Following intensive pressure by our grantees and other consumer activists—and amid growing regulatory scrutiny—three major banks announced that they are discontinuing their deposit advance services. These “bank payday” products are very short-term loans secured by the account holders’ next direct deposit.
In addition to being incredibly expensive (as much as 300 percent APR), because the full amount of the loan is immediately taken out of the account on the next deposit, families are forced to take out the loans month after month to make ends meet. Payday loans have typically been offered by storefront lenders, and the availability of an equivalent product from a more mainstream, government regulated institution gives the loans a veneer of security that makes them especially insidious. The end of bank payday is a huge win for financial justice—and represents a huge opportunity.
Because certainly, getting rid of bank payday leaves low-income consumers in need of useful small-dollar financial products. At the same time, banks are weighing new services to introduce in place of deposit advance, and they have an opportunity to consider alternative products that pass both a consumer and regulatory bar—some of which are being developed by our grantees. These include short-term credit that is underwritten based on factors other than credit score, and loans that offer incentives for repayment or are structured to help consumers save at the same time.
“Stopping the bad opens up market demand for the good,” says Amy Brown, program officer in our Improving Access to Financial Services initiative. “So we’re really maximizing our impact: protecting consumers against harmful products and also identifying and generating interest in the better products that can take their place.”