IN THE MONEY.

Think of payday loans--small, short-term, high-interest vehicles offered outside the mainstream banking system--and chances are some pretty tawdry images spring to mind. Perhaps you picture a dingy, no-name shop with signs that shout "Cash Til Payday!" A grimy storefront on the wrong side of town. Or a diamond engagement ring pawned to make ends meet until the next paycheque.

If that's your idea of a payday lender, it may soon change. Today, companies like this year's top Investor 500 small-cap performer, Edmonton-based Rentcash Inc. (TSX: RCS), offer payday loans through large corporate chains. And they're developing customer service strategies and slick marketing campaigns with the aim of doing the unthinkable: making payday loans respectable.

Gordon Reykdal is at the forefront of this industry-led charge. He's president, CEO and chairman of Rentcash Inc., the only publicly traded payday loan company in Canada. Under Reykdal's management, Rentcash has grown to 330 outlets across the country--30 more than the ubiquitous Money Mart, which began as a Canadian operation but is now owned by Pennsylvania-based Dollar Financial Group Inc. And Reykdal says he isn't stopping there. His plan is to open no less than 11 new outlets each month. If he wasn't already busy enough, he is also a founding member of the Canadian Association of Community Financial Service Providers, a body that represents the payday loan industry.

Reykdal has set a feverish pace since Rentcash began operations in 2001. (It took Money Mart 23 years to grow to its current roster of Canadian stores.) His expansionist tendencies have been criticized in the past, however. He once ran the Edmonton-based national furniture rental chain RTO Enterprises Inc. (now Easyhome Ltd.), which industry watchers say expanded too quickly. Reykdal left the company five years ago. "It was just time to move on," he says.

And move on he did--without entirely abandoning the furniture rental business. Rentcash now operates under the Cash Store and Instaloans banners. It also runs Insta-rent (rent-to-own) kiosks in stores of the Brick and United Furniture Warehouse. But furniture rental accounts for only about 25% of Rentcash's revenues.

Reykdal, who drove a gravel truck for a living after graduating from high school, apparently wants to help lower-income Canadians enjoy a better lifestyle--even if they can't really afford it. His vision is more than renting furniture and lending money--he wants to take the stigma out of living hand-to-mouth. Take, for example, the design of Cash Store outlets. Gone are the Plexiglas windows typically found in currency exchanges or banks in seedy neighbourhoods. Reykdal says he wants no barriers between his clients and his employees. By having no cash on-site (money is loaded electronically onto a cash card and customers withdraw it through ATMs), he has abandoned the cold, sterile look of old (not to mention security concerns) in favour of an open-concept office and what he calls a "financial institution-like atmosphere." Staff members are young, friendly, dressed in business casual, and usher customers to desks where they get their loans.

Reykdal's goal: for people to see payday loans as an honest business, perhaps even a stick-it-to-the-big-banks option for borrowing. "I think ours is not a well-understood industry," he says. The approach seems to be paying off: Rentcash's revenues have climbed exponentially--to $22.3 million in 2004, from $4.9 million in 2002, its first full fiscal year. For the six months ended Dec. 31, 2003, Rentcash brought in $8.3 million, but operated at a loss of $634,841; for the same period in 2004 (the first two quarters of its current fiscal year), it pulled in $26.1 million, while making a profit of $3.8 million. (It recently announced profits of $3.3 million for its latest third quarter on revenue of $18.9 million.)

All the good news attracted a $34.8-million round of financing led by Acumen Capital Finance Partners Ltd. of Calgary in April. Rentcash used the money to help it acquire the Edmonton-based Instaloans chain of 99 stores that same month for $39.5 million.

But can the good times last? Or will Rentcash go the way of last year's I-500 chart-topper, ConjuChem Inc., which fizzled out faster than a bad science experiment? (It saw its impressive one-year return of 2,716% shrink to a loss of 72.7% this year.) Before you begin to try to answer that question, consider this: Rentcash's success has come at a time when the payday loan industry is unregulated. That situation will likely change very soon--and Rentcash will have to stare down some big legal and political challenges in the months ahead.

