If we had a vibrant economy where delinquincies were receding and employment was roaring back (NOT!), it would make sense that banks would take on a little more risk. The evidence is clear, though. We have recovery in share prices, but the budgets of households are not back where they were. Credit card charge-offs are up, and unemployment is still high.
That is why it seems odd that some of our largest banks have decided to offer a new payday-loan product. US Bank, Wells Fargo, and Fifth Third are three banks that are rolling out short-term loan programs where APRs exceed 120 percent.
Did I mention that each of these banks was given a huge TARP investment? True, US Bank and Wells have already repaid their TARP funds, and Fifth Third indicates that it intends to do the same in the next quarter.
I think the appearance of these new products reveals how this credit crisis is hurting middle America. Consumers don't want to use loan products like payday loan-priced advances on their next paycheck. They would prefer to use credit cards (interest rates of as much as 29 percent) or a line of credit (perhaps 12 percent.) These new payday products cost at least 120 percent. People aren't dumb. They are taking this bad deal only because banks aren't offering something more reasonable.
Let's review the new payday products.
Fifth Third's Access Now: "when you need money but you don't have time to wait." The cost is simple - $1 for every $10 advanced. Funds are repaid with the next direct deposit. If your
direct deposit is 30 days off, then your interest rate comes to about 121 percent. If you borrow in the middle of the month, or if you have a bi-monthly direct deposit, then it amounts to 267 percent.
Wells Fargo Direct Deposit Advance Service: "Alternative sources you could consider include: a credit card cash advance; personal loans; home equity line of credit; using existing savings; or borrowing from a relative." Hey, why not mention loan shark or your neighborhood hard money man? The cost is $2 for every $20 borrowed. Like Fifth Third, this product is repaid with your next direct deposit. There are some additional "promises" in the Wells product. For example, if you don't have a direct deposit in the next 30 days, then Wells adds a $35 fee to your principal balance. Wells gives you 35 days to make your payment, so the APR could be as little as 104 percent.
Wells is always talking about the need to sell multiple products to each customer. Looks like they've just added to that vision.
US Bank Checking Account Advance. "A line of credit from your own future deposit." $2 for every $20, repaid from next eligible deposit. Loan term is up to 35 days. US Bank says it amounts to a loan of up to 120 percent APR. That seems like some fuzzy math. It could be far more, depending upon how soon your next direct deposit occurs.
The Broader Story
More consumers are having a hard time getting loans, credit cards, small business loans, and consumer lines of credit. These new payday-style services are coming in their place. Remember - these products are not going to people on the fringe of the financial system.
It is harder to get "good credit" now. In that situation, there is demand for these bank payday products. That is a shame, because this is high-cost credit.
this chart is from CFSI.
The main difference with these advance loans, though, it that they are going to go to a more well-off set of consumers. These are people with checking accounts. Right off the bat, that represents the encroachment of high-cost credit into a more well-off demographic than traditional payday lending.
Those prepaid cards go to the unbanked. I have spent some time talking about the unbanked. The FDIC says that between 9 and 13 percent of American households have no transaction account. The Center for Financial Services innovation suggest that another 40 million households are underbanked. It might be hard to believe, but only about 51 percent of American households have access to the standard set of services that we would consider to make up the idea of regular banking.
Those consumers are largely poor. The Progressive Policy Institute says that four of every five non-banked households makes less than $25,000 per year.
These products are going to go to a better sort of consumer. It's a shame. Banks are turning their backs on tax payers. Banks are ignoring the people who got them out from under the burden of their own mistakes.