If you follow Provident Financial, a subprime lender you would know the share price took a battering, due the admission that staff recruitment has affected their CCD division with collection rate falling from 90% in 2016 to 57% thus far, this year. They also mentioned problems with their operating systems. But, if things weren’t bad enough, their Vanquis division is facing an investigation into their “Repayment Option Plan”. And this would lead to tens of millions in compensation.

The share price stands at £7.70 from a peak of £35, a fall of 80% in market value. But, if you believe in Neil Woodford that in two years, the shares will return to making pre-tax profits in excess of £300m then you got to understand the business model.

Therefore, I outline a three-step process to understanding Provident Financial.

Step one: Their business model and how it works.

Step two: The positive side of their business.

Step three: The game plan, how will things likely to play out in the next six months, and whether you should or shouldn’t invest from two different scenarios.

Let’s do this.


STEP ONE: The Business Model of a payday lender.



Illustration – Simple

Let’s say a customer borrows £1,000 at 45% APR, and has to pay £50 fee for this arrangement. Assuming the person pays it back in one year (keeping it simple), the payment is as follows:

£1,000 (Original amount borrowed);

£50 (Arrangement fee);

£450 (Interest).

This means Provident Financial report gross interest income of £500.

Remember Provident Financial incurs expenses from these loans. Let say the £1,000 lend costed them the following in expenses:  

Borrowing rates at 5% of £1,000 = £50;

Staff costs at 15% of £1,000 = £150;

Other costs like system upgrade, utility bills, insurance, auditor fees, bonuses, etc. makes up for another £50 from £1,000.

N.B.: The above is for illustration purposes only and not based from Provident’s financial accounts. 

So, annual operating costs totals £250. Therefore, Provident Financial makes £250 in profit from this arrangement.


Illustration 2 – More business like

Illustration 1 explains the lenders model and how it makes money. One thing missing from that is the default rate or the non-performing loans or the impairment…

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