Even though we are ourselves payday lenders we would really welcome if banks starts offering payday loans as this will increase competition and improve the product. Consumers will benefit and this is exactly we want.
There was a time when most banks would do anything to get new customers and serve their existing clients. It was the customer’s needs and convenience that mattered above everything else. So they would offer payday loans as well, out of fear sometimes that the client could go to a competitor if the loan money was denied to him. They would still manage decent profits if enough people took small loans. These banks also lived in the hope that by keeping a customer in the loop, one day, they could offer a bigger sum to him at a larger profit.
But something changed down the line. The banks realized that the payday loans were not cost effective for them. The acquisition cost was just too high, and the profit percentage was too less. These loans were simply not working out to their advantage. So the banks stopped issuing these loans. And now, most cost conscious banks are simply not interested in issuing small dollar loans anymore.
It’s a pity, because what most people need are actually these small dollar payday loans because most requirements are simple really. And usually, most individuals think of banks when they need some cash as these are the conventional lending institutions.
Nick Bourke of The Pew Charitable Trust has written in his post dated September 16th that more competition in the short-term credit marketplace is going to be good news for customers as this would improve competition. He is correct in this observation, and a stand we agree with. We, and most others in the payday industry, want the banks to be back offering payday loans to their customers, because we believe that offering these loans is in the best interest of the consumer.
The Banks Are Not Being Very Helpful
However, there were very few banks in this market in the relatively unregulated market that existed before 2013, in spite of the fact that the banks were in a position of offering legal products to help consumers who needed just a little bit of cash to tide over temporary financial constraints.
The fact is that, if the banks had wanted to, then they could easily have competed with payday loan companies and drove many of them out of business a long time back. That is of course not possible anymore, as the payday businesses have proved their worth among the American population and showed that they stand committed where the banks have failed. These businesses offer a real service that helps their clients greatly, and these services are offered where the banks and other lenders fail consistently. Naturally, most consumers appreciate the help they get in times of need.
Payday loan companies have become deep-rooted into the American psyche already. They now operate from thousands of outposts that are located almost throughout the country. These businesses issue thousands of loans every year, serving a wide section of the American population.
Why the Banks Are Not Offering Payday Loans?
Nick Bourke has offered a simplistic view of this. He says that the banks focus on the cost of funds. This includes real estate and personnel costs, which mainly drive the cost of issuing a loan. These costs for the banks on a unit basis are much higher as compared to the payday lenders.
Payday loan companies, on the other hand, unlike the banks, have lower overhead costs. Their retail outlets are located in neighborhoods where people maintain smaller balances. These people are usually poor prospects for credit cards and mortgages. However these are the individuals who require loan money the most as they are from the relatively poorer sections of the society. The requirement is that much more, as these people are denied loans by almost all lenders, including the banks.
Money transfer, check-cashing, remittance and other such high-touch services these people ask for are not consistent with the present models of most retail banks, which depend on electronic and streamlined self-service transactions.
Banks need to underwrite, originate and service small loan installments of $300 for the total finance charges of $35, which is about an average charge for one single overdraft. However currently, this economy isn’t working out for them. This is one strong reason why payday loan companies are often the only hope for these people. Where will they turn to, what will they do, when they genuinely need some money in real emergencies?
It also needs to be kept in mind that many people, particularly those from the less fortunate sections of the society, don’t always feel that comfortable in banks. These individuals often find that the banks are foreboding and unaccommodating, and will thus rather go to a non-bank lender.
Competition Is Good For Consumers
But what consumers really want is competition. Good and honest payday loan companies welcome this too. A competitive environment regulated and monitored through legislation is a welcome move. So instead of passing more stringent laws against payday lenders and virtually killing the business, the regulators should actually take steps to bring the banks back into offering small dollar loans. We firmly believe that this is going to be good for everybody.
What are the legislators going to achieve by killing the payday loan business? Where are the people who need small dollar loans going to turn to? What is going to be the social impact when a large section of the population doesn’t have a way to get money in real emergencies? There are no answers.
It’s a fact that currently there is no alternative to payday loans. So why are the lawmakers of our country trying to kill the only way to get small dollar loans without proposing a viable alternative? Nobody knows. We have to question the intent and the rhetorical statements made in recent times by critics of the payday businesses.
In the right environment, payday loan companies as well as banks and the other non-bank entities should address the credit requirements of their consumers.
In fact, we would even like to go to the extent of saying that payday loans are probably more important than most other credit products. That’s because, if you consider the numbers, than more people take these loans than anything else. The law makers should thus focus on payday loans and make it easier for people to get them, and make it worthwhile for the businesses to offer them. They should take steps to make the banks start offering them again.
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