U.S. Bank announced that it is rolling out a new small dollar, short-term lending product to existing deposit customers. Banks have traditionally stayed away from this payday lender type of loan because the expense of acquisition was so high, it just didn’t make sense at rates that were reasonable (or legal). With digital account acquisition options, the business model have become viable. Some background on the product:
“U.S. Bank, the bank unit of Minneapolis-based U.S. Bancorp, is the first of the nation’s large banks to bring such a loan to market. Executives spent recent weeks demonstrating the product to regulators.
The loans are for $100 to $1,000 and have to be paid back in three payments over three months.
The bank will charge $12 for every $100 borrowed if borrowers repay the loans via autopay from their U.S. Bank savings or checking accounts. The charge will be $15 for every $100 borrowed if a customer repays the loan manually, such as by writing a check and sending it in.
For example, a person who borrows $300 will wind up paying $336 over three months if the repayment amount is deducted automatically a U.S. Bank account.
U.S. Bank piloted the loan product for a few months in late 2016 and early 2017. It polled customers to find out why they needed the money, and most responded to fill a gap in cash flow or to pay for a surprise expense.”
The unbanked have payday lenders to help them with short-term funding needs, the underbanked using perhaps prepaid cards for financial services are sometimes offered the option to receive an advance of wages before pay day to bridge the gap from one paycheck to another. But banked individuals are less likely to use these services and often rely on credit cards or overdraft protection to make ends meet. This seems like a better, more fiscally responsible approach. I do hope U.S. Bank will let us know how successful this product becomes.
Overview by Sarah Grotta, Director, Debit and Alternative Products at Mercator Advisory Group