The end is nigh...for purveyors of online payday loans. In response to growing public backlash, Google is giving payday loan companies the boot from its AdWords service. So why should you care about the fate of this other industry?
The implications of Google's policy decision could have far-reaching effects on any business that uses AdWords and even those that don't. Fortunately,we don't anticipate the new policy negatively impacting legal funding businesses, but the specter of future bans should be on the minds of all legal funders. We'll provide a few tips on what the industry and individual businesses can do to prevent future action.
First, a quick recap of Google AdWords for the uninitiated. If you've used Google's search engine, then you've already been exposed to AdWords.
See those hits at the very top of the search result? Those are not, in fact, the best results for your search, but rather ads targeted directly at you based on your search query. According to research by WishPond marketing:
Needless to say, as an industry that relies on originations, AdWords can be a useful tool in some legal funders’ lead-generation arsenal.
Now let’s break down the new policy change and what it means. Google’s new policy will ban ads from companies offering loans where repayment is due within 60 days of the date of issue. In the U.S., Google will also ban ads for loans with an APR of 36% or higher. Though Google never explicitly calls out payday loans in its policy announcement, this new change comes on the heels of a Consumer Advisory report by the Consumer Financial Protection Bureau (CFPB) that singled out the payday lending industry for abusive practices and negative outcomes for borrowers.
The CFPB report concluded that payday loans lead to unaffordable payments and high default rates, while the collection systems used by online companies lead to over half of all borrowers getting hit with overdraft charges in addition to growing debt. So while Google’s new policy doesn’t explicitly say it is banning payday loans, the terms are clearly targeted at the shortcomings of that industry.
Based on the terms of the new ban, it is unlikely that legal funding will be barred from advertising on Google AdWords. There are a number of reasons, but it essentially boils down to the fact that, as we all know, legal funding is not a loan.
In fact, many states have begun to officially recognize the differences between legal funding and traditional loans. Indiana, for example, recently passed legislation with specific language that differentiates legal funding from a traditional loan. The findings by the CFPB focused on the negative outcomes for borrowers, which simply don’t apply to the legal funding industry. These are just some of the reasons why we do not expect any adverse impact on legal funders stemming from this latest policy change.
However, just because we don’t think that this current ban is an issue, doesn’t mean that Google won’t target other types of financial products in the future. Google has sole discretion to determine its AdWords policy, and with the recent spotlight on the industry thanks to the Thiel-Hogan-Gawker revelations, legal funders would be wise to at least consider the implications of world without AdWords.
The most obvious impact of a ban from Adwords would be a reduced origination capacity for funders that generate leads from direct-to-consumer ad campaigns.
I’ll reiterate here that there are over 6 billion impressions per day at stake, and what do you think is the first step for anyone looking for funding? Googling it! AdWords also controls over two-thirds of the PPC campaign market, meaning there will be a huge opening for alternative services like the Yahoo! Bing Network (YBN). While YBN offers a 50-70% lower cost-per-click than AdWords, a new AdWords ban would drive up demand for YBN services and, with it, prices.
The corollary to these effects is that companies with deft search engine optimization (SEO) strategies stand to gain more hits that otherwise would have been eaten up by AdWords placements. All those searches would be funneled into companies that smartly manage their search-engine placement, heavily favoring those occupying the top spots.
The ripple effects don’t stop there. Many funders rely on brokers for case leads, and those same brokers often rely on AdWords to generate their own originations. Fewer broker originations means more competition for those leads, which will drive up the price brokers can charge and decrease profits for legal funders.
Those that rely exclusively on brokers would feel the biggest impact, but even funders with a strong network of attorney referrals should be wary. Just as competition for brokers would increase, higher broker fees would mean a more concerted effort towards monopolizing attorney referrals.
There are some simple steps every legal funder can take to reduce the chances of an AdWords ban and mitigate the impact should a ban be imposed.
Google AdWords is one of the most useful tools for any business predicated on sourcing leads online. You can agree or disagree that fewer payday loans isn’t the worst thing in the world, but Google’s power to make unilateral decisions that can have direct impact on people’s businesses is cause for discomfort.
While this ban doesn’t directly affect the legal funding industry, Google banning other financial products that are misunderstood is no stretch of the imagination. A rising tide lifts all boats, so remember to take proactive steps to improve the industry’s image and mitigate the risk of an AdWords ban. Be mindful of terminology, deal transparently with plaintiffs, and take steps to diversify your origination strategy.
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