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Apple's high-profile app could give mobile wallets the jump start they needed.
October 30 -
The CFPB and other agencies are expected to take a hammer to banks' lucrative overdraft fee business, saying that it is a form of short-term credit akin to payday loans. Some banks see the writing on the wall and have made changes, but others have lagged.
October 28 -
As banks flee the deposit advance business, startups are offering services that let consumers name their payday and collect what they have earned up to that point, regardless of the day of the week.
August 14 -
Instead of trying to stop companies from offering payday loans and check cashing services to lower-income households, we should encourage more competitors including banks to enter this space.
October 24 -
Regulatory constraints make it hard for banks to offer payday and other short-term loans, so why not refer those potential customers to credit unions who can? Some banks -- including Bank of America, TD and South State -- have decided this is a good strategy and helped start a credit union in South Carolina to do the job.
July 17
Apple Pay has drummed up a lot of publicity by promising to make boring payments faster, safer and even a little bit sexy. A recent television ad for Apple Pay emphasized its life-changing possibilities. In the ad, a man arrives early to his own surprise birthday party. The secret was spoiled because mobile payment technology had saved him so much time, allowing him to arrive home earlier than anyone had expected.
But is Apple Pay really that revolutionary? At most, a mobile payment could save customers a second or two. And the technology will wither on the vine without widespread merchant adoption which is unlikely to happen as long as Apple wants a cut of every transaction.
To my mind, Apple Pay is mostly a solution in search of a problem. I wish the finance and technology industries would take half the energy they've poured into mobile payments and put it toward solving a real problem: making it cheaper to borrow money.
Payments have a certain amount of glamour in the current environment, while lending tends be the red-headed stepchild. Online marketplace lenders are the exception to this rule, having attracted abundant attention for their technological innovations. But so far these platforms are targeting lower-risk segments.
Lending Club, for example, has
A recent
Reducing the cost of borrowing would provide significant benefits for cash-strapped Americans and for the economy as a whole. The need is particularly great in the small-dollar credit market.
Overdraft and deposit advance products, as well as payday loans, are extremely expensive. I have worked in consumer banking all over the world, and I have never seen a more expensive form of short-term borrowing than a bank overdraft in America.Bank of America, for example, charges a $35 overdraft fee and an extended fee of another $35 if the account is not brought current within five days. This means that borrowing $6 for less than a week could easily cost a consumer $70.
People will always need short-term borrowing options. It is within banks' reach to find a way to deliver the solution at dramatically lower prices.
Given the unique deposit data that banks have on their consumers, they could crush the payday lending market in an innovative way. For example, when a customer uses direct deposit to put their paychecks into a bank account, the bank has important information about the customer's employment status, income and salary date. I have used this deposit data to make low-cost loans in Russia, back when no credit bureau existed, and in the United Kingdom to people with poor credit. Banks in America could do the same thing.
The most exciting innovations tend to attract money. For years, all of the excitement has been in the payment space. Fresh ideas are finally heating up the lending business, but it remains largely focused on helping people with the best credit scores, the highest degrees and the biggest incomes. Loans remain far too expensive for those people who have less.
Innovative sources of data, low-cost mobile distribution and a sense of social purpose could cut the cost of lending dramatically. But we need to convince technologists in the Silicon Valley and bankers setting innovation budgets that the troubled short-term, small-dollar lending market shouldn't be avoided. Rather, it should be revolutionized. It's never going away.
Innovation in mobile payments is certainly worth celebrating even if Apple Pay in particular winds up falling short. But I hope we will be toasting better short-term credit products by the time the next iPhone is released.
Nick Clements is the co-founder of
