MADISON, Wis.—A new study seeks to find some answers to what is being called a “complicated relationship” between payday lenders and traditional institutions, such as credit unions, and suggests there are growth opportunities for CUs willing to make certain investments.
Using Winnipeg and rural Manitoba, Canada, as its focus, the Filene Research Institute study titled “The Impact of Two-Tiered Banking: How Credit Unions Can Bridge the Divide” probes the question of why payday lending outlets continue to be in demand?
“Do consumers choose them because they’re convenient or because they have no other option? Where are credit unions and banks?,” asks the study’s author, Marilyn Brennan, adjunct professor with the Asper School of Business at the University of Manitoba. The findings are “intriguing for anybody who cares about the complicated relationship between payday lenders and traditional outlets like credit unions,” according to the author.
The study uses location analysis to examine the hypothesis that mainstream financial institutions have played a role in the rise of payday lending in poor neighborhoods where traditional branches are absent or underrepresented. The study further examines the counterargument that payday lenders are not geographic substitutes for mainstream banking, but are instead complements, serving different segments of shared markets.
“Deregulation and technological change together with changes in demand for consumer credit have affected the distribution of mainstream bank services over the last 30 years, culminating in the advent of the payday loan sector,” Brennan said. “This report looks at the spatial relationships of payday lenders, banks, and credit unions relative to each other and to demographic and socioeconomic factors influencing location.”
The implications of the study will lead credit unions to “rethink (their) assumptions about payday lending, and suggest a growth opportunity for credit unions willing to make the investment in new markets overlooked by traditional banks, according to the author. Among those implications:
- Results suggest that the payday lending industry (at least in Manitoba) is not exclusively located in lower-income neighborhoods or solely focused in areas where there is an absence or reduced presence of bank and credit union branches. Moreover, except in Winnipeg’s inner city, newer payday lender outlets are almost always located next to mainstream banks and credit unions.
- Products seem to matter more than branches. Increased representation by bank and credit union branches is unlikely to reduce the number of payday lenders operating in an area.
- The preponderance and continued viability of for-profit payday lenders in the underbanked inner city suggests many things, not the least of which is a strong demand for transactional services. Credit unions and traditional banks naturally seek out profitable locations for branches. But because profitability comes to traditional institutions through a full mix of deposit and loan products, these mainstream institutions may be leaving behind the transactional needs of their communities. Credit unions may not be in a position to supplant the payday loan industry, but they may be able to ward off the worst effects in underbanked neighborhoods.
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