First Bank and Trust in Brookings, S.D., has developed a prepaid debit card product that could open a door for community banks to gain new customers and boost fee income.
The $760 million-asset bank's Revel Card also can be used for small, short-term loans - up to $1,000 that is loaded on to the card and must be repaid within three months. To help customers establish a credit history, First Bank reports a borrower's repayment record to the three major credit bureaus.
First Bank is aiming the card at a market segment that often turns to payday lenders or other providers of alternative financial services. It's a market that traditional banks, including First Bank, have had trouble serving - not least because most solutions to date have been frowned on by regulators.
But the Federal Deposit Insurance Corp. has begun encouraging banks to offer products for consumers using payday loan companies and other alternative lenders.
The agency released guidelines in December suggesting ways to make affordable, short-term loans and recently created an advisory committee that will offer recommendations for getting more unbanked consumers into the banking system.
"Banks have the infrastructure and the imagination needed to create an array of affordable-lending services to meet the needs of all of their customers," FDIC Chairman Sheila Bair said in a speech last October.
Mr. Sorbe said First Bank started developing the card in September 2005, after its executives attended an FDIC seminar, Affordable, Responsible Short-Term Credit. First Bank, a unit of Fishback Financial Inc., has detailed the Revel Card program in two separate letters to the FDIC. The agency declined to comment on the product.
First Bank aims to persuade other community banks and credit unions to offer the card in their markets, and then share the fee income.
Trent Sorbe, the president of First Bank's national products affiliate, First Community Financial Inc., said partnering banks would be creating relationships with customers they might otherwise "have said no to."
"What is the profit margin in saying no?" Mr. Sorbe asked. "You think about the opportunity cost of not having them as a customers when they want that first mortgage."
The biggest difference between a payday loan and a Revel Card loan is the repayment period. A Revel Card loan can be paid down over three months; payday loans either must be paid within two weeks or rolled over, at which point additional fees are incurred. Studies have shown that a large percentage of borrowers roll over their loans.
Payday lenders typically charge $15 per $100 borrowed. Fees on the Revel Card loans range from 8% to 10% of the loan amount, depending on a customer's credit history, and a monthly fee of $4.95 to $9.95. For example, Mr. Sorbe said, a consumer borrowing $400 to be repaid over three months would pay fees totaling $69.90.
"With a payday loan, you roll it over and pay the same fee. With the Revel Card, you pay much less over time," he said.
Jean Ann Fox, the director of consumer protection for the Consumer Federation of America, agreed Revel Card loans are cheaper than payday loans but said they are still too expensive for low-income borrowers.
"This expands the group of consumers who can take out high-cost loans," she said.
First Bank levies other fees when consumers use the Revel Card as a debit card: $5.95 initially and $3.95 to reload the card; $1.50 to pay bills; and 50 cents to check a balance at an automated teller machines.
"It's an expensive form of credit if you include all the costs of having the card," she said.
First Bank launched the Revel Card in July 2006 and is marketing it through roughly 200 check-cashing stores in the eastern United States. Mr. Sorbe would not say how many cards have been issued but said he is bullish on its future.
"We think the underbanked market is one of the last frontiers for banks," he said.
First Bank, as First National Bank of Brookings, was one of the first banks - and last - to originate payday loans through partnerships with payday lenders.
The Office of the Comptroller of the Currency forced it out of the payday-lending business in 2003, but it later switched to a state charter, renaming itself First Bank and Trust. It continued originating the loans until last year, when the FDIC started turning up the heat on state-chartered banks engaged in payday lending.
Mr. Sorbe said he believes First Bank's experience in payday lending is one selling point in its effort to recruit bank partners.
"We think we understand the marketplace" for small consumer loans, he said, "and we understand the consumer."
