be. As you know, the conventional wisdom is that the bureau cannot start promulgating new regulations regarding the non-depository industry until a director is named and confirmed. Given that the Senate has indicated it will refuse to confirm any director until other policy issues related to CFPB are addressed, it may be some time before the bureau has that power to create new regulations for our industry. However, they already have the authority to enforce various existing consumer financial protection regulations transferred to them by other agencies through provisions in the Dodd-Frank act.

>> Editor’s Note: The second half of this interview will be published in the Fall issue of Cheklist.

The Ultimate Irony


Reality is a harsh teacher. For years, check-cashers and payday lenders were routinely chastised for charging to provide financial services to consumers and communities that banks refused to service.

In a go-go economy the unfair attacks only worsened as soufflé-like stock prices (based on fast-paced mortgage generation and inflated asset valuations) allowed banks the luxury of spending lots of money to open branches in less-than-toney neighborhoods.

Post bailout realities and regulations have become a wake-up call, both for banks and for their customers, many of whom are finally feeling pinched enough to read the fine print in their monthly statements and make reasoned decisions about what they do and do not want to pay for.

Party’s Over

The music has stopped. So has the giving of free stuff that, in truth, never was very free.

In many neighborhoods, brick-and-mortar service has stopped, too, with 1,400 bank branches closing nationwide in the last two years.

As the consumer becomes increasingly aware, banks that once lived off less visible overdraft-protection and interchange fees are being forced to be more open about their charges.

It turns out the TANSTAAFL principle is all the more true during a recession.

For those of you unfamiliar with the acronym, it stands for There Ain’t No Such Thing As A Free Lunch.

Banks are just getting accustomed to actually admitting TANSTAAFL to their customers. Finding all of a bank’s fees and charges can be difficult and frustrating, to say the least.

So as it stands, despite all of the rhetoric, check cashers and payday lenders are perhaps the only financial service organizations that have been openly disclosing their charges.

Less Money = Better Choices

More to the point, after all of the unwarranted attacks on the industry, it is coming to light that the un-banked and under-banked are way smarter about managing their money than their well-heeled societal counterparts.

They’re also far better able to make intelligent choices about financial services than their self-proclaimed protectors realize.

I really must apologize for falling prey to using the terms “un-banked” and “under-banked.” They are really just clever creations of bank lobbyists and marketers, since both imply everyone should have a bank account.  Perhaps we should rename this group “The I-Don’t-Want-To-Be-Banked.”

The I-Don’t-Want-To-Be-Banked see neighborhood financial service centers as a simpler, much more straightforward alternative to banking: To cash a check, you present it along with your ID, and assuming everything passes the normal verifications, you get your money, less a fee.

Want to pay a bill, get a money order, send or receive a wire, pay a parking ticket, buy a toll pass, get a transit card? You can do that, too.

The service is local, fast, friendly and fairly priced. In fact, that check cashing fee averages only about 1 percent to 3 percent, depending upon market and type of check. And by the way, it’s a clearly disclosed fee — in most cases posted prominently in the store and on a receipt.

Prepaid Now Mainstream

And what of all the attacks on the prepaid industry?

Well, according to recent AP articles, prepaid cards are now “mainstream.” After reading those articles it seems to me “mainstream” is code for “it’s better to know what you’ve got and what things cost than getting surprised every month by bank charges.”

By the way, a search of “prepaid cards” and “mainstream” produced 395,000 results on Google.

Yes, prepaid cards carry charges. But in today’s consumer-driven marketplace, they’re generally simple, usually well disclosed, and relatively easy to understand. That’s precisely why the free-market made them a runaway success.

Face it: If prepaid cards really were too expensive, or had too many hidden charges, people wouldn’t use them for long. Yet today, because of that very simplicity — what might be termed honesty — prepaid cards are often replacing checking accounts.

Transparent PDLs

Just like check cashing, payday loan disclosures are generally very clear, as are the fees associated with the loan.

Sure, some muckraker can always find the widow who borrowed money in an unregulated state and ended up in litigation, and use it with a broad brush to paint the industry. But that has nothing to do with the thousands of payday loans that serve their purpose and work out just fine every single day.

Payday loan customers realize that the APR calculation cannot be compared to collateralized, long-term, large-dollar borrowing.

A payday loan APR is not driven by interest rates alone.  It’s driven in large part by the fee charged to issue a relatively small, short-term, uncollateralized loan.

What exactly is the equivalent APR on a $34 charge by a bank for overdraft protection for using $12 for two weeks? What would it be on a $60 ATM withdrawal where a $2 (or $5) fee is applied?

Does anyone seriously claim that a person could walk into a bank branch and actually get a loan for $177 to get their brakes fixed so they could drive to work and keep their job?

