Small-Dollar Lending Need a Dash of Apple Pay's Glamor

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Apple Pay has drummed up a lot of publicity by promising to make boring payments faster, safer and even a little bit sexy. A recent television ad for Apple Pay emphasized its life-changing possibilities. In the ad, a man arrives early to his own surprise birthday party. The secret was spoiled because mobile payment technology had saved him so much time, allowing him to arrive home earlier than anyone had expected.

But is Apple Pay really that revolutionary? At most, a mobile payment could save customers a second or two. And the technology will wither on the vine without widespread merchant adoption — which is unlikely to happen as long as Apple wants a cut of every transaction.

To my mind, Apple Pay is mostly a solution in search of a problem. I wish the finance and technology industries would take half the energy they've poured into mobile payments and put it toward solving a real problem: making it cheaper to borrow money.

Payments have a certain amount of glamour in the current environment, while lending tends be the red-headed stepchild. Online marketplace lenders are the exception to this rule, having attracted abundant attention for their technological innovations. But so far these platforms are targeting lower-risk segments.

Lending Club, for example, has historically required a minimum 660 credit score and 36 months of credit history. Peer-to-peer lender SoFi targets graduates of elite schools with high-paying jobs. These lending platforms have yet to target themany Americans who remain without affordable access to credit.

A recent MagnifyMoney survey found that 42.4% of Americans could not pay their credit card statement balance in full and would end up paying high interest rates on their balances. Many others are forced to turn to high-cost alternatives like payday lenders.

Reducing the cost of borrowing would provide significant benefits for cash-strapped Americans and for the economy as a whole. The need is particularly great in the small-dollar credit market.

Overdraft and deposit advance products, as well as payday loans, are extremely expensive. I have worked in consumer banking all over the world, and I have never seen a more expensive form of short-term borrowing than a bank overdraft in America.Bank of America, for example, charges a $35 overdraft fee and an extended fee of another $35 if the account is not brought current within five days. This means that borrowing $6 for less than a week could easily cost a consumer $70.

People will always need short-term borrowing options. It is within banks' reach to find a way to deliver the solution at dramatically lower prices.

Given the unique deposit data that banks have on their consumers, they could crush the payday lending market in an innovative way. For example, when a customer uses direct deposit to put their paychecks into a bank account, the bank has important information about the customer's employment status, income and salary date. I have used this deposit data to make low-cost loans in Russia, back when no credit bureau existed, and in the United Kingdom to people with poor credit. Banks in America could do the same thing.

The most exciting innovations tend to attract money. For years, all of the excitement has been in the payment space. Fresh ideas are finally heating up the lending business, but it remains largely focused on helping people with the best credit scores, the highest degrees and the biggest incomes. Loans remain far too expensive for those people who have less.

Innovative sources of data, low-cost mobile distribution and a sense of social purpose could cut the cost of lending dramatically. But we need to convince technologists in the Silicon Valley and bankers setting innovation budgets that the troubled short-term, small-dollar lending market shouldn't be avoided. Rather, it should be revolutionized. It's never going away.

Innovation in mobile payments is certainly worth celebrating even if Apple Pay in particular winds up falling short. But I hope we will be toasting better short-term credit products by the time the next iPhone is released.

Nick Clements is the co-founder of, a price comparison business for consumer financial products. He previously served as the managing director of the Barclaycard UK consumer credit card business and held several risk director roles at Citigroup. Follow him on Twitter @npclements.

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