As the operators of a community bank in the state with the most payday lenders per capita (32 for every 100,000 people), executives at BankPlus in Belzoni, Miss., are characteristically appalled at the exorbitant rates that payday lenders charge.
But uncharacteristically for a bank, BankPlus decided four years ago to compete with these payday lenders. Now it successfully offers a small-dollar loan product to thousands of people, with significantly better terms and outcomes.
"The idea was to create a program to assist anyone caught in the payday lending cycle, but also to serve the underbanked who seek to enter the commercial banking system," says Bill Ray, the president and CEO of $2.3 billion-asset BankPlus.
CreditPlus targets underbanked and unbanked payday lender customers, offering loans of $500 or $1,000 on one- or two-year terms, with an APR of just 5 percent. Before customers even apply for the loan, they have to take the bank's three-hour financial literacy course (an adaptation of the Federal Deposit Insurance Corp.'s Money Smart curriculum).
Once approved for a loan, a customer must set up checking and savings accounts, where the loan proceeds are deposited in equal amounts. The money in the interest-bearing savings account must be held there until the loan is repaid.
BankPlus promoted the program at first, but now most CreditPlus customers come in through word of mouth or in association with churches, nonprofits, schools or businesses where the bank offers its financial literacy courses. In four years, the bank has made more than 12,000 CreditPlus loans totaling $9.3 million, with a default rate of 7.14 percent.
Ray says the program lost money the first few years but is profitable now, especially with all the new business it has brought in from these previously underbanked customers.
"It's rewarding to see the impact the program is having on families right here in Mississippi," says Ray, who notes that CreditPlus has steered many people away from payday lenders, while helping them pay off previous payday lender debt, medical bills and emergency household expenses.
BankPlus's success with the product has spurred several credit unions and at least one other bank in the state-the $360 million-asset First Bank in McComb-to develop similar small-dollar loan alternatives, says Paheadra Robinson, the consumer protection director at the Mississippi Center for Justice.
But she says that all these efforts have thus far had little impact on the state's enormous payday lending industry, which also has the dubious distinction of charging the highest rates in the nation.
"Unfortunately payday lending is huge in Mississippi," she says. "And I have found there are still plenty of people resistant to banks, so there is still a huge consumer education piece to really have an impact."
On the national scale, few banks have been eager to follow in BankPlus's footsteps by offering a small-dollar loan product with such favorable terms.
In 2008 and 2009, the FDIC conducted a Small-Dollar Loan Pilot Study with 28 banks. While the loans spurred more banking relationships and had default rates similar to other types of unsecured lending, the banks in the program did not offer resounding support for these loans, as they were time-consuming to monitor and unprofitable in the short term.
Rob Levy, the manager of insight and analytics for the Center for Financial Services Innovation, says that a growing number of credit unions are getting into the small-dollar loan space but few banks-beyond the use of deposit advance-have gotten on board.
"We really need to see more banks getting into this space as it offers a lot of potential to benefit consumers, getting them out of a debt cycle and building savings," he says.
Jack Webb, BankPlus' chief retail banking officer, says that creating a product like CreditPlus is easy. The hard part is then gathering momentum and driving customer interest.
"The key to the program's success is commitment to seminars, education and beating the pavement in communities that really need help," he says.