CFSA Exec “Skeptical” About Banks Entering Short-Term, Small-Dollar Lending Industry

Last month, both the Office of the Comptroller of the Currency (OCC) and the National Credit Union Administration (NCUA) issued proposals to allow banks and credit unions to offer short-term, small-dollar lending products. In an article published this week in American Banker, Dennis Shaul, Chief Executive of the Community Financial Services Association of America (CFSA), argues that banks have historically found trouble in offering these kinds of products.

Responding to the OCC bulletin, Shaul writes that he is “skeptical that banks and similar lenders will actually offer this vital form of credit to the millions of consumers who need it, because the truth is, banks largely find loans of a few hundred dollars unprofitable and unsustainable due to the high cost and risk of offering these products.”

CFSA represents non-bank lenders that offer small-dollar credit products and other financial services.

“If banks truly could serve the small-dollar loan customers profitably, they would,” Shaul also writes. “Instead, they have in large part abandoned certain communities, leaving them underbanked or unbanked and writing them off as poor prospects.”

This is not the first time that traditional lending institutions have dabbled in short-term, small-dollar products. In 2009, the FDIC tested a pilot program to explore the viability of banks offering small-dollar loan products with a 36 percent interest cap. Banks largely found these products unprofitable, which made them hesitant to become full players in the arena.

According to a 2015 study, 7.0 percent of households were unbanked, and an additional 19.9 percent of households were underbanked, meaning that the household had an account at an insured institution but also obtained financial services and products outside of the banking system within the past 12 months.