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Payday-Loan Foes Give Valuable Product a Bum Rap

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A search under the term "payday loan" is guaranteed to net at least one negative news-piece on the product daily.  

Opponents of this innovative product have seized the narrative simply by repeating a few misleading words: "triple-digit interest rates." Pundits and politicians subsequently transform this distortion into a trope, and a trope into needlessly restrictive public policy.  Consumers who freely chose payday loans over other options are then forced back to the very product they tried to avoid in the first place: overdraft fees.

As the CEO of a firm that brokers private equity capital to nonbank firms including payday lenders, it is disheartening to see many activists, journalists, and politicians refuse to acknowledge that innovation and marketplace competition, not legislation, lower borrowing costs. Yet, this same triumvirate seems intent on destroying innovation rather than encouraging it, by excoriating banks that have created a cheaper alternative.

US Bank, Fifth Third, and Wells Fargo appear to understand that the payday loan default rate is virtually eliminated by requiring borrowers to have payroll direct deposit. By pulling principal and fees at the moment of payroll deposit, the banks are instantly repaid. As defaults are the primary expense associated with payday lending, banks thus gain a price advantage over payday lenders, which cannot protect themselves this way.

Yet this ingenious concept, which can save consumers up to 50% fees, is still not good enough for critics.  U.S. Senators insisted the banks cease making these loans.  A Consumer Reports blog echoed the call.  The only rate deemed acceptable for payday loans by activists is at a 36% annual percentage rate, an amount notably chosen because it would kill 90% of lender revenue, driving them out of business.

The roots of payday lending's problems are twofold. The first is likely ideological, given the political leanings of activists and politicians who oppose the product.  Anti-capitalist forces are not new to the battle over certain financial services. 

Yet the greater problem rests with the superior messaging emanating from the activists, which is met with weak and obsolete communications from the product's banking providers. "Triple-digit interest rates" conjures emotion in those who hear it.  The universal values of fairness and justice, particularly in financial dealings, are so deeply engrained in our culture that these four words are all that are necessary to win over uneducated observers.

To date, banks have failed to reply with equivalently passionate messaging.  By choosing to rely on facts and logic – or worse, remaining silent – they have ceded the more powerful emotional ground to their enemies.  To be sure, finding an equally powerful and demonstrative counterargument is difficult, yet banks seem unwilling to even try, despite opponents openly proclaiming that they want the product obliterated.  Indeed, activists are firmly committed to this cause, as demonstrated by their unwillingness to embrace innovations.

Banks also seem unwilling to attack a significant weakness in activist motive, which is unquestionably mercenary. Most opponents utilize camouflage afforded by creating non-profit organizations with noble-sounding monikers. Regrettably, forming a 501(c) (3) doesn't prevent an entity from engaging in emotional extortion and media manipulation to achieve its ends – even when those ends are the exact opposite of the organization's stated goals ("to protect the consumer").  In truth, some seek to perpetuate their own relevance as "consumer champions," thereby solidifying millions in annual contributions and grants, from which its employees draw salaries. 

One organization collected some $7 million in contributions and grants in 2011, ample capital that could be used to research, develop, test, obtain proof of concept, market, roll out, and fund any number of innovative solutions. Yet, they continue to uses their funds for destructive purposes while proponents remain silent.

The activist thus has no risk, with its nonprofit status and earnest name, and so begins from a place of emotional credibility.  The organizations do not rely on profit, so there is no revenue stream to protect. Thus, the only reason for existence is to destroy commerce and jobs, not engage in productive activity.  Proponents seem utterly uninterested in exploiting this truth.

Consumers have choices for short-term credit.  They understand the terms.  The industry actively supports transparency. Twelve million Americans choose payday loans over other credit repeatedly, according to 2012's Pew Charitable Trust Survey on Payday Loans. Many problems with the product are those concocted by activists and politicians with mercenary intent, who are more interested in squelching innovation than letting people make choices for themselves.

Lawrence Meyers is the CEO of PDL Capital, a firm that brokers private equity capital to nonbank firms, including payday lenders. He has written about the financial services industry since 2003.

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Comments (1)
The problem with most regulatory initiatives and legislation favored by consumer advocates is that they usually fall under the rate-cap umbrella, to ameliorate the trumped up triple-digit APR charge. If lenders could make these loans at a fraction of what they charge, they wouldn't need laws to make them do it; they would do so because they would make a killing serving this market. These loans are expensive for no other reason than they are costly and risky. All the consumer activism and spin in the world can't change that.
Posted by tatkins | Friday, February 22 2013 at 2:22PM ET
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