Raj Date, the former deputy director of the Consumer Financial Protection Bureau, tells American Banker’s Maria Aspan that, in the words of her headline, “Banks Can Develop a Better, Cheaper Payday Loan”. Well, yes, they can. But they won’t.
Date gave a speech at a conference in Miami last week where he was very bullish on big data and sophisticated analytics and all that kind of stuff. Can it all work to the benefit of poorer bank customers with cashflow issues, who need to borrow money against their next paycheck?
Date sees what he calls “the small-dollar credit problem” as one that can be largely solved by better data, which can then give lenders an incentive to lower their prices…
“The credit costs are much higher than what they need to be. I think that through the application of more and different data sources, you can actually make fraud and credit decisions much better than has been possible in the past, and that, with the right competitive dynamic, can therefore start bringing pricing in,” he says.
There is a parallel universe where such thinking makes sense. In this universe, if I have a job, and bad credit, and short-term cashflow issues, and a bank account, and my paycheck gets directly deposited into that account, then my bank knows with a high degree of certainty exactly when I’ll be able to repay what Date calls a “deposit advance”. Indeed, it can take the money it’s owed directly out of my paycheck before I get any access to it at all. This product is as low-risk as an unsecured loan to a person with bad credit can ever be. Since it’s low risk, banks ought in theory to be able to make such loans at relatively low interest rates. And because everybody loves being able to borrow at a low interest rate, a “competitive dynamic” could then drive rates down.
But that’s not the world we live in. In this world, banks have no interest in banking the kind of people who need payday loans — unless they can extract a large amount of fee income from them. Indeed, Chase launched its Liquid prepaid debit card in large part because it no longer wanted to offer checking accounts to these customers at all, and wanted some other product to move them into. The last thing that banks want to do is to create a new product which will in any way incentivize low-income customers to open new checking accounts, which are likely to always hover around the zero balance level.
The only way this product could ever work, after all, is when the person asking for the loan is also directly depositing their paycheck into their checking account. As such, it’s not a product where there’s much of a “competitive dynamic” — the number of banks which can offer me one of these loans is exactly one. And the number of people willing to change their primary bank just so that they’ll have access to a lower-cost payday loan is extremely close to zero. Very few people ever change their primary bank at all, and when they do it’s not because of low loan rates — especially when the loan in question is something you’ve promised yourself you’ll never need.
Date’s vision, then, involves three highly improbable things all working together: banks which want to attract low-income customers; low-income customers willing to change banks to get lower payday loan rates; and the promise that “better data” can magically improve credit underwriting. Even more simply, there’s one big reason why we’re never going to see this product: you can’t get an is from an ought. Date’s heart is in the right place, but he’s not going to get very far trying to sell this idea.