Funny how those who criticize the payday industry didn’t cry foul about irresponsible mortgage lending and lack of disclosures during the housing bubble.

It’s a heck of a lot easier to attack small business owners than banks — and easier to attack in the name of those who need $200 loans rather than call out the over-banked (over-leveraged) middle class.

And just who were most of those folks who purchased homes with that easy mortgage money?  They were not the customers of check cashers and payday lenders or users of prepaid cards. Turns out they were mostly middle- and upper middle-class folks looking to make money in the housing market.

They couldn’t predict where the market was going, had no idea what their costs were going to be, or even how they were ever going to make that monthly payment. Many of the very same folks doomed to a lifetime of credit card debt — with bank-issued credit cards.

The Rest of the Story

Below is a table showing selected published rates for four of the largest banks in the United States.

It took some work to prepare this chart. On July 11, 2011, I went to each of their websites and set out to determine their detailed account charges.

Mind you, I feel that I am an above-average computer user and a proficient web consumer. My experience locating detailed bank charges and fees varied from relatively ready access to a single-page rate chart to rates located in 30-page-plus PDFs.

Actually, I had listed a fifth major bank, but deleted it when I had zero success in finding their detailed account charges after spending more than an hour on their website.

I then went on to look at other bank sites both large and small.  Just trying to find each bank’s checking account charges highlighted the challenges faced by consumers as well as serious disparities between banks.


• Required disclosure doesn’t mean easy-to-find-or-easy-to-understand disclosure

• Differences in where to find charges

• Differences in presentation of charges

• Differences in terminology and definitions

• Differences in the amount of information

This experience reminded me of the story about a manager reviewing an employee’s expense report:

Manager: “I have a little problem with your expense report.”

Employee: “What’s that?  It’s all there.”

Manager: “I see a total of $710 — the gas, the hotel, the meals, and the raincoat for $89.  We don’t pay for raincoats.”

Employee: “But it started to rain after I got there.”

Manager:  “You have to take it out.”

The next day …

Manager: “I got your revised expense report. The raincoat is gone — good — but the total is still $710.”

Employee: “Oh, the raincoat’s still in there — you just have to find it.”

Lessons Learned

What did I learn overall?

If your financial life is simple, and you don’t want to spend your time defensively managing a bank account, you can economically use the services of a financial service provider, and avoid a potentially complicated and potentially expensive relationship.

It is important to note that some services provided by neighborhood financial service providers are materially less expensive than banks. Like bank money orders of $5 each, or bank wires from $18.75 up to $50.

When your landlord won’t accept a personal check or your relatives need money, paying a lot less (an average of about $1 for a money order at a check casher) for those services becomes important.

Add to the mix keeing a bank monthly account fees, overdraft fees, multiple overdraft fees, and extended overdraft fees, overdraft transfer fees, returned item fees, statement fees, and many, many others, and you suddenly begin to appreciate why bank-free money managing options are increasingly the choice of people who need make their buck go father than ever.

E=mc2 F=MA S=1/2AT2  and Others

Speaking of checking accounts, one of my favorite requirements to avoid a monthly checking account maintenance fee is to “maintain an average daily balance.”

I consider myself a fairly smart person, but calculating “average daily balance” on a daily rolling basis takes a bit of work — and probably a spreadsheet program. Since an ordinary person can’t figure it out, they are either forced to maintain their balance at a higher level to protect themselves or face the penalty of a monthly charge.

I should point out that some accounts do provide multiple ways (typically involving direct deposit or use of other services) to avoid a monthly account maintenance fee, but if you live paycheck-to-paycheck the monthly charge may be inescapable.


The check cashing and payday lending industries are by and large composed of hard-working, honest business owners who charge fees for the services they provide.

They make investments and take economic risks and are often highly regulated by their host states, and where applicable, as Money Service Businesses by the federal government.

In many states, their rates are regulated by law.

Personally, I love banks and believe they serve a vital role. They have the absolute right to charge fees for all of their services.

So do check cashers, payday lenders and prepaid card issuers. They can peacefully coexist, serving different customers with different needs, wants and resources.

In today’s information age, average consumers have no trouble figuring out what’s a reasonable price to pay (provided the price isn’t buried deep inside some opaque billing structure several clicks deep on an Internet site, and then inside a multi-page PDF).

With tough times pressing them to watch every dollar, they’d much rather be plainly told what they’re paying, pay it, and be sure there are no surprises, than kid themselves that they can get something for nothing.

Richard Kelsky is president of TellerMetrix, Inc. a provider of POS transaction, compliance, interface, electronic deposit and marketing software to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of NYU and NY Law School grad, a certified anti-money laundering specialist, and a frequent lecturer on business, legal, compliance, and technology issues. He can be reached at: