With 15 million customers, the small-dollar credit market deserves a closer look. The Center for Financial Services Innovation (CFSI) study referenced by Rachel Schneider and Rob Levy in their Sept. 17 article "Banks Can Make Small-Dollar Credit Products Work" examined the behavior of small-dollar credit consumers.
While grouping products together can be useful in research, the fact remains that payday, pawn, direct deposit advance and auto title loans are vastly different from installment loans. Of the products studied, only installment loans report consumers’ payment behavior to credit bureaus – which can help them rehabilitate or build a credit history. With this in mind, installment lenders work with their customers to determine their ability to repay a loan and set an affordable payment schedule. In addition, installment loans are fully amortizing and do not require a balloon payment. There is no cycle of debt associated with them.
Installment lenders have been successfully serving their communities with small-dollar credit for close to 100 years, and have been effectively regulated at the state level. These loans meet CFSI’s definition of "high-quality credit,"which according to the study "must be affordable, marketed transparently, priced fairly, structured to support repayment without creating a cycle of repeat borrowing and should support credit-building."
Schneider and Levy assert that banks can make small-dollar credit work, but a 2008 Federal Deposit Insurance Corp. pilot showed that they could not do so profitably. At best, deposit-driven banks and credit unions could use the products as loss leaders to bring in customers who would later use other products. Banks are welcome to enter the small-dollar credit market, but they continue to stay on the sidelines because the numbers just don’t work.
Chris Stinebert is president and CEO of the American Financial Services Association.