The Borrower’s Fallacy: The High Cost Of Betting With House Money

Action 24/7 boasts of the distinction of being the only local, independent sportsbook in Tennessee that “continues to lead the industry with innovative practices like same day pay and cash withdrawals.” On the surface, it has the makings of an underdog story in which the hometown hero thrives on its “buy local” appeal, despite the competition of industry titans DraftKings, FanDuel, and BetMGM, among others. But it appears that the Action 24/7 narrative is less of an underdog tale than it is the story of a top dog carving out new revenue-generating opportunities.

The sportsbook is an operation from the executives at Advance Financial, the Nashville-based “flexible loan” or colloquially “payday” lender with more than 100 physical locations across Tennessee. In early January, Advance Financial’s money transmission company became an approved vendor of the Tennessee Education Lottery Corporation. Action 24/7’s CEO and promoter is Tina Hodges, also president and CEO of Advance Financial. Patrick Conroy, executive officer at Action, is the CFO. The general manager of operations, Andrew Jacks, is a former senior director at Advance Financial. Although Action 24/7 flyers appear inside Advance Financial storefronts, these dual business interests may or may not be known to the general public.

In addition to the shared leadership, Advance Financial has created an apparent overlap between the business of high-risk lending and the business of sports betting. For several months, Action has promoted its “cash deposit and withdrawal services,” at a $2 fee per transaction, to sweeten its brand appeal with a tangible component partially absent — the ability to withdraw cash — in Tennessee’s exclusively digital sports betting market. (Bettors can deposit cash into accounts at competing sportsbooks using PayNearMe stations at CVS and other establishments, but not withdraw that way.)

Of course, these deposit and withdrawal features are entirely accomplished through and dependent upon the state’s physical Advance Financial locations, which conveniently may assume the role of a sportsbook ATM when needed. And while — at least on paper — Hodges may be accurate in characterizing Action 24/7 as “a separate and new business venture,” on a practical level the benefit of this venture is that it creates two avenues of collection: One is as a lender gaining loan interest, and the other as a sportsbook profiting from the juice (or “vig”) on its bets in a business where the overwhelming majority of bettors lose money over time in exchange for entertainment value and occasional big wins.

Pick your poison

While the association between sportsbook and financial lender may be the first of its kind, the practice of borrowing money to chase prospective profits within the same industry as the lender is not unusual in capitalist society.

For example, people with a basic familiarity with the stock market have likely heard of buying stocks “on margin.” “Margin” is money that an investor borrows from a broker, and, to the hopeful investor, a means of boosting stock buying power and investment returns.

But the risk cuts both ways; if the stock tanks, the money lost can far exceed an investment consisting solely of personal funds. Conceptually, trading stocks on margin is similar to betting on sports with borrowed funds.

Both involve high-risk investments driven by (often misguided) ambitions to accelerate financial gains. And each comes stamped with a guarantee to the lender — the “house” — of repayment plus interest and fees. While the margin trader is betting on their ability to pick profitable investments, the consumer debtor is betting on their ability to pick which team wins a game or covers the point spread.

How it differs

However, unlike the recipient of a payday or flex loan, an investor who trades on margin does so on a short leash. Margin trading is a highly regulated enterprise. Federal regulations apply uniformly to all states. Federal regulation of the small-loan industry has been proposed but so far an unsuccessful effort, based in part on well-financed lobbying efforts to avoid regulation.

Most notably, investors seeking margin must deposit a minimum of $2,000, or 100% of the purchase price, whichever is less, and investors must maintain an equity balance amounting to 50% of the price of the securities they are attempting to purchase.

For example, someone who wants to buy 100 shares of a stock at $50 per share would need $2,500 of personal equity, and the other $2,500 would be covered by margin. If the stock goes up 10%, the investor profits $500 rather than the $250 had the investment consisted solely of personal funds.

The same holds true for losses. If the stock price drops 10%, instead of a $250 loss the investor is $500 in the red and still has to repay the amount borrowed plus interest. Furthermore, the margin requirement is ongoing. If at any point the investor’s equity falls below the margin requirement, the broker can immediately — with or without notice — access and sell as many of the investor’s positions as are needed to bring the account into compliance.

Because the broker has continuous and immediate access to the borrower’s existing securities, the risks of non-payment or late payment are virtually non-existent. In the typical payday lending transaction, borrowers give lenders access to their deposit account by way of a post-dated check, but this does not guarantee those funds will be sufficient on the due date. By failing to pay on the due date, the borrower incurs an additional fee to pay for a “rollover” period to extend the deadline.

Flex loans often follow a similar course: By paying the minimum, you will be repaying the loan for a long time with interest rates of up to 279.5% annually. The result is often an endless cycle of debt. The payday loan industry generates roughly $400 million per year in interest and fees from customers in Tennessee, most of whom are low-income and, over the course of a few months, end up paying more in fees than the principal borrowed.

Envisioning this already high-risk scenario play out as funds are deposited into a sports betting account elevates consumer protection concerns in Tennessee. Whether it plays out more as a sportsbook encouraging bettors to finance their bets through high-interest loans, or as a high-interest lender encouraging borrowers to bet on sports, the most likely result is the same: an elevated risk that more consumers will wind up stuck in an endless cycle of debt.

Local danger

Sportsbooks charge players a commission — vigorish (or “juice”) — on each wager they take. Generally 10%, the vig is what ensures the house’s long-term gains and bettors’ long-term losses. Not surprisingly, most sports bettors lose money in the long run. They are already operating at a disadvantage by being taxed on each bet; there is no sensible argument to suggest that betting with funds that are tied to (up to) a 279.5% APR loan (in the case of flex loans) will improve the prospect of loan repayment. Quite the opposite.

The consumer is paying a fee and interest on the loan in addition to the vig on a sports bet. Not only will Advance Financial continue to profit from its high-risk loans, it will profit from the vig it collects from sports betting borrowers. Thus Action 24/7 adds a notable and concerning secondary level of risk to an already high-risk transaction.

Tennessee’s transition into the legal sports betting market has been encouraging as it sets the precedent for its Southern neighbors. Certainly, Action 24/7 deserves recognition for becoming the state’s first and only local sportsbook. But its novelty as the local guy should be viewed in context: Its affiliated business of providing high-risk loans to vulnerable consumers alongside its sportsbook business is also a novelty — and a dangerous one for Tennesseans.

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