The on-going discussion about the CFPB and non-bank financial products such as payday loans, prepaid cards, and the like reminds me of a conversation I had with an attorney general (who will go unnamed for obvious reasons) of a state that had prohibited payday loans. I asked him what he thought people should do when they had an emergency cash need. His response was that in his state people used “The Boot.” Curious, I asked for more information on this intriguing financial option.
It turned out that “The Boot” was literally a boot – the kind you might wear.
The attorney general’s suggestion was that people stand along the road and hold out a boot for passing motorists to deposit spare change. Panhandling as the solution to emergency cash needs!
I wish that this callous view of the real-world needs and options for under-banked consumers was a rarity, but I’m afraid it afflicts a large group of otherwise well-intentioned people on both sides of the aisle.
Most opponents of short-term credit products like payday loans believe that eliminating options for consumers is the right thing to do because they legitimately believe consumers can’t be trusted to make their own financial decisions. That is a dangerous and patronizing point of view.
The truth is that all surveys of under-banked consumers who use products like payday loans show that they are educated, hard working Americans who fully understand their options.
The average payday loan customer has at least some college education, is meaningfully employed, and makes between $35,000 and $50,000 a year. They understand the bottom-line costs (both economic and psychic) of their options and can be counted on to make the best possible decision for them from the options that are available.
Furthermore, the academic studies of products like payday lending by the New York Federal Reserve Bank and others clearly prove that when the product goes away consumers are worse off and face higher levels of bankruptcy and overdraft fees.
Given the facts, the goal of the industry, regulators, and consumer advocates should be the same – to create improved options for more access to needed credit, not to drive people to unpleasant options like “The Boot.”
Like many Americans, I have concerns about payday loans. They typically don’t reward good payment history with lower rates and they don’t help consumers improve their credit rating. They are not a perfect financial product by any stretch of the imagination – but for millions of Americans they are the best financial option in a time of shrinking options.
We’ll only make headway toward improving the financial options available for under-banked consumers when we put ourselves in the shoes of payday loan customers. A person with limited savings and limited access to mainstream credit who is facing financial challenges such as not being able to pay the rent or being hit with numerous overdraft charges has different needs from a credit card customer with substantial savings. According to the FDIC, the effective APR of an overdraft charge is over 3500% - no wonder payday loans are an intelligent financial choice for millions of Americans.
Under-banked Americans don’t want charity and they certainly don’t want moral superiority; they just want financial products that meet their needs for convenience, speed, and transparency of pricing. And they are smart enough to determine the best financial option for their unique situation.
Let’s focus our efforts on expanding the financial options for under-banked consumers. This will likely involve innovative new products and new applications of technology and will need to be supported by a progressive regulatory environment.
The last thing Americans need in these difficult economic times is to be given “The Boot” as their only financial option.
Ken Rees is the CEO of Think Finance, a leading developer of next-generation financial products for underbanked consumers. Please visit http://www.thinkfinance.com