Banks Getting in on Payday Loan Boom

By: Javi Calderon
Banks Getting in on Payday Loan Boom

With a myriad of socio-political issues and legislative decisions threatening to cut into banks’ profits, many banks are looking for alternative sources of revenue.

Starting with the financial crisis, there have been a litany of issues that have kept banks from prospering as they have in the past. The foreclosure crisis, robosigner scandal and general distrust in banking institutions have all left banks scrambling to recoup lost profits by tightening restrictions and raising fees.

In the meantime, the payday loan industry is booming. The combination of distrust for traditional financial institutions, tightened lending requirements, and a population of Americans who are struggling through a tough economy and are in need of quick cash, have led to the proliferation of deferred deposit products and cash advance stores.

First, credit unions started getting in on the short term lending craze. Known as non-profit organizations, focused on the responsible management of their clients’ money, credit unions (who also admitted that they have been losing money on most of their long-term loans) have begun offering short-term loans under the guise that they are offering them at lower interest rates than payday lenders.

In preparation for new federal regulations on debit card interchange rates, set to take effect in October, banks are looking into options to make up for the expected losses. They will surely be hiking up rates and fees for products like checking accounts, but many have already started offering new products – like short term, high interest loans.

Alabama-based Regions Bank estimates that the new restrictions on debit card transactions will cause approximately $170 million in losses annually. Last year, the Federal Government placed restrictions on overdraft fees.

In response, the company has begun offering direct deposit loans that take the amount of the loan out of the customer’s next direct deposit check. They also intent to start offering check cash loans, claiming that both new products are due to consumer demand.

While legislators across the country have been signaling payday loans out, traditional lenders are doing the same things right under their noses. Once the new bureau gets under way, the Consumer Financial Protection Bureau will be sure to examine these new practices.