The FDIC’s Small-Dollar Loan Pilot Program is a two-year case study designed to identify best practices in affordable small-dollar loan programs that can be replicated by other financial institutions. The FDIC recently published results from the first year of the pilot program. So… can banks profitably issue small dollar loans with lower fees than payday lenders?
The FDIC thinks so. Here's their conclusion:
After one year, the FDIC’s Small-Dollar Loan Pilot Program has provided evidence that banks can offer reasonably priced alternatives to high-cost, short-term credit.
But we are not so sure. Here's a snapshot from the FDIC report:
It shows that while a number of lenders are participating, the volume of loans is quite small. Almost any bank could issue a small number of small loans if the profitability is not an issue.
The question remains: can big banks profitably issue short term loans to lots of consumers?
Payday lenders are set up to do this quite efficiently. The demand for the product is high (many payday lenders issue as many loans in a week as all of the FDIC pilot banks did in a year), and payday lenders are able to do it despite high chargeoff and loss rates.
It would obviously be better for consumers if they were able to get short term, small dollar loans from their local banks. However, we believe the reality is that they can't… and won't, despite the good intentions and work by the FDIC.
What do you think?
By the way, you can read the FDIC report here.
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