Many banks are concerned about recent and pending regulation on small-dollar credit lending. They worry about losing a longstanding source of profit in light of the Federal Deposit Insurance Corp.'s guidance on deposit advances and the Consumer Financial Protection Bureau's upcoming rules on payday lending. Some have argued that the rules will hurt struggling families who depend on these lines of credit to make ends meet.
While I understand banks' concern about losing a significant source of revenue, I firmly believe that most deposit advance products do more harm than good by trapping vulnerable consumers in cycles of debt repayment. Regulatory scrutiny of these products isn't going away. It is time for banks to reframe the way they view small-dollar credit regulations and revamp the loan products they offer to low- to moderate-income customers.
Too often, banks define the worthiness of a product based on its returns and whether it is legal under current regulation. That test is not enough to ensure that products are truly safe for consumers, as evidenced by the subprime lending debacle of the very recent past.
While it may be somewhat unfair to compare subprime mortgages to payroll advance loans, both should prompt banks to fully vet the question of whether they ought to put products on the market simply because they can. I propose that rather than push back against deposit advance and payday lending regulations, our industry should use them as opportunities to create innovative products that are good for consumers, our businesses and the communities we serve. By changing our attitudes toward regulation on small-dollar lines of credit, there is a real opportunity for lenders to find success with a new suite of products. These rules can serve as opportunities rather than road blocks.
Banks should also consider how safer small-dollar credit products could lead to long-term, profitable relationships. Up until this point, the financial services industry has had a dearth of small-dollar loan options that are truly supportive of low- to moderate-income customers. Many banks think such products would be unprofitable. That is not the case. Serving this client base can be profitable for lenders, although less harmful products may not be as lucrative as the ones that existed prior to regulatory pressures for reform.
However, small-dollar credit products can be used as a stepping stone for previously overlooked consumers to form deeper relationships with their financial institutions. These products can lead to developing a deeper credit file, which, in turn, may lead to other consumer products, such as auto and home improvement loans.
As an industry, we need to look at the big picture and realize that safe consumer products can be both profitable and beneficial to underserved communities.
But in order for banks to create products that are both profitable and safe for consumers, their relationships with regulators needs to change. The financial services industry as a whole could make major strides if banks and regulators worked more closely together to solve challenges. Banks must continue to press regulators for better clarity and more timely guidance, while regulators must cease regarding banks as an industry intent on harming consumers for its own benefit. An open dialogue between banks and regulators will only increase the opportunity for innovation.
Banks must also include community advocates in conversations about small-dollar credit products. Community advocates can offer banks valuable insights into the potential negative impacts of certain products. They can also add transparency to the product development process. By including these groups in product development from the get-go, banks will be much less likely to create loans they must later pull from the shelves.
The regulations from the FDIC and CFPB offer banks a chance to hold themselves to a higher standard of product innovation. Let's find ways to offer cost-effective products that allow customers to change harmful financial behaviors, break cycles of debt and live better lives.
Bruce Murphy is head of corporate responsibility at KeyBank and is the board chair of the Center for Financial Services Innovation.