FDIC conducted several studies in the US and found out that banks just cannot compete with the payday loan companies on offering payday loans.
Several studies have indicated that banks and other conventional lenders are not able to compete with payday lending companies, and in fact, they are not even interested in servicing this industry. Consumer experience is much the same on the ground. This has actually been a common complain of thousands of Americans who are in urgent need of short-term credit.
And this idea has got even more established now, with the FDIC coming out with a detailed report of their “Small Loan Program“. The detailed findings of their extensive study have been published in the FDIC Quarterly.
FDIC Study Details
In this study, the FDIC encouraged banks to offer their clients small dollar loans that can be compared with the credit issued by payday loan businesses. The purpose of the study was to find out whether the banks would be able to offer small dollar loans to their customers profitably. The FDIC encouraged innovation in design and execution. Only general guidelines were provided. The banks could largely offer whatever they deemed suitable in the small dollar loan space. Flexibility was allowed.
31 banks participated in this program from across the country, including the Bank of Commerce, First United Bank, Community Bank & Trust, Amarillo National Bank, Lake Forest Bank & Trust, Pinnacle Bank, Wilmington Trust, and BankFive among many others. Most of them, except for The First National Bank of Fairfax operate from many locations. However still, participation was not as good as expected.
The banks that agreed to be a part of the study were headquartered in 15 states. Their net asset size ranged between $26.0 million to $10.0 billion. To be a part of the FDIC program, the banks had to agree to certain supervisory conditions. It was also agreed that the banks will have to process the loan application promptly, the loan amount would be up to $1,000, that there would be low or no origination fees, and they must offer financial education.
Findings of the FDIC Study
The FDIC has discovered that the banks are just not able to compete with the payday loan industry when it comes to making it easy and cost.
Here are some of the findings…
1. Very few banks are offering small dollar loans to customers.
Together, the 31 banks operate from just 446 locations in a mere 26 states. It was further observed that the banks that did not have a small dollar loan product before the program only issued an average of 9 such loans. The total number of such loans issued was 8,346 and the money worth was $5.5 million. On the other hand, payday loan companies issue in excess of 150 million in loans every year.
2. The total loan cost is much the same as traditional payday lending.
It was discovered that this program from the FDIC was not able to save consumers any money. Yes, the interest rate appears lower if the loans are issued over a longer duration of time. However in actual costs, a 15% interest paid over a period of 12 months comes to be the same as 15$ paid for a $100 loan. So in the end, it is much the same as payday loans.
Plus there is another catch. The banks in the FDIC program are issuing loans that are double, or even triple of the average payday loan size. This means that consumers are ending up deeper in debt and that too needlessly, as they didn’t even require all that excess cash in the first place. So in the end, they have to repay much more than what they ought to.
The average size of small dollar loans is around $675, while the average for banks that participated in the program stood around $1,700, while the interest outflow remained much the same in real terms, it was found. The loan from banks ranged between 14 to 16 months, which means that consumers have to stay in debt for much longer.
3. Banks don’t feel that the small dollar loans are profitable.
Though the banks are charging much the same as the payday loan industry from their consumers, but still, the banks don’t feel that their small dollar products are profitable. They are rather seeing this as community service, and a way to bring in consumers for the long-term so that they can eventually sell their more profitable products.
The FDIC report says that just a few banks feel that the small dollar loan program is profitable for them. Most of them used the program to build long-term relationships with their clients in the hope of selling other products to them. They were seen cross-selling other products, and the focus was definitely on this.
This itself beats the purpose of small dollar loans, as those who require this kind of credit belong to the poorer section of the society. A deeper debt over a longer period of time isn’t good news for them. It can drive them towards bankruptcy.
4. Banks issuing small dollar loans are not as convenient for clients.
It was necessary for all the pilot banks in the program to fetch a credit report before they could decide whether the loan application is to be approved or rejected. The report determined whether the applicant would be able to repay the amount. So it was found that the rejection rate was quite high as many of these applicants have average to poor credit scores. On the other hand, no payday loan company would ever ask for this report. And not just that, 10 of the banks in the program required the applicants to open a savings account, which was then linked to their loan.
So What Can We Say about the Findings
Frankly, the findings of the FDIC study are no surprise, though we must complement the FDIC for their effort to find out whether the banks can offer small dollar loans. It is time the banks and other financial institutions realized the importance of small credit products, and that the market needs them. But the sad reality is that, only the payday loan companies are willing to come forward with such plans.
Results of the study shows once more that there is no replacement for the payday loan business. Presently, there is no financial institution in the United States that can compete with them in cost, efficiency or ease.
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