Statistics of the present banking system in the United States will shock most people.
Twenty-seven percent of American homes, which come to one in four, don’t have access to the complete range of banking services. 7 percent of all people in the US are “un-banked”, which means that they do not have access to insured bank accounts, or any banking services. Plus, about 20 percent of homes in the United States, are “under-banked”, which means these people have an account at the bank, but don’t use banking systems for transactions or their credit needs.
Leading Presidential Candidates Raise Financial Inclusion Issues
The issue was raised briefly during the recent Presidential election, with both the leading candidates promising swift action to rectify the situation. But the situation is nothing new. Experts had pointed this out even after the economic turmoil of 2008 and asked the administration to prioritize financial inclusion.
But nothing much has changed, though almost a decade has passed since then. Payday loans or quick cash loans have remained the best bet for a large section of these un-banked or under-banked Americans who need credit. Yes, a few alternatives have been launched from time to time, but nothing has worked. For a large section of the population, payday loans remain the only viable and practical option.
What’s most worrying is the result of a recent survey carried out by the Federal Deposit Insurance Corporation. This survey confirms that formal financial services are highly skewed towards the well-educated and whites. The informal sector on the other hand is tilted towards the less-educated and minorities. In this FDIC survey, they looked at data from last year. But that is changing fast, as more and more people from all backgrounds are approaching payday lending agencies to meet their short-term fiscal gaps.
Download the Survey Here by FDIC – Report Economic Well Being US Households
Why Payday Loans Are Good for the US Economy
State of the economy improves when people have steady jobs, income, and can also access financial services and products they need. The overall economy grows when more and more people become a part of it. When people participate in the economy, there is a positive impact on the economics of those earning less, because, over time, they too have the opportunity to improve their financial conditions.
However, there cannot be economic stability, if consumers face financial uncertainty. It is absolutely essential that they have adequate liquid assets, or can borrow money easily when there is a financial emergency. Almost every home faces such situations sometimes, so it’s quite common. Consumers should be able to both save and borrow for the health of the financial system. Without this, people have to depend of friends and family, or worse, they will end up becoming a victim of unethical lenders who charge really steep fees and interests, thus causing a debt trap.
That is precisely what is happening now. A large section of Americans cannot borrow money from conventional banks as they are either un-banked or under-banked. These banks won’t give them the money they need also because these people don’t have a perfect credit score. Plus, the amount they require is often too less for the larger banks, so they are not interested.
Payday and quick cash loans remain their only hope. It would be a serious problem, if these loans are disallowed as well. Where will the millions of Americans turn to in a real emergency? They will be left with two choices – either declare themselves bankrupt, or approach the grey market and get exploited.
Most Developed Countries Are Doing Better Than the United States
The World Bank started measuring financial inclusion in 2013. The US lags behind many other developed countries significantly in providing access to banking services. For instance, in Germany, France, Britain, and even South Africa, every person has a basic bank account, and can access financial products that offer many services, including bill payment, money transmission, and cash. A basic bank account also promises them insurance, savings, and affordable credit.
It’s not the case with the United States. This is one reason why we see financial instability, and why so many people cannot save for emergencies.
So the next administration led by Donald Trump should focus on financial inclusion to make sure that more Americans are brought under banking. That should be the priority, and not the fight against payday lending companies that are actually part of the solution. These businesses with their services are helping to prevent the American economy from completely breaking apart. These services are allowing families to stay liquid and avert serious financial crisis, which may even cause social unrest according to some people.
Federal Reserve Survey Shows Alarming Situation
According to a survey carried out in May 2016 by the Federal Reserve, close to 50% Americans don’t have any savings. The situation is not at all comfortable. They don’t have anything to fall back on in an emergency, are often denied by the big banks, and would be in real trouble if payday loans and cash advances are not allowed as well.
Are Payday Loans Bad for the Poor?
The payday loan market has grown quickly since the 1990s. In fact, according to an estimate of the Federal Reserve, about 11 million people in the United States are taking these loans every year now.
But in recent times, there have been complaints of high fees and interests. Critics point out that the APR or Annual Percentage Rate of payday loans comes to 200%. However, the reality is that, the charges of bank overdraft fees, when amortized over the full period of one year is actually much more than what the payday loan companies charge.
The bank’s interest on overdrafts exceeds 1,000% annually, much higher than the 200% of payday companies. Also, it would be unfair to attach an unusual percentage rate for payday loans that are typically for 2 to 3 weeks.
Growing Support for Payday Lending
It is becoming increasingly evident with each passing day that payday lending is offering good value to a lot of people. There is also increasing evidence that there is no other credit instrument that works for the millions of poor and mid-income American homes.
Case 1 – A study carried out by Christine Dobridge of the Federal Reserve in 2016 finds that payday lending supports families when they face extreme misfortune, like a natural disaster, for example. The study paper comments, “Payday loans helps households keep food on the table and pay the mortgage”.
Case 2 – There is more. Gregory Elliehausen from the Federal Reserve and Chintal Desai from the Virginia Commonwealth University have carried out a detailed study to understand how consumers are affected by the payday loan ban in Georgia. According to their findings, the ban has negatively affected the ability of consumers to pay off other debts. Gregory and Chintal conclude by saying, “payday loans do not appear, on net, to exacerbate consumers’ debt problems”. They both have asked for an immediate halt on passing new regulations against payday lending.
Case 3 – Mehrsa Baradaran works as a professor of law at the University of Georgia. In June 2016, Mehrsa wrote in the Washington Post that payday lending fills a “void created by banks” that do not sell small loans to people who are not economically well off as these loans are not profitable to the banks. She suggests that the post offices should become public banks, but adds that won’t work too, unless there are subsidized interest rates.
Payday lending businesses don’t offer subsidies. They, like the big banks, need to make a profit as well so that others in need can have credit. These businesses offer a valuable service. They are the only hope for millions of Americans who need urgent credit. The fees and interest too isn’t as high as what the banks charge for overdrafts.
Many studies have revealed that America needs the payday loan industry. It could be complete chaos if it becomes impossible for these businesses to survive.