Opinion

Felix Salmon

Why payday loans won’t get cheaper

By Felix Salmon
June 10, 2013

Raj Date, the former deputy director of the Consumer Financial Protection Bureau, tells American Banker’s Maria Aspan that, in the words of her headline, “Banks Can Develop a Better, Cheaper Payday Loan”. Well, yes, they can. But they won’t.

Date gave a speech at a conference in Miami last week where he was very bullish on big data and sophisticated analytics and all that kind of stuff. Can it all work to the benefit of poorer bank customers with cashflow issues, who need to borrow money against their next paycheck?

Date sees what he calls “the small-dollar credit problem” as one that can be largely solved by better data, which can then give lenders an incentive to lower their prices…

“The credit costs are much higher than what they need to be. I think that through the application of more and different data sources, you can actually make fraud and credit decisions much better than has been possible in the past, and that, with the right competitive dynamic, can therefore start bringing pricing in,” he says.

There is a parallel universe where such thinking makes sense. In this universe, if I have a job, and bad credit, and short-term cashflow issues, and a bank account, and my paycheck gets directly deposited into that account, then my bank knows with a high degree of certainty exactly when I’ll be able to repay what Date calls a “deposit advance”. Indeed, it can take the money it’s owed directly out of my paycheck before I get any access to it at all. This product is as low-risk as an unsecured loan to a person with bad credit can ever be. Since it’s low risk, banks ought in theory to be able to make such loans at relatively low interest rates. And because everybody loves being able to borrow at a low interest rate, a “competitive dynamic” could then drive rates down.

But that’s not the world we live in. In this world, banks have no interest in banking the kind of people who need payday loans — unless they can extract a large amount of fee income from them. Indeed, Chase launched its Liquid prepaid debit card in large part because it no longer wanted to offer checking accounts to these customers at all, and wanted some other product to move them into. The last thing that banks want to do is to create a new product which will in any way incentivize low-income customers to open new checking accounts, which are likely to always hover around the zero balance level.

The only way this product could ever work, after all, is when the person asking for the loan is also directly depositing their paycheck into their checking account. As such, it’s not a product where there’s much of a “competitive dynamic” — the number of banks which can offer me one of these loans is exactly one. And the number of people willing to change their primary bank just so that they’ll have access to a lower-cost payday loan is extremely close to zero. Very few people ever change their primary bank at all, and when they do it’s not because of low loan rates — especially when the loan in question is something you’ve promised yourself you’ll never need.

Date’s vision, then, involves three highly improbable things all working together: banks which want to attract low-income customers; low-income customers willing to change banks to get lower payday loan rates; and the promise that “better data” can magically improve credit underwriting. Even more simply, there’s one big reason why we’re never going to see this product: you can’t get an is from an ought. Date’s heart is in the right place, but he’s not going to get very far trying to sell this idea.

Comments
6 comments so far | RSS Comments RSS

Years ago, depositors changed banks to get a free toaster. I guess payday borrowers have a different relationship with money.

Posted by StuartG | Report as abusive
 

Changing banks is painful these days, with the plethora of direct deposit/debit setups in place. Even re-doing BillPay stuff is a challenge, as I found out recently when a water bill payment was never cashed even though I literally copy/pasted the data from my old bank to my new bank.

Posted by Harpstein1 | Report as abusive
 

“The only way this product could ever work, after all, is when the person asking for the loan is also directly depositing their paycheck into their checking account.”

Why does this presuppose that the bank providing the account is the only possible lender?

Payroll advance lending is fairly mature in many other countries, notably Mexico. While this usually involves direct payments from employers to lenders, there’s no technical limitation that prevents banks from diverting direct deposits to repay a lender.

Posted by f00 | Report as abusive
 

What do you think of places like western sky? They aren’t really payday, but they are aiming for a less credit-worthy demo.

Posted by Zdneal | Report as abusive
 

thanks for showing this .

Posted by bjorharjo | Report as abusive
 

Payday cash loans are a very good way to get money in a big hurry. Payday loan is not affordable if payback period increases. Customers are required to pay only as much as they borrow. The APR depends on the time period for which the money is borrowed. So, the APR varies depending on whether a customer extends the borrowing period or not. 1stratelenders.com is the good company, their interest rates and financial fee is very low.

Posted by bstefe | Report as abusive
 

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