Payday loans go mainstream

Big banks looking for fresh revenue sources

Friday, November 18, 2011, Vol. 35, No. 46
By Colleen Creamer

What’s the next big thing for big banks? Payday loans.

And, according to industry analysts, it’s only a matter of time before the federal government will have to figure out what to do when they become one of the hottest, and most controversial, products in banking.

Four big banks are now offering short-term “payday loans” to customers who have their paychecks, Social Security, unemployment or disability checks deposited directly into their checking accounts.

A report from the National Consumer Law Center states these loans, like payday loans, won’t be cheap.

“Recently, Regions Bank became the fourth large bank to start offering 300% APR or higher payday loans, following Fifth Third, U.S. Bank and Wells Fargo,” the report reads. “Fiserv and other bank consultants are encouraging banks to offer payday loans as a way of augmenting overdraft fee income.”

The report predates Bank of America’s September announcement of its debit card fee and the ensuing national protest, Bank Transfer Day, Nov. 5, which encouraged customers of large banks to move their accounts to local banks and credit unions.

Fifth Third bank, Regions and U.S. Bank offer, for example, a $400 loan for $40 at an APR of 365%, according to the NCLC. The loans are short-term – less than two weeks – but with “triple-digit interest rates disguised with fee-based pricing.” However, the banks are clear on their FAQ sections that consumers’ checking accounts must be in good standing and that the loans should be a last resort because they are expensive.

Still, for the poor and elderly, who might have trouble meeting their financial needs, these loans could be tempting. The large-bank loans are not subject to protections for Social Security, disabled and unemployment benefits that ensure creditors cannot take income needed for food, rent and medicine.

The Center for Responsible Lending states that because the interest rates are high, and the entire principal is deducted on payday, it forces most customers into “a long-term cycle of borrowing that systematically strips them of their funds.”

As well, banks can now offer 300% payday loans to military service members by using a loophole in the law that normally limits military loans to 36% APR, according to the NCLC.

Big banks began recently to look for ways to offset losses when the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted. It limited the amount of point-of-purchase “swipe” fees that banks with more than $10 billion in assets can charge. Banks answered with monthly fees for debit card use, then backed down, but only after triggering a national protest over banking practices.

Large national bank chains, analysts say, will likely push credit cards and may begin to charge more for checking accounts and other products. And this time, they add, banks probably won’t be as transparent as they were in announcing they plan to charge consumers monthly fees to use their debit cards.

As a result of protests, Nashville’s community financial institutions have seen a clear increase in customers during the last few months.

“We had a 35 percent increase in new account openings on Nov. 5, for what we normally see on a Saturday,” says Buddy Brent, vice president of business development at US Community Credit Union in Nashville. “That was huge. There were a lot of people that actually made the switch that day.”

Brian Shaw, Reliant Bank’s executive vice president and chief retail and deposit officer, believes it’s more of a “season” than a day, adding Reliant has seen large increases in business since early October. Shaw says he is watching to see how the larger banks respond to the withdrawal of monthly card-use fees.

“They [big banks] are definitely going to push credit cards, because they aren’t impacted by the Durbin Amendment at all. Credit cards have high interest rates, and they are going to hope that people aren’t going to pay their credit cards off.”

Many banking analysts say large banks will continue to attempt to offset the losses from the swipe fee caps, an estimated $6.6 billion a year in revenue, and though in more subtle ways.

Many larger banks have already eliminated free checking accounts that had been a staple for two decades and dismantled rewards programs for debit cards. As well, they are expected to charge more for bank transfers, certified checks, money orders and stop payment fees, a shift that is already beginning.

TD Bank, with more than 1,250 branches in the Eastern United States, is hiking all the above-mentioned fees beginning in December and will add a new $9 fee for savings account customers who exceed six transactions in a billing cycle.

“A lot of larger banks are beginning to charge $15 to $20 for cashing checks for non-customers, and usually that’s around $5,” Shaw says.

Large institutions may also begin to charge more for ATM fees, statement fees and will surely steer their customers towards the less-regulated credit cards. They also may raise credit card fees or interest rates for their current credit card holders.

“They [consumers] are paying 10 to 12 percent and higher, and they could be a huge money maker for big banks,” Shaw says.

The upward trajectory for credit unions will naturally taper off, says Hank Flurry, CEO of Cornerstone Community Credit Union. Like most credit unions, Cornerstone offers free checking and no debit card fees, as well as other traditional banking products such as car loans and mortgages.

“I don’t think that will be sustained over the long haul,” Flurry says. “I think it really is a reaction to the fees. We didn’t see a spike, per say, on Friday, but it’s been steadily busy.”

Thomas Norton, president of The Norton Group, a Princeton, N.J., consulting firm with expertise in general banking and regulatory issues, believes that, wittingly or unwittingly, Bank of America actually wanted to thin its herd of less profitable, low-level depositors, which might explain why it is not offering direct deposit loans.

“It was so egregious that the general public just revolted against it,” Norton says. “Bank of America, as I see it, is not concerned with the average depositor as they are with the large depositor, the corporate client. It’s easier to serve one large client than it is to service 10,000 smaller clients. By discouraging them, people won’t be coming into their branches and costing them money.”

Shaw says credit unions, though they have their place, are getting the lion’s share of goodwill in the media when it should be equally extended to locally owned banks.

“Credit unions do not pay any state or federal taxes,” Shaw says. “Ultimately, who pays teachers’ salaries? The taxpayer does, and those taxes go to local infrastructure.”

Shaw adds that many community banks across the country donate service hours and money to local causes.

“Not only do we pay our taxes, but all of our employees get 20 paid hours a year during the week to go and volunteer in the community for various non-profits,” Shaw adds.

Michael Martin, president and CEO of Tennessee Credit Union, says his credit union’s big jump happened more during the month of October than it did on Bank Transfer Day. He also foresees steady growth.

“We had a little more business than normal on Saturday in new accounts, but I wouldn’t call it a big crush,” Martin says. “The big banks blinked big time, and what they are going to do now is hard to say. I know what we are going to do and that is to stay the course and provide services at a fair price.”