Why don’t banks in the UK offer payday loans? Quick Loans Express explores whether banks in the UK and the US will offer a bank payday loan any time soon.
We look at the issue of bank payday loans from the perspective of US and UK banks. We’ll examine:
Bank Payday Loan
Significant changes are coming soon to the US payday loan market. As part of these changes, banks will be permitted to offer their customers short-term loans. Will this give customers a greater sense of security when taking out a payday loan? Would the option of a bank payday loan drive unscrupulous lenders out of business? Could British banks follow suit? More importantly, should they? Quick Loans Express explores these issues from several angles.
Regulatory Changes to the American Payday Loan Market
There are regulations in the works for American payday lenders which could change the face of lending as they know it. The CFPB (Consumer Finance Protection Bureau) has proposed legislation that has met fierce opposition. These regulations would require lenders to carry out creditworthiness checks and verification of borrowers’ income. These checks will confirm whether short term loan applicants can afford to repay their loans.
The CFPB is introducing the new regulations due to the rising concern of “repeat borrowing.” Customers get stuck in an unhealthy pattern of taking one loan after the next, making their debt problems worse. The Pew Charitable Trust had found in their research that the average customer was paying $520 in fees a year to borrow an average sum of $375 repeatedly. The CFPB found in its own research that nearly half of instant payday loan borrowers applied for more than 10 loans a year.
Opposition to Payday Loan Regulation
One of the main worries is that this stricter underwriting process would be costly for lenders to implement. As a result, many would leave the market, leaving many Americans unable to access credit when they needed it. Although budget advisory services recommend that people have an emergency fund, an estimated 44% of Americans would find it impossible to raise $400 in a hurry. Payday loans meet this essential need.
One of the solutions the CFPB offered was to cooperate with the regulator for the biggest US banks, the Office of Comptroller of the Currency. On the same day that the new payday regulations came out, US banks were permitted to offer short-term loans to their customers. Banks now have the option to “fill the void” for payday loans, but the question is, will they?
US Banks & Deposit Advance Products
US banks have, in fact, offered bank payday loans in the past although they didn’t market them with that name. Instead, banks offered their customers ‘deposit advance products’. However, upon closer examination, their terms and conditions were almost the same as payday loans.
Consumer protection groups found that even though mainstream lenders offered these financial products, they were just as likely to cause debt traps for consumers. They discovered that recipients of deposit advance loans were likely to have an outstanding balance for nine months of the year.
Because of these problems, the six major US banks (Wells Fargo, US Bank, Fifth Third Bank, Regions Financial, the Bank of Oklahoma and the Guaranty Bank) all phased out deposit advance loans by 2014. Are they likely to offer them again?
Experts are doubtful whether bank payday loans will pick up speed. As financial institutions, banks tend to be very conservative to protect their public image. Associating deposit advance loans with payday loans will make them very reluctant to offer these loans. Banks fear that venturing into payday lender territory will tarnish their reputation, as people will associate them with unscrupulous lending.
What about UK banks? Let’s weigh the pros and cons of UK banks offering a bank payday loan and see whether it’s likely to happen.
The Advantages & Disadvantages of UK Banks Issuing Payday Loans
Pros of A Bank Payday Loan
Since banks are household names and guard their reputation jealously, they would be more likely to lend responsibly. As a result, borrowers would be more likely to trust them. With their presence on the High Street, banks would also be able to ask for supporting documents as proof of income and so on. With this advantage over online lenders, banks would be able to lend more confidently without relying on trusting their customers.
Also, with a possibly long-standing relationship with the borrower, banks would know more about their spending habits and financial behaviour. Their decision to lend money would, therefore, be less risky for them and safer for the consumer.
Cons of a Bank Payday Loan
The reputation of the payday lending industry is slowly improving since the FCA took over regulation. However, banks are very conservative in their practices and would perhaps be worried that some of this distrust would rub off on them.
Banks are institutions which look to the long-term. Larger loans are paid back over the years, and mortgages take decades. Some banks would think that the underwriting process of fast online loans wouldn’t be worth the return on profits. This is especially true as many banks are closing down branches and trying to do most business over the phone or online to save money. This extra expense may not be worthwhile to banks, which would again leave consumers stranded when they need short-term credit.
Furthermore, banks receive most of their fees from revolving credit facilities like credit cards or unauthorised overdrafts. There is a potential danger that they’ll overextend themselves by offering even more unsecured credit.
Are Banks Likely to Offer Payday Loans?
After weighing up the pros and cons of UK bank payday loans, it’s clear that it wouldn’t be worth their while to offer these loans. They already provide a wide range of financial products, so small cash loans would be redundant. If a bank customer needed some emergency funds, the easiest solution would be to request an overdraft. It would work exactly like a payday loan in this situation and be much cheaper.
The history and regulation of the payday loan markets in the US and the UK are entirely different. What works well in one country won’t necessarily be suitable in the other.
Even if banks started offering payday loans in the UK, they wouldn’t even be a threat to newly-authorised payday lenders. The application procedure for FCA registration is so thorough that a new lender’s business model has to pass controls before they can start offering loans.
So, would a bank payday loan be a safer option? Not necessarily. Banks would have to carry out the same credit and affordability checks as online lenders, so they would essentially offer the same quality product. All in all, bank payday loans do not seem likely to appear in the UK anytime soon.