Regions, Courting the Underbanked, Defends Payday Loans

SAN FRANCISCO — For banks trying to serve more low-income customers, Regions Financial (RF) could become both a shining example and a cautionary tale.

The Birmingham, Ala., bank has spent the past year trying to attract the poor, the young, immigrants and other types of customers whom most banks have long ignored. It has rolled out check-cashing services, prepaid cards and payday loans, and it is expanding those services; last week, a senior executive announced plans to offer prepaid cardholders savings accounts with matching fund contributions and check-imaging technology for faster deposits.

As Regions actively courts the long-ignored underbanked population, it has faced both praise and criticism. Wells Fargo (WFC) and a handful of other banks also offer such products, and Regions' new "Now Banking" services are pretty familiar to anyone who has ever walked into a Western Union (WU) or a payday lender office. But by building on ground usually occupied by nonbank storefronts, the bank has attracted a high degree of scrutiny for some of those products, especially the payday loans.

At an industry conference last week, senior executive John Owen found himself repeatedly defending Regions' short-term "Ready Advance" product, citing high customer demand and the bank's cheaper prices.

"It's going to be very hard for any of us to serve the underserved if you don't have a loan product," Owen, Regions' head of business lines, said during a speech on Thursday. "There's a huge need for liquidity."

People without credit cards or other way of immediately accessing funds will always need some sort of short-term funding in emergencies, Owen added in an interview later, calling Regions' payday advances much less expensive than the average storefront payday loan. The bank charges $10 for every $100 advanced, which the Center for Responsible Lending calls the standard for bank payday lending, compared to average fees of $16 per $100 lent by nonbanks.

Regions is also planning to lower those prices for its best customers. By the beginning of 2013, as customers regularly repay their short-term loans and "get a track record of credit, we'll lower the price point and increase the amount they can borrow," Owen said.

"Customers have real emergencies, real needs. … People walk into those storefronts every day by choice," he said. "We view this as a way to pull more people into the regulated banking industry, and I think that is perceived as a good thing. It is [perceived that way] by us."

Owen was speaking at the Underbanked Financial Services Forum, a three-day conference devoted to financial products for the roughly 60 million Americans who do not have or do not regularly use traditional bank accounts. The conference was hosted by the non-profit Center for Financial Services Innovation and American Banker.

Payday loans and their alternatives were a big topic of discussion during the conference, and consumer advocates and industry members alike raised repeated questions about the pricing, regulatory oversight and reputational risks for the banks offering them.

"When the innovation in the banking space is moving from opt-in overdraft loans to deposit advance loans that are cheaper versions of a payday loans and that keep borrowers in repeat borrowing cycles that you see with the standard payday loans, that's not what we would call innovation," Paul Leonard, the Center for Responsible Lending's California director, said during a panel discussion Friday morning.

Owen fielded several questions from the audience on Thursday about Regions' payday loans, after CFSI moderator Kimberly Gartner referred to the product as "highly controversial." By the end of that day, Owen made multiple requests for this reporter to be "balanced" in writing about Regions' payday advances.

"If you do a fair and balanced look, alternative providers are [charging] $15 to $28 … we're charging $10," he said. "If all the banks were to say, 'I'm out,' I think that's a bad solution. The best solution is competition."

During the speech, Owen called the development of Regions' "Now Banking" products a "somewhat lengthy and painful process" that took almost a year and had to be vetted by all of the bank's departments, including risk management. (He wryly referred to it as a "wipeout course.")

Regions continues to tweak those products. Starting in late July, customers with prepaid cards will be able to deposit money into a linked savings account, where they can earn up to $100 annually in matching funds from the bank. Regions will match 1% of deposited funds if customers make a monthly deposit of at least $5, and if they do not make any withdrawals from the account, Owen said.

As of early next year, Regions customers will be able to use remote-deposit capture technology to put money on their prepaid cards by taking pictures of checks with their phones. Owen said the bank will even allow customers to immediately deposit all of their paychecks onto their prepaid cards, instead of waiting the traditional hold times to access the full deposit. (Customers will have to pay a fee for the immediate availability of those funds; Owen said the amount would vary depending on the type of check, but that for government payroll checks, the customer would pay 1.5% of the deposit amount.)

Regions promoted Owen from head of consumer services earlier this month, also giving him oversight of wealth management, lending and business services. He described his team's long-term goal with the "Now Banking" products as trying to encourage more people to use the traditional banking system.

"We're just trying to encourage people to save," he said of the new savings accounts. "We're trying to put a behavior in place."