U.S. Bancorp mulls return to deposit advance after OCC gives green light

U.S. Bancorp may soon jump back into the business of offering small-dollar loans to cash-strapped customers.

During a conference call Wednesday morning, CEO Andy Cecere said that the company is considering “a number” of different options for offering so-called deposit advances now that the Office of the Comptroller of the Currency has reversed course and given national banks the green light to re-enter the business.

“We’re looking at a number of different products in that category, and that may be something we pursue over the next few quarters or the next year,” Cecere said, when asked about the OCC’s revised stance.

The comments offer the first sign that big banks are hungry to get back into short-term, small-dollar lending, a business they largely abandoned several years ago under pressure from federal regulators and consumer advocates.

U.S. Bancorp was one of several companies – including Wells Fargo, Fifth Third Bancorp and the Regions Financial – that exited the deposit advance business in early 2014, after the regulators issued guidance requiring them to underwrite loans based on a borrower’s ability to repay.

The guidance was viewed as a death knell of sorts for the business, which was viewed by many in the banking industry as offering a safer alternative to high-cost payday loans. Deposit advances have many similarities, often carrying triple-digit annual percentage rates and requiring full repayment within about a month.

Two weeks ago, however, the OCC unexpectedly rescinded its previous guidance – and opened the door for banks to get back in the business. The move was intended, in part, to give consumers an alternative to “less-regulated lenders,” the agency said in a Federal Register notice.

Still, it’s too early to say how a potential offering would be structured – or what kind of benefit, if any, it could provide to the U.S. Bancorp’s bottom line. While deposit advances were once a solid source of noninterest revenue for the Minneapolis company, any move to get back into the business would likely be done on a much smaller scale this time around, executives said.

In an interview Wednesday, Chief Financial Officer Terry Dolan emphasized that the company is in the “early stages” of exploring its options. In the past, deposit advances were only offered to existing customers with direct deposit, but future iterations of the product could be geared to unbanked or underbanked consumers, he said.

“As a company, if you’re going to be a good citizen in the community, you need to think about how you’re going to serve unbanked and underbanked citizens,” he said.

During the call, Betsy Graseck, an analyst with Morgan Stanley, asked if any move back into deposit advance could once again generate 2% of total fees, as it did before the $459 billion-asset U.S. Bancorp got out of the market three years ago.

“Likely not,” Cecere said. “If it comes back, it would probably be at a different fee level and probably not the same size as what you saw historically.”

Fees at U.S. Bancorp have recently been flat. During the third quarter, noninterest revenue dipped slightly from a year earlier, falling by about 1%, to $2.4 billion.

A number of factors contributed to the decline, including an industry-wide drop in mortgage banking revenue, as higher mortgage rates lead to fewer refinancings.

Lower merchant payment revenue was also factor, falling 1.7%, to $405 million. Over the summer U.S. Bancorp exited two joint payments ventures with other big-name banks. Merchant payments revenue was also hurt by recent wave of hurricanes and natural disasters across the country, according to Dolan.

U.S. Bancorp, in particular, processes payments for a “fairly significant amount of merchants” in Puerto Rico. Nearly a month after the island was devastated by Hurricane Maria, much of the island is still struggling to restore power.

“We have a nice business in Puerto Rico,” Dolan said, acknowledging the destruction experienced by merchants the island. “It’s probably going to be several quarters before they start to come back.”

During the fourth quarter, fee income in general, and merchant processing revenue in particular, are expected to be flat, the company said during the conference call.