Magazine article American Banker

Cost-Conscious Banks Have Little Interest in Small-Dollar Loans

Magazine article American Banker

Cost-Conscious Banks Have Little Interest in Small-Dollar Loans

Article excerpt

Byline: Dennis Shaul

In his op-ed, "Regulators Should Let Banks Get Back to Small-Dollar Loans" (Sept. 16), The Pew Charitable Trusts' Nick Bourke is correct in his observation that increased competition in the short-term credit marketplace would benefit consumers. The payday loan industry broadly supports the notion that banks should also offer small-dollar loans. However, in the relatively unregulated environment that existed prior to 2013, very few banks chose to enter this market -- despite their ability to offer lawful products designed nearly exactly as Mr. Bourke posits. Had they wanted to do so, banks might have competed payday lenders out of business a decade ago. There are many reasons why, given the choice to do so, banks have nearly universally abstained from offering short-term, small-dollar consumer credit.

Mr. Bourke offers a simplistic model of banks' costs, focusing exclusively on the cost of funds. But banks' personnel and real estate costs -- the principal drivers of the cost of a payday loan -- are much higher on a unit basis than those of storefront payday lenders.

Moreover, unlike banks, payday lenders are willing to locate their retail outlets in neighborhoods where consumers maintain small deposit balances and are poor prospects for mortgages and credit cards. Mr. Bourke presumes that banks would want to serve these customers, but in fact banks do not; to the contrary, the check-cashing, money-transfer, remittance and other "high-touch" services these customers demand are inconsistent with current models of retail banking that depend on streamlined self-service and electronic transactions. …

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