Well, surprisingly, the next big threat to consumer finance companies comes not from plaintiffs' lawyers, nor from state regulators, nor from the CFPB. In my opinion, the next big threat comes from banks and credit unions. It seems that the regulators of depository institutions may be doing an “about-face,” and beginning to encourage banks and credit unions to make small dollar consumer loans. With the publication by the CFPB of the Small Dollar Loan Regulation, the prudential regulators—the OCC, the Fed, the FDIC and the NCUA—are beginning to look more favorably at small dollar loan products.
The regulators know the fact that small dollar lending is a $30 billion per annum segment of the consumer loan market. And, according to research by the PEW Charitable Trusts, three-quarters of all households in the USA make use of small dollar loans. It is hard for regulated institutions to ignore such a fertile field. The PEW Study can be found at the following link:
The PEW report states: “The nonbank options for credit are often poor, with high-cost loans dominating the landscape. Twelve million Americans use payday loans annually, and many others use different forms of high-cost credit. The FDIC has found that 20 percent of all American households are underbanked, meaning that they use alternative financial services in addition to using banks and credit unions.” While the PEW report is focused on payday and title loans, there is a lesson in it for traditional installment lenders.
Banks and credit unions would seem to have much going for them in entering this segment of lending. They have lower costs of doing business. They have sound compliance structures. They understand automation. They have a captive customer base with checking accounts. Consumer finance companies on the other hand, generally have higher costs of capital and higher costs of covering their overhead.
Bank and credit union lenders presumably have learned a lot since their regulators shut down most small dollar loan programs five or six years ago. That is, if they make more prudent small dollar loans with fair pricing, affordable payments and a reasonable repayment schedule, they can more easily compete with consumer finance companies. The PEW study goes on to argue that banks and credit unions are very well situated to take a greater market share of small dollar loans.
So, what does the future hold for traditional installment lenders? Well, companies that can deliver their loans personally, efficiently and above all else, quickly, will stay competitive in this new market. The term “personal loans” has and always has had real meaning in the consumer lending space. The personal touch has accounted for the historical success of consumer finance companies. If and when banks and credit unions make a concerted effort to compete for small dollar loans, consumer finance companies will need to redouble their efforts to retain their market share.