Cashing in -- Area Lenders Bank on Payday-Style Services to Reach the Working Poor

By Johnson, Jennifer | The Commercial Appeal (Memphis, TN), November 4, 2012 | Go to article overview

Cashing in -- Area Lenders Bank on Payday-Style Services to Reach the Working Poor


Johnson, Jennifer, The Commercial Appeal (Memphis, TN)


Most big banks aren't making payday loans, but they're finding new ways to cash in on just about everything else the payday lenders do.

The prospect of making money on fees for services to the working poor has a host of big companies -- including Regions Financial Corp., SunTrust Banks Inc. and Wal-Mart Stores Inc. -- competing with the city's 180 payday and check-cashing stores on prepaid debit cards, cashing checks and wire transfers.

It follows an initiative by Memphis government leaders who see such bank services as an anti-poverty measure. Some 96,000 households never use banks and in turn pay costly fees. Bank usually charge less than a payday lender. But some analysts sense a disturbing trend in banks following the path of the payday industry.

Going into payday lending is kind of a classic example of what I would describe as a desperate search for profits, said John Gnuschke, a professor of economics at the University of Memphis.

Even though the region's three largest banks -- First Tennessee Bank, Regions, SunTrust -- have joined a handful of smaller rivals in Bank on Memphis, the anti-poverty program, Gnuschke sees possible problems. He worries that some banks are moving into risky lines of business they don't understand.

With low interest rates, tepid loan demand and problem loans still running off the books, Gnuschke said, there is tremendous pressure on financial institutions to gin up profits. Although the bank industry shrugs off such concerns, it has been prone in the past to flock into trends, such as subprime mortgage lending, which later backfired and set off the nation's 2008 economic crash.

Bankers are moving ahead again. They say they have good insights into the new lines of business. Large banks have historically provided payday lenders with the lines of credit they need to operate, though until recently, they've stayed in the shadows.

Cautious approach

First Tennessee, the No. 1 bank in Memphis, was stung by mortgage lending in the past decade. Now, it has taken a cautious approach.

First Tennessee courts Memphians who don't have bank accounts and reaches out to the underbanked -- those who have accounts, but also rely on alternative financial products and services.

Herman Strickland, head of diversity banking at First Tennessee, said there are two main reasons people don't have bank accounts: They come from cultures that don't trust banks, or they have lost access to banking services because of poor credit history. It's the latter the bank is trying to attract, he said.

First Tennessee carefully designed its Bank on Memphis products, he said, knowing that many of the customers have had credit issues in the past and could be riskier customers. That meant removing access to checks because so many customers with poor credit have run into financial trouble after writing multiple checks that bounced.

First Tennessee offers no overdraft loans to customers who have had past credit problems. Customers who write multiple bad checks and repeatedly overdraft their accounts can rack up hundreds of dollars in fees that perpetuate a cycle of debt. Unlike some banks that have moved into the check cashing business, First Tennessee only cashes checks for its clients and does not charge a fee.

You shouldn't be paying to get your check cashed, Strickland said. If you just walk in to cash your check, we are just a service provider.

With the safety measures First Tennessee has implemented, Strickland said he hopes Bank on Memphis customers will be able to rebuild their credit and to establish long-term relationships with the bank.

I see this unbanked population as fertile ground for growing new customers, he said.

More competition

Other banks have also moved into the payday lending space.

Atlanta-based SunTrust Bank doesn't offer payday loans, but it has introduced products to Memphians who shy away from banks. …

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