Cost-Conscious Banks Have Little Interest in Small-Dollar Loans

In his op-ed, "Regulators Should Let Banks Get Back to Small-Dollar Loans" (Sept. 16), The Pew Charitable Trusts' Nick Bourke is correct in his observation that increased competition in the short-term credit marketplace would benefit consumers. The payday loan industry broadly supports the notion that banks should also offer small-dollar loans. However, in the relatively unregulated environment that existed prior to 2013, very few banks chose to enter this market — despite their ability to offer lawful products designed nearly exactly as Mr. Bourke posits. Had they wanted to do so, banks might have competed payday lenders out of business a decade ago. There are many reasons why, given the choice to do so, banks have nearly universally abstained from offering short-term, small-dollar consumer credit.

Mr. Bourke offers a simplistic model of banks' costs, focusing exclusively on the cost of funds. But banks' personnel and real estate costs — the principal drivers of the cost of a payday loan — are much higher on a unit basis than those of storefront payday lenders.

Moreover, unlike banks, payday lenders are willing to locate their retail outlets in neighborhoods where consumers maintain small deposit balances and are poor prospects for mortgages and credit cards. Mr. Bourke presumes that banks would want to serve these customers, but in fact banks do not; to the contrary, the check-cashing, money-transfer, remittance and other "high-touch" services these customers demand are inconsistent with current models of retail banking that depend on streamlined self-service and electronic transactions. Mr. Bourke suggests that banks should be willing to underwrite, originate, service and collect $300 installment loans for a total finance charge of $35 — about the average charge for a single overdraft. These economics simply do not work for banks.

One must also consider that many consumers do not feel comfortable in a bank. They may find banks unaccommodating and foreboding and therefore choose to visit a nonbank lender.

The small-dollar credit needs of consumers should be addressed by banks and nonbanks; and despite the rhetoric from critics, the nonbanks that are members of our organization help millions of Americans by providing them access to simple, transparent, cost-competitive and regulated credit products.

Consumers thrive in a competitive, regulated financial services market. Through the creation and enforcement of a level regulatory playing field, federal regulators can foster such an environment. As long as similar services are treated consistently, competition and transparency will rule the day, driving prices lower and providing the greatest benefit to consumers.

Dennis Shaul is the CEO of the Community Financial Services Association of America in Alexandria, Va., which represents payday lenders.