Demand for small-dollar loans is likely to spike. Will banks be ready?

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The economic costs of the coronavirus pandemic to U.S. households are mounting rapidly. So rapidly, in fact, that these effects generally don’t show up yet in government statistics.

To cite just a few anecdotes: Airlines are canceling thousands of flights in what many employees fear is a precursor to layoffs. Amtrak has asked non-essential workers to take unpaid leave. A well-known Seattle restaurant owner plans to temporarily close 12 locations on Sunday, leaving about 800 people out of work.

In addition to the lost jobs, many U.S. workers face the prospect of reduced hours. Others cannot work because they are either ill or under self-quarantine. More than 65% of part-time workers lack paid sick leave, though the Trump administration and Congress are reportedly close to a deal on a legislative package that would include paid emergency leave.

What’s more, many millions of American families do not have much of a financial cushion. A widely cited Federal Reserve survey in 2017 found that four in 10 adults did not have enough cash to cover a $400 emergency expense.

Consequently, U.S. consumer demand for small-dollar credit is likely to soar in the coming weeks. Many Americans will probably borrow on their credit cards, but their ability to do so will be limited. Card issuers typically reduce credit lines at the first sign of an economic downturn.

Payday lenders will also likely see a spike in demand. But many prospective customers won’t qualify because they are out of a job. Those who do get approved will pay triple-digit annual percentage rates.

The banking industry, which has been touting its capital levels as robust, now has a unique opportunity. U.S. banks have lost a lot of public goodwill as a result of the 2008 mortgage bust, the subsequent bailouts and a raft of scandals. They could regain some of that lost trust by offering affordable small-dollar consumer credit to Americans who need it. But to do so, most banks will probably need the government’s help.

Read more: Complete coverage of the coronavirus impact

Most banks seem ill-prepared for this moment. Only a small fraction of banks currently offer reasonably priced small-dollar consumer loans. Banks typically blame government regulations for their failure to compete in this market, but the reasons for their disinterest don’t matter much right now. What matters is the fact that banks are generally on the sidelines.

Launching a new banking product is usually a time-intensive process. It’s hard to envision many institutions being able to move quickly enough to meet the expected surge in consumer demand.

Credit unions will likely be somewhat better positioned. In September, the National Credit Union Administration finalized a rule that gives credit unions a new option for providing short-term, small-dollar credit. Those loans can be up to $2,000 with terms of up to 12 months. At the end of 2018, more than 600 federal credit unions participated in a separate small-dollar credit program, which remains in operation.

The relatively small number of banks that are currently in the small-dollar credit business are also well positioned to respond quickly. U.S. Bank, which launched such a loan product in 2018, announced Friday that it is temporarily reducing borrowing costs by at least 50%.

As the outbreak’s economic impact has spread, banking trade groups have been touting the industry’s efforts to work with affected customers. Those steps — which include waiving fees, allowing early withdrawals from certificates of deposit and providing flexibility to borrowers who cannot make their scheduled payments — are useful but not a panacea for many cash-strapped consumers.

Bank industry groups have had less to say about small-dollar consumer loans. In response to an inquiry Friday, the Consumer Bankers Association said that the coronavirus outbreak is just the latest crisis to highlight the need for federal banking regulators to work together on issuing relevant small-dollar credit rules.

“Millions of Americans needed short-term financial assistance before coronavirus and will continue to need it after the immediate impact is over,” a spokesman said in an email.

With the virus spreading quickly, some observers are looking to the Federal Reserve for faster, more decisive action.

Karen Petrou, managing partner of Federal Financial Analytics, wrote in a blog post Friday that the central bank has the legal authority to provide liquidity to banks for the purpose of offering short-term, low-cost funds to affected consumers and small businesses.

She called on the Fed to set up a borrowing facility that would require consumer loans to be on terms that mitigate banks’ risks rather than reinforcing their profits. At the same time, she acknowledged the difficulties involved in establishing such an emergency program on the fly.

“None of these complexities is large enough to stop quick action,” Petrou wrote, “if Fed leadership pushes over-punctilious lawyers out of the way and mandates the rapid action the emergency demands.”

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Consumer lending Coronavirus Small-dollar lending U.S. Bancorp Consumer Bankers Association Credit unions