
Google’s Pound of Flesh - astrec
http://www.cringely.com/2010/09/googles-pound-of-flesh/
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gojomo
Cringely suggests Google could offer payday loans at 20% interest, and further
would make that same rate as a profit. That seems far-fetched; these loans are
costly to offer and collect upon, with high default rates.

Various sources peg the profit margins of existing payday lenders, with their
"400%" effective interest rates, at only 3-10% -- less than Google's margins
in their existing lines of business, I suspect.

~~~
microtherion
Except that Google would probably do "algorithmic" collections. They already
roam the streets with a fleet of cars equipped with cameras and face
recognition software. Equipping them with robotic drive by shooting
attachments should be simple enough.

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pmcginn
_Why would Google do that? Payday loans are despised by consumer advocacy
groups, governments, and my Mom, alike. Nobody likes payday loans, except of
course the companies that make billions providing and servicing them._

Those companies and the people that actually make use of their services, of
course. This author might not have noticed, but generally markets for things
no one wants don't exist.

It's tempting to view loans that are typically paid back quickly in terms of
an APR, but it's extremely deceptive. The reason the annual rate is so high is
that, surprise, people who can't plan their budget out more than a few days in
advance are also not generally the best at paying loans back on time (or at
all.) And viewed in raw amounts, paying an extra few dollars a week from now
for milk today isn't the worst deal in the world, if it keeps the kids fed.

~~~
goodside
Also, "400% APR" is misleading because it implies somebody might potentially
take out the loan and pay it back five-fold a year later, when in reality
these loans are almost always paid back either quickly or not at all.

By extension, any time you pay 50% more on the price of something in order to
have it one day sooner (cough medicine at a convenience store, food at an
amusement park, etc.) you're getting it at an APR in excess of 10 to the 60th
power.

~~~
retube
I don't agree the APR is misleading. An APR is a normalised, comparable rate.
That's exactly why you should look at the APR. Just because the loan is for a
short time is irrelevant. It's like staying in a hostel and being charged a 5*
rate just because you'll only be staying there for a short time.

Edit: the company you are borrowing from will be borrowing the money they lend
to you at probably 10 - 15% APR (in the UK). That's quite a spread.

~~~
yummyfajitas
There are even worse APR's. Suppose you place a bet at 2:1 odds, 7 minutes
before a 3 minute horse race. The racetrack is essentially borrowing money
from you at at an APR of 3.6 million %!

The right way to look at loans is to break them down into APR and default risk
multiplier. The total amount which needs to be paid back is DRM x exp(APR x
duration). Payday loans, much like the racetrack, have reasonable APR's but
high DRM's.

Dividing ln(DRM) by small numbers is as ridiculous as dividing a $1 investment
by 1/1 billion % of a company and claiming that 37 signals has a $100 billion
valuation. Yeah, they are using a standard formula, but in a ridiculous way.
Models are pointless when you use them beyond their range of validity.

[http://37signals.com/svn/posts/1941-press-
release-37signals-...](http://37signals.com/svn/posts/1941-press-
release-37signals-valuation-tops-100-billion-after-bold-vc-investment)

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jessriedel
This author is confused about the meaning of "don't be evil". He seems to
think it means to conform to a particular morality (i.e., the one to which the
author subscribes) in all aspects of business. He probably thinks this is
supported by the fact that Google embraces various left-leaning causes
(investing in geothermal energy, etc.) when it's not clear that this could be
justified in a business sense by the good publicity it generates.

But I think the original meaning of "don't be evil" is much more modest. It
means: don't betray the trust of the user. For example, don't sell SEO favors,
don't sell the user's info to advertisers, don't trick the user into
downloading anything, don't abuse a monopoly position, etc. (This isn't to say
that Google hasn't bent/broken these rules.) The fact that Google _also_
supports various left-leaning causes is just a reflection of the fact that an
unusually small number of left-leaning people influence the company's
decisions.

I think the wikipedia article supports this interpretation.

I really don't think "don't be evil" has anything to do with a particular
ideology which might disapprove of pay-day loans or whatever.

~~~
Robin_Message
There aren't many ideologies that accept pay-day loans as anything other than
evil frankly, so it's not one particular ideology that disapproves of pay-day
loans, it's all of them. See <http://en.wikipedia.org/wiki/Usury> and note
that a pay-day loan is exactly the kind of loan that is usurious — anyone who
takes one hasn't got the money they need to make it to the end of the month,
i.e. their outgoings are more than their incomings. They will never be able to
pay such a debt off.

This is not a business I would have thought Google wants to get into, not
because of the evil nature of it, but simply because making money from it
legally is logically impossible.

~~~
jessriedel
I don't think we'll settle an argument here, but I'll say this: The large
majority of payday loans are repaid. So long as (1) the borrowers are well
informed and (2) there is healthy competition between the loaners, payday
loans are good for society. They allow people who otherwise wouldn't get
credit to float over rough patches.

Let me ask you this. If you are poor and living month-to-month, and your
uninsured car--which you need to get to work to continue earning money--is
wrecked, what do you do? Not everyone has families to help them in this
situation.

