In a city with dozens of retail banks, including some of the nation’s largest, Austin Bank of Chicago has found that some of its toughest competition has come from payday lenders.
So in hopes of capturing some of the business that is now going to the likes of Payday Loan Store, the $227 million-asset bank is set to launch a loan product it views as an alternative to payday lending.
Senior lending officer Colette Loesher said she and president Sam Scott decided to develop it after consumer lending staff members told them that many people the bank turned down for loans were going to payday lenders.
“People come in and want to borrow $300 because they want to get their car fixed or their furnace went out,” Ms. Loesher said. But Austin Bank, like most others, did not offer small loans, because they are too expensive. A $300 loan can cost as much to underwrite as a $3,000 loan, Ms. Loesher said.
Meanwhile, payday lenders offer loans of $300 to $500 with a two-week term using just a post-dated check, for fees ranging between $10 and $35.
Austin Bank began developing an alternative six months ago and will begin marketing it next month.
It will work like a credit line. Would-be borrowers will apply for three-year loans of $1,000 to $10,000. If approved, they will receive checks for drawing on the loan. If they write checks, they will have to make monthly payments of 3% of the principal and accrued interest until the balance is paid.
“It is for low-level emergencies,” Ms. Loesher said. If they write no checks against the credit line, they will not be charged, she said.
Consumer advocates have been pushing for banks to offer short-term credit products as alternatives to payday loans. The advocates say payday loans have high interest rates and trap people in a cycle of debt. Payday lenders argue that consumers are willing to pay for the convenience of short-term credit they cannot get elsewhere.
Despite activists’ prodding, most banks have avoided competing directly with payday loans. Some banks had formed partnerships with payday lenders, but regulators have forced all national banks and thrifts out of the business.
Still, bank alternatives are available. The $405 billion-asset Wells Fargo & Co. of San Francisco offers a Direct Deposit Advance program that allows customers with direct deposit accounts to borrow up to half of the money directly deposited a week in advance. The Bank One division of the $1.1 trillion J.P. Morgan Chase & Co. is considering a similar program, but no decision has been made, a spokesman said.
Yolanda Brown is a senior vice president with the $46.5 billion-asset Union Bank of California in San Francisco. She said the Mitsubishi Tokyo Financial Group Inc. affiliate, which already offers check cashing, is looking at ways to offer short-term loans.
Low-income people who open bank accounts and no longer need check cashing services still have financial needs that banks do not meet, so they turn to other providers, such as payday lenders, Ms. Brown said.
Some credit unions already offer short-term loans as an alternative. Among them is North Side Community Federal Credit Union in Chicago, which offers a six-month loan.
Ed Jacob, its manager, said the product is more about building membership than earning profits, since North Side is lucky to make even $25 on one of those loans. He measures the profitability of the program by how many people graduate to larger, longer-term loans, he said.
Ms. Loesher said that customer relationships are among the benefits that Austin Bank hopes its new loan program will bring.
The bank plans to market the loans in conjunction with financial literacy classes held at churches and through newspaper advertising and statement stuffers.
A borrower will have to hold an account with the bank. Austin Bank hopes the requirement will lead more people to open accounts with it — people without bank accounts who use check cashers and people with accounts elsewhere who use payday lenders.
