LAKE FOREST, Ill.—Payday lenders, despite their bad reputation among consumer groups and in Washington, will continue to steal credit union business unless CUs decide to make some changes, and that includes no longer “seeing the work of the devil,” asserts one economist.
Those changes involve overdraft pricing and limits, and also staffing, said Michael Moebs, economist and CEO at Moebs $ervices, which has just completed a new study on payday loans.
“Should banks, and especially credit unions, be doing short-term credit different? Most definitely,” said Moebs. “All depositories, especially credit unions, need to change their ways. Overdrafting has become a way of life. Payday lenders recognized this over 10 years ago. This is why charging based on end-of-day balance with a term of 14 days, coupled with the lowest price in town, is beating the depositories.”
Moebs said payday lenders view the consumer not as people who have made errors, but simply as people needing a loan.
“Banks and CUs still view a negative checking balance by a transaction as unauthorized, unsecured credit, which should be punished,” he said. “Many a preacher has disparaged payday loans and overdrafts as the work of the devil. Yet, over 80 million Americans have used one or the other, or both, and often more than once. ”
On the lower-dollar end of the short-term loan market, payday lending has been the best choice for many Americans until Bank of America and Walmart lowered their prices in 2021, noted Moebs.
“Banks really do not like to do ODs. This is why for the most part banks are keeping their overdraft price high,” said Moebs, who added many large banks, such as BofA, have in the past year either cut or dumped OD charges. “Chase Bank is an example of this at $35 an OD transaction. CUs need the OD money to have a positive net income in order to grow. CUs need the high price of $30. Anything less reduces net income. Both banks and CUs are stuck in the past—but for different reasons.”
Overly Reliant
Moebs emphasized that credit unions rely too heavily on fee income, especially overdrafts, to drive the bottom line. And they are far less efficient than banks—having two employees to every one for a bank.
“Net fee revenue from overdrafts is 15% of net income for most depositories, but 44% of net income for all credit unions,” said Moebs. “Our new study on payday loans plus ODs determined the median end-of-day overdrawn balance for Americans short of funds is about $40. The median charge for a payday loan of this amount is $17.65, while an overdraft is $30. The difference of $12.35 is 41% less at a payday lender.
“So, if you have a cash crunch, where do you go?” continued Moebs. “A $100 payday loan is the lowest price option by far (see chart) for a term of 14 days. Yet, payday lenders have a reputation worse than Scrooge.”
What CEOs Have Said
Moebs said during a recent state conference of CU CEOs, executives said they were steadfast in keeping their overdraft price at $30.
“Banks and thrifts will be able to withstand payday lending competition, but many CUs who rely on overdrafts for net income will suffer the loss of revenue substantially unless they quickly adapt to the new OD environment,” said Moebs.
Moebs pointed out that even with 12 states now having banned payday lending, the service flourishes.
“The number of payday lenders has fallen by over 60% to about 1,000 payday lending firms, yet the number of payday locations has increased over 50% over the last 10 years,” Moebs reported.
Steps to Take
Michael Moebs
Moebs recommended steps FIs can take to more effectively battle payday lending:
- To counter payday, lenders should make substantial increases in OD limits—such as Bank of America’s new $5,000 limit, which is working.
- “Reducing the OD price, like Bank of America and Walmart have done in the past year, will actually increase revenue. ODs are no longer a penalty, but an error and payday lenders are using this approach and winning,” noted Moebs.
“The bottom line is payday lenders have adapted to meet consumer needs and wants, while their bank and credit union competitors have continued with business as usual,” concluded Moebs. “COVID has made this remarkably clear. To the American consumer, overdrafts are a way of life which the payday lenders are delivering at lower prices, thus threatening overdraft revenue at depositories—mainly at credit unions. The evil and sin attached to payday loans and overdrafts are vanishing.”