New Revenuefor Banks
Byline: Jeff Plungis Bloomberg News
U.S. banks, threatened by new limitations on overdraft fees, may look to short-term products similar to "payday" loans to help replace as much as $20 billion in lost revenue.
Banks including Fifth Third Bancorp, Wells Fargo & Co. and U.S. Bancorp are already making such loans, charging $10 for every $100 borrowed for 30 days -- the equivalent of an annual interest of 120 percent. The loans, which they call "checking advance products," are comparable to those made by so-called payday loan stores, which target customers who generally don't have credit cards to bridge the gap until their paychecks come.
"The smarter banks are trying to resell overdraft protection to consumers as a different product," said Elizabeth Rowe, group director of banking advisory services at Mercator Advisory Group in Maynard, Massachusetts. They don't call the advances "payday" loans because it's a "very tarnished, negative brand."
The Federal Reserve's rules on overdrafts, effective July 1, will prohibit banks from charging fees at automated teller machines or on debit cards unless a customer has agreed to pay for being allowed to draw more than their account balance. Banks may lose $15 billion to $20 billion in annual revenue, Rowe said.
For consumers, getting a short-term, high-interest loan from a bank might be worse than going to a payday store, said Lauren Saunders, managing attorney with the National Consumer Law Center in Washington. A bank has direct access to consumer accounts, meaning its loans will be paid off first, ahead of food, housing or utilities, she said.
"They're looking for ways of replacing their overdraft income," said Saunders, whose group has represented plaintiffs in lawsuits against banks and hasn't filed any lawsuits over the loan programs. "Instead of pricing their products openly and upfront, they seem addicted to back-end ways of making profits."
Banks do caution their customers that the loans are an expensive form of credit. Alternatives "may be more suitable to your long-term needs," says a statement on Fifth Third's Web site.
Still, Wells Fargo spokeswoman Richele Messick said the advance from the San Francisco-based bank is less expensive than a payday loan. It has been offering the loans since 1994.
"Wells Fargo encourages all our customers to properly manage their accounts," Messick said. "Emergencies do arise, and our Direct Deposit Advance Service can help customers when they're in a financial bind."
Cincinnati-based Fifth Third, Ohio's largest lender, began offering "Early Access" loans in September 2008, before the current debate on overdraft fees and the Fed announced its opt- in rules, bank spokeswoman Stephanie Honan said. …