A New York Times editorial called the payday lending industry a "predator," yet many banks, thrifts and credit unions will tell you payday lenders serve many of their customers and members. Why? Most of the Small Cash Market, about 40 to 50 million people, is highly illiquid and needs cash immediately. Paycheck-to-paycheck cash need is a reality for more Americans than one would think. Payday lenders are participants in the financial service marketplace despite the fact that the short-term unsecured loans they provide are avoided by traditional financial service providers.
The Small Cash Market includes people who are unbanked, underbanked or with credit scores less than 600. The underbanked only have a checking or savings account often required by an employer who no longer issues paper pay checks. Banks, thrifts and CUs work with people who are underbanked but not the unbanked or borrowers with less than a 600 credit score. This leaves millions whose source of needed cash is limited to mom, dad, payday lenders, pawn shops, or loan sharks.
There are 2,697 payday lenders offering payday loans in 36 states at 12,405 locations and employing over 50,000 people. More than half of these payday lending outfits are single location, family owned outlets that run 24/7.
A 2008 Government Accountability Office study of overdrafts and a subsequent FDIC overdraft study show the median amount of a consumer shortfall between paychecks is $40. The 18 to 19 million frequent users of overdrafts at depositories and 22 to 23 million payday loan users know the low-price way to cover a shortfall is with a payday loan.
What payday lenders charge on a small amount is less than what most banks, thrifts and CUs charge. Their loans are either traditional$18 fee per $100 for 14 daysor installment loans at $20 per $100 for up to 180 days or six months. A depository charges an overdraft fee of $30 per transaction on average.
Truth-In-Lending formulas for calculating the Annual Percentage Rate (APR) are meaningless to the payday borrower. Using APR to report the pricing of small loans or overdrafts is like using a grandfather clock to time a sprinter. Reporting using simple and clear information for the price, defined as a fee rather than an APR, gives a better picture of the out-of-pocket cost to the cash-thirsty borrower, while the useless APR places an unfair stigma on the payday loan, borrower, and lender.
Much greater transparency of the fee price for the payday loan is the goal payday lenders need to achieve. The payday loan borrower needs to be treated with the same level of justice that banks, thrifts and credit unions treat their consumer borrowers.
The expense of covering a negative checking balance is one of the costliest transactions in a financial institution - anywhere from $12 to $30 per transaction. A low-priced payday loan reflects high service efficiency, while a very high-pricedpayday loan often reflects an inefficient operation, not necessarily greed.
Payday lenders meet the spot cash needs for millions of consumers. Eliminating payday lenders would create a void that banks, thrifts, and CUs cannot fill because of volume, regulation, cost or policy. The cash needs of 22 million people will not go away by eliminating one of the providers of cash, but only by finding viable information solutions that are price efficient and user friendly.
G. Michael Moebs, CPA, is the CEO of economic research firm Moebs $ervices, Inc.
