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Bruce Murphy is head of Corporate Responsibility at KeyBank and is the board chair of the Center for Financial Services Innovation.
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Small-Dollar Credit Rules Are an Opportunity, Not a Burden

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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.

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Comments (3)
While we respect the intent of the sentimental notions outlined by Mr Murphey we are equally struck by the number of "shoulds" and "oughts" in these ideas which belie a serious disconnect with the natural laws of consumer supply and demand not to mention basic economics. If Americans wanted a safer hamburger they wouldn't be lining up three deep at their local McDonalds to get the super sized deal of the day despite the ample warnings about fat content and calorie counts. And neither could McDonalds sell a $25 hamburger which would be the relative cost of a low cholesterol, low fat sandwich that tasted good enough to satisfy the American palate. These products exist because Americans WANT them, and they appreciate the ease and convenience of acquiring the solution to an immediate need, not because they don't have choices or don't understand the cost or risk. If Mr Murphey had any track record of founding and running a successful business offering consumers these "safer" small dollar loan products his ideas and suggestions might carry a bit more real word credibility. Instead, they hang in midair as ethereal and lifeless as stale smoke in the continuing bar room brawl over the ethics of giving consumers what they want.
Posted by AllThingsUnderbanked | Wednesday, May 14 2014 at 8:13PM ET
I don't have a problem with payday loan companies because they tell you how much borrowing will cost. I have just had a direct debit bounce, just a stupid oversight as my payday has changed, but my bank charged me $10. So my bank lent me nothing, told another company (who also charged me $25) that I didn't have enough money, and charged me $10 for the privilege. That sounds more expensive than a loan to me.
Posted by tommy0 | Thursday, May 15 2014 at 9:39AM ET
If such optional forms of credit exist, why have they not been offered? Underbanked communities clearly exist and there is a high demand for small loans and other financial services in those communities. The fact that there are more check cashing and payday loan stores than Starbucks reflects that high demand. The magic formula for a business is opportunity, the ability to supply products and services to meet those needs, and a profit for the provider. The problem with providing small loans for short terms is the economies of scale -- it cannot be done at the same rates as larger loans for longer terms. Mr. Murphy's article highlights the themes often repeated in the debate about payday loans but the failure to offer any suggestion or description of what an alternative product or service would be shows that in the end his well intentioned notion of lets-all-work-together-to-solve-this is just wishful thinking. The real issue is this: do we want the underbanked communities to have access to the short term loans for small amounts they need? Or should those loans be prohibited because of the high interest rates required for a lender to earn a profit? As part of that discussion, it would be especially helpful to get a clear idea of how many people get caught in an unmanageable cycle of debt mentioned by Mr. Murphy when payday loans are available. No doubt some do. But so do some people with access to credit cards, loans to buy cars and other big ticket items, and other kinds of mainstream credit, but no one suggests that because of those instances all credit should be banned. So what level of people having problems with payday loans would be tolerable when weighed against the convenience and needs served for those who repay the loans?
Posted by gsutton | Thursday, May 15 2014 at 11:36AM ET
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