COLUMN: Small-Dollar Credit in Short Supply

By Tescher, Jennifer; Gartner, Kimberly | American Banker, October 28, 2010 | Go to article overview

COLUMN: Small-Dollar Credit in Short Supply


Tescher, Jennifer, Gartner, Kimberly, American Banker


Byline: Jennifer Tescher and Kimberly Gartner

Earlier this month, the Office of Thrift Supervision ordered MetaBank to shut down its iAdvance loan product. According to Meta, the OTS said it had engaged in unfair or deceptive acts or practices in offering the product, which provided prepaid card users with small amounts of credit advanced against their incoming direct deposits.

In the wake of this action, it is worth reflecting on the state of the small-dollar credit market and the credit needs of underserved consumers. Despite some innovation and a handful of new products over the last few years, the gap between supply and demand is greater than ever.

Demand for small amounts of credit is high among certain segments of the underbanked. Our organization's 2008 Underbanked Consumer Study found that 28% of the underbanked had borrowed money within the last 12 months. Almost 40% of those borrowing do so to pay bills or to cover basic living expenses.

Borrowers used a wide array of debt products, including personal loans (30%), lines of credit (24%), cash advances on credit cards (16%) and payday loans (8%); a sizable group (43%) borrows from family and friends.

Two distinct behavioral patterns emerge among these borrowers. One group borrowed once a year for $1,000 or more, most often to purchase a vehicle.

The other group of borrowers generally borrowed two to four times a year at amounts between $100 and $1,000.

They borrow to pay for utilities (32%), home repairs (31%), basic living expenses (22%), repayment of other debt (21%) or medical bills (17%).

The need to borrow to make ends meet has almost certainly been exacerbated in the last two years by the recession, job loss, the tightening of credit and other financial stress.

Underbanked consumers were already at a disadvantage before the financial crisis.

Our survey showed that one-third of underbanked consumers had subprime credit scores, while over 40% had limited or no credit information on file, making them unscorable.

Some may interpret these statistics to mean that underserved consumers are income-challenged rather than credit-challenged, and that the solution is better income supports or budgeting help. Others may read the numbers and believe the answer is encouraging savings in order to build a cushion to weather crises.

However, income supports, budgeting guidance and additional savings will not entirely fill the need that credit satisfies. Well-structured credit can help build a credit history; facilitate an investment or purchase that provides the foundation for other wealth-building activities; and support a household's ability to save. …

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