When the credit crisis hit the middle class, many experienced some of the same credit crunches that low income and those in other demographics have dealt with for ages. Losing a job can also quickly ruin a credit score with late payments and or repossessions and bankruptcy, making conventional forms of lending like credit cards no longer available. While middle class America may just be discovering payday loans as a way to regain some credit, those in other demographics known as “the underbanked” have long made use of them to help find sources of emergency cash when no other avenue was open to them.
Immigrants or Low Income
Banks have understood that many immigrants come into the country with a distrust of banking. They may choose to do their transactions in cash to avoid the necessity of using a bank account. While it may work for them during good times, it keeps them from establishing the bare minimum of credentials to get a loan someday. Even those with bank accounts can be considered underbanked if they do not have enough history with lending to provide some idea of what type of borrower they might be. While it may seem strange to someone who has used credit cards and unsecured debt as part of a middle class lifestyle, there are plenty of people who don’t want to have any debt at all. However, they do want the ability to borrow on the short-term and for them payday loans have been a high demand product.
Some Banks Step In
Rather than fight the tidal wave, some banks like Regions Financial in San Francisco have opted to provide services like payday lending to their customers, along with check cashing services or prepaid credit cards. Since banks are not the prime lenders for payday loans, they are coming up against a lot of criticism for offering the service at all. While some banks see it as a natural outgrowth to other types of low income services, others are worried that it could be a step in the wrong direction for traditional bankers.
Forum on the Underbanked
More debate was heard on the merits of payday lending and whether banks should provide the service or not during the Underbanked Financial Services Forum. It is estimated that there are 60 million Americans who are not tied into traditional banking that might be able to use the service. Whereas the payday lending industry is heavily regulated for payday lenders, there appears to be some question as to how those regulations apply to banks. In addition, some banks fear that if they start offering payday lending services they risk losing their reputations. Payday lenders usually only deal with payday loans and no other type of service, making them specialists in this form of lending and the types of regulations they must meet to satisfy federal guidelines, whereas for traditional banks it is completely new. The questions still remain whether offering a payday lending service through a traditional bank is a community service or will be abused. For now, many banks choose not to go into this area of lending and leave it up to payday lenders to navigate the complex set of regulations that govern their industry.