Let competition curb payday lending excesses

By | December 16, 2013

Payday lenders draw heavy fire from fair-lending activists and community groups. Critics say they gouge low-wage workers who sometimes run short of cash when unexpected expenses arise between paychecks. And there’s no question that payday loan fees-500% or more on an annualized basis-far exceed the cost of credit for consumers who can borrow on credit cards or take out home-equity loans.

But payday lenders have a point when they respond that their loans fill a need other lenders won’t. Only the storefront payday lender is willing to lