There might not be the will for banks to get into small-dollar consumer lending, but technology is providing a way.
Although many observers say the Consumer Financial Protection Bureau's recent proposal for payday lending guidelines will keep banks, especially community ones, from making small-dollar consumer loans, there will likely be a few willing to maneuver the regulatory framework to get an edge. They'll just need to figure out how to do it profitably.
Banks often avoid small loans because the economics aren't there — they take a lot of work upfront and often don't add much to the bottom line. But tech solutions focused on streamlining and automating the process have already helped banks get back into small business loans and now similar products are popping up for small-dollar consumer loans.
"The whole industry started treating small dollar as an afterthought," said Pierre Naude, chief executive of the tech vendor nCino. "They were focused on bigger loans in the commercial sectors. The wisdom became that is where they make their money. Retail and small-dollar loans were seen as afterthought and a loss leader. And give the nonbank lenders credit, they uncovered this marketplace."
nCino is one of the firms that have helped banks expand small-business lending through automation and it released an "auto-decisioning" product for consumer lending earlier this year. The company in Wilmington, N.C., was spun out of internal technology developed at Live Oak Bancshares, also in Wilmington.
Naude says the manual processes involved with writing small-dollar loans makes it unappealing.
"It involves going to the branch, paperwork, it can be a nightmare," he said. "But if you can make these loans with the click of a button, that's different."
QCash, another vendor focused on helping banks make small-dollar loans, said the business's labor-intensive tasks had been a barrier to entry.
"With the manual processes involved [in making loan decisions], many financial institutions didn't want to make these loans because the margins are so much smaller," said Ben Morales, chief executive of the technology provider QCash, which was also developed in house at $2.3 billion-asset Washington State Employees Credit Union and then spun off into its own company. QCash allows consumers to get loans ranging from $50 to $4,000 with six taps on a mobile app. The credit decision is automated and near-instantaneous. QCash primarily targets the credit union market, though also is in talks with some community banks, too, Morales said.
But many say technology alone will not bring these loans back to regulated financial institutions en masse.
The challenge for financial institutions is not that they lack tools to make quick decisions, it's that most do not use them for the consumer loan process, said Christine Pratt, a senior analyst with Aite Group.
Instead, information technology resources are sucked up by the demands from "unrelenting new regulatory reporting" rules from the Dodd-Frank Act.
Some of it is also a human factor, she said. Despite years of experience and results that show more consistency and accuracy in automated decisions, many financial institutions still display an unwilling to trust technology to make simple even complex credit decisions, she said.
Technology such as that being offering by QCash and nCino could help address the small margins of consumer loans, but that won't be enough to overcome the regulatory scrutiny they face, Pratt said.
"It's hard to reconcile the risk with the cost of doing business," she said. "And figuring out how to price these products so [the bank] can make money and satisfy regulators."
Like Pratt, Bob Conery, chief operating officer of Avidia Bank in Hudson, Mass., said it's not so much a lack of technology, but an unwillingness to deal with the risk and regulatory scrutiny that comes with writing short term loans that will still largely keep banks out of this market.
"I don't see there being an uptick in banks providing these services," said Conery. "banks are facing the same level of regulatory scrutiny as the non-bank lenders, I don't see many bank changing their underwriting standards" to offer these loans.
Ultimately, Pratt believes credit unions are more likely than banks to get back into this market, since their nonprofit status means the business case is more palatable. Indeed, the Credit Union National Association in June sent a seven-page letter to Rick Metsger, chairman of the National Credit Union Administration, asking that credit unions be exempt from the CFPB's proposal.
"There are already some large credit unions that have done a good job in this area, and they are well positioned in this space," she said.
One of QCash's customers, USAlliance Federal Credit Union in Rye, N.Y., said it was seeking for several years to start offering these kind of loans and now can do so with QCash's technology.
"We know for a fact there is certainly a need out there among our members, they are using other sources for these kind of loans," said Kris VanBeek, chief executive of the $1 billion-asset credit union.
Van Beek said USAlliance will go live with QCash in the third quarter of 2016, as it wanted to see what the CFPB's rulings in this space would be before moving forward.
"Our best read on the regulations is that they are very much in line with what we are planning to do," he said.