Controversy surrounds the exorbitant cost of payday loans, which typically charge rates equivalent to $20 for a two-week advance of $100. When annualized at a straight-line rate, that works out to more than 500% interest--well over the legal limit on usury, which is currently 60%. To keep things legit, payday lenders typically charge 59.9% interest and then tack on various fees to cover their costs and turn a profit.

According to Reykdal, Canadian banks have shown no interest in fronting money to payday loan companies, yet. (In the U.S., some banks have lent money to them.) So Rentcash acts as a broker that puts its customers in touch with third-party lenders. One of them is a private holding company, 19695 Yukon Inc., which, in conjunction with Calgary-based Avenir Diversified Income Trust (TSX: AVF.UN), has lent $11 million to Cash Store customers at a combined interest rate of 59% per annum before expenses. Avenir also lent Rentcash $3 million in the form of a subordinated debenture with an annualized yield of 12%, plus an additional annual financing fee of 4% for its Insta-rent expansion. With the Cash Store acting as a broker to consumers, and 19695 Yukon and Avenir not technically the lenders, none of the companies has direct responsibility for lending money at rates that, with fees included, work out to more than 60%.

Consumer advocates and credit counselling services say the only people who would ever pay such exorbitant interest rates and fees on payday loans are either desperate or financially illiterate. Either way, they argue, payday lenders are capitalizing on a legal technicality that must be addressed to prevent further exploitation. And it didn't take long for lawyers to sniff out a potential windfall--there are currently 10 class-action lawsuits against various payday loan companies across Canada; three of them name Rentcash.

Provincial regulators are having their say, too. The Consumer Measures Committee, a group of federal and provincial officials working on consumer protection issues who report to deputy ministers who, in turn, report to consumer ministers, have been holding consultations with payday lenders and industry representatives for the past year and a half. Their recommendations are scheduled to be made to the ministers at their next meeting, expected sometime this summer. And while the committee probably won't suggest changes to the usury rate set out in the Criminal Code, it may suggest new regulations governing the fees payday lenders can charge--and the means they use to collect overdue loans, including the practice of garnisheeing wages, something Rentcash stopped doing in April.

Reykdal says he's all for industry regulation. "It's just good, common business sense," he explains. But no matter what happens on the regulatory front, it's likely the class actions will proceed, since there is a legal precedent for the courts to apply limits to fees as well as to interest.

In a 1998 case, Garland v. Consumers' Gas Co., the Supreme Court of Canada upheld an Ontario Court of Appeal ruling that Section 347 of the Criminal Code applied to certain late-payment fees that the energy company was charging. Regardless of whether they are called interest charges or fees, both courts determined that late-payment charges exceeding the 60% per annum limit were unlawful.

Still, industry representatives say that once all the regulatory hurdles are cleared, people will start warming up to payday loans. "The legislation that exists today did not foresee this type of industry," says Bob Whitelaw, president and CEO of the Canadian Association of Community Financial Service Providers in Ottawa. He adds that Canadians who don't have access to mainstream sources of credit are using the loans. "Banks don't offer this service."

Chartered banks, payday loan providers maintain, are increasingly focusing on wealth management for high-net-worth individuals at the expense of smaller retail customers. And unless you have overdraft protection, you are not able to borrow $100 from a typical bank.

Meanwhile, Canadians have been spending more than they earn. The consumer debt-to-income ratio shot from 61% in 1981 to 102% in 2000, according to Statistics Canada. Those who are particularly hard-hit are lower-wage earners, who have watched their incomes decline over that same period. So for anyone facing a cash crunch, or feeling frustration with the big banks, payday loans, the industry argues, are a hassle-free way to get some quick cash--even if there's a large fee.

Those fees, not the interest, are how payday loan companies make the bulk of their money. And whether such charges are reasonable, or even legal, will come under intense scrutiny in the year ahead.

So far, Rentcash seems to be working just fine for most of its customers and investors alike. Payday lenders are certainly here to stay. But the way they do business may see some big changes in the months ahead.