JANUARY 2005

More Banks Compete With Payday Lenders

Banks in many cities recognize an underserved market for small loans. Most banks have been reluctant to offer single loans as small as $200-$300 because such loans can cost as much to originate as a $3,000 loan and don't generate much finance charge income. Some banks in recent years affiliated with payday loan companies to fill the void. However a number of banks are attempting to compete directly for small consumer loans.

For example, Wells Fargo and Co. offers a Direct Deposit Advance program that allows customers with paychecks directly deposited to borrow up to half of their regular paycheck a week in advance. In another version of a small loan product, Austin Bank of Chicago is offering a product similar to a credit line that can be accessed with checks. Borrowers apply for three year loans of $1,000-10,000. If approved, they receive checks that can be used to draw on the loan. If they tap the loan by writing checks, monthly payments are 3% of the principle and accrued interest until the balance is paid. If they write no checks, there is no charge. Collette Loesher, senior lending officer at Austin Bank said the product "is for low level emergencies". Another Chicago financial institution, North Side Community Federal Credit Union offers customers a six-month loan. Ed Jacob, manager of the Credit Union, told the American Banker the product is more about building memberships than earning profits. Finance charge income is small on these loans but Jacob said he measures the profitability of the program by how many people graduate to larger, longer term loans.