According to the Community Financial Services Association of America, more than 15,000 payday advance locations across the country extend about $25 billion in short-term credit annually.
At least one bank in Chicago, Austin Bank, has decided to make an effort to capture a piece of the multi-billion dollar industry. Austin Bank is launching a loan product it bills as an alternative to payday lending that works like a credit line. Would-be customers apply for three-year loans of $1,000 to $10,000. If approved, they get checks for drawing on the loan.
Austin Bank’s $1,000 minimum represents the bare minimum most banks would be willing to offer. Small loans typical of the kind issued at cash advance stores are too expensive to service at traditional banks. The reason? It costs a bank just as much to underwrite a $1,000 cash loan as it does a $30,000 loan. Banks would actually lose money if they lent loans out as small as the payday lenders do.
Dollar Financial Corp, an international check-cashing and payday lending company that operates in the United States under the Money Mart and Loan Mart names, is partnered with Wilmington-based bank called First Bank of Delaware. First Bank is just one of 12 of 5,200 banks supervised by the Federal Deposit Insurance Corp. that funds payday loans.
But new FDIC regulations that limit payday lending by banks are forcing Dollar to also limit its relationship with First Bank, as it moves to fund its own payday loans in states where it is legal.
Consumer advocates have pushed for banks to offer more short-term credit products as alternatives to payday loans, claiming the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need.
There are other bank alternatives, such as one program offered by Wells Fargo that allows customers with direct deposit accounts to borrow up to half of the money directly deposited a week in advance. Other banks are considering similar programs.
Meanwhile, some credit unions offer short-term loans as an alternative. Memphis-based FirstSouth Credit Union does not offer “payday loans” specifically but does offer small, unsecured loans for its members that work almost the same way.
At FirstSouth, a member could get a loan for as little as $300-$500 to get them by until their next payday at an APR of 13.2 percent to 17.99 percent, said FirstSouth CEO Craig Esrael.
Payday lending is not really a growing concern in banking because those lenders are serving a different market niche, Rowe said. Federal regulators also have very strict rules about payday lending and banks that associate with them.
“I’ve talked with a number of community banks who’ve said even thinking about doing it is not worth the risk,” Robert Rowe, regulatory counsel with Washington, D.C.-based Independent Community Bankers of America, said. “On the other hand, I’ve heard if community banks had another way to do this without it being so expensive, they would like to do it — they’re just caught between a rock and hard place.