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ryanf
Based on the quote in the article, I'm not sure why Cringely would leap to the
conclusion that Google is planning on _entering_ the loan business. It would
make much more sense for them to set up some kind of competitive marketplace
to connect lenders and borrowers, which would meet their stated objectives of
"[righting] inefficiencies, [providing] better transparency, and [allying]
with consumer protection agencies."

~~~
einarvollset
Ah, sense! This is similar to Google's move into credit card and mortgage
comparison shopping (read: lead generation).

Arguably Google is a beacon of transparency in the latter industry, and I say
that as someone who a) has spent time researching the business and b) don't
hold with the majority geek/HN view of Google as being the Universe's Love
Child.

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johnglasgow
There's nothing wrong with being a pay day loan company. Their interest rates
(500% or more) are through the roof for making high risk loans that no other
bank will touch.

high risk = high reward

~~~
retube
I'm not sure how much risk these outfits really run. They're not unsecured
loans. You don't repay it, they'll call in the debt collectors and take away
your TV and anything else they can get their hands on.

~~~
johnglasgow
If payday loans are really as secure as you make them sound, the interest
rates wouldn't be so high on the loans. It's pure economics.

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gyardley
Google 'getting into the payday loan business' is likely just Google
continuing to test its Comparison Ads feature:

[http://adwords.blogspot.com/2009/10/introducing-adwords-
comp...](http://adwords.blogspot.com/2009/10/introducing-adwords-comparison-
ads.html)

Not surprising that they're there - the industry throws off a boatload of
money, but only a portion currently goes to Google, since there's an
established lead gen industry acting as intermediaries between Google and the
actual payday loan providers.

Same situation as with mortgage leads - and in fact Google's used the same
'bringing transparency to a shady and inefficient industry' rhetoric when
they've talked about mortgage lead generation.

Like with mortgage leads, this initiative is probably doomed, since the big
advertisers in the space have absolutely no desire to efficiently compete for
consumers via directly-comparable financial terms. When an industry's
confusing and opaque, it's usually for a reason.

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Tyrannosaurs
An aside to his point about Google.

400%? In the UK we've got companies charging over 2500% a year for payday
loans.

While I accept these are high risk, there surely has to be a limit?

~~~
scotty79
Amazing. And is that legal? In my country there is limit on how high interest
rates can get. Maximum credit interest rate is ... 20%. Of course loan sharks
are circumventing this rule in every way they can by requiring from you to buy
additional services and insurances.

~~~
Tyrannosaurs
That sort of law was being proposed by the previous government but it doesn't
seem to be on the new government's agenda.

~~~
gaius
The alternative to expensive credit isn't cheap credit. It's no credit at all.

~~~
Tyrannosaurs
Personally I'd see that as a good thing for people who are likely enough to
default that expensive credit is all they can get.

~~~
Robin_Message
I'd rather, for their own sake and for the good of society that they couldn't
get credit at all. It's too easy and tempting and it doesn't help for more
than a few days.

~~~
gaius
So how much interest is "too much"?

Also I think you may misunderstand who these people are. Take wonga.com for
example, they're on ads on TV with their iPhone app. How many truly poor
people have iPhones?? Their customers are people who need (want) cash for the
weekend before payday to go drinking/clubbing/partying. It's a luxury (of
sorts) and people always pay a premium for luxury.

~~~
Robin_Message
I don't know, but most jurisdictions have a view on that and most ethicists
would to. I can tell you it's less than 400%.

I think "these people" are not a homogeneous group, so defining them as truly
poor is tricky. I would argue though that it is still a social negative to
lend to anyone who has an iPhone but doesn't have the money to go on a night
out before pay-day. I can't think of a better example of socially-useless
lending. I think that is bad for the state to allow that, but I can see not
everyone would agree. There are however definitely much worse off people using
such services, and they should be prevented from doing so [1].

The other issue thing I want to mention is that the state schooling system is
woefully inadequate in the area of personal finance. Maybe it's the parent's
job, but budgeting and managing your finances is too important a skill to be
left to them, and schools waste plenty of time teaching "personal, social and
health education" — it'd be easy to shove money management in there.

[1] With the possible proviso of a proper social emergency loan or payment
system for people living below the poverty line with unexpected non-
discretionary spending [2], e.g. car breakdown which prevents them getting to
work.

[2] Don't even get me started on medical bills here. Pay-day loans are a
third-level kludge on a totally broken system there.

~~~
gaius
The headline interest rate is misleading remember. Let's say it costs s fixed
amount to do the paperwork to set up _any_ loan. Obviously that is going to be
a greater or lesser part of the overall interest charge if the loan is for 1
week or 100 weeks.

How would you ensure your "social emergency loans" were ever repaid?

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dbingham
I'm not sure what to make of this. So far Google has largely succeeded at not
being evil - as much as any large corporation can, really. Google's stated
reason and the posters logic holds up to the test of possibility. And it would
seem to fit into Google's general way of doing things and its ADHD tendencies.
I guess we'll all have to just watch and see what happens.

~~~
scotty79
What's evil in payday loans? High interest rates. If Google was offering
payday loans at 5% annual interest rate how would that be evil?

No profit for Google from such loan? How doing unprofitable things was any
trouble for Google?

~~~
dbingham
Right, I know all that. What we're waiting to see is whether or not that's
really what Google is up to. I strongly suspect that the poster has it right
in thinking that this is what Google is doing. Like I've said, they've done a
pretty awesome job of not being evil so far.

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illdave
On his point about Google placing the news for "payday loans" at the bottom of
the screen instead of the top - I really do think that's algorithmic, rather
than a concious decision by Google to hide bad press. In the UK, I'm seeing
the news box appear at the bottom of the results for "car insurance".

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mhb
Payday Loans: New laws aimed at payday lenders will end up hurting the poor:

<http://news.ycombinator.com/item?id=1735537>

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marknutter
Ugh, I can't stand Cringely. He relentlessly bashed Apple around the time I
was starting to switch over from Windows and made some of the dumbest
predictions and damnations about Apple at the time, all of which were totally
off base. His reputation was ruined for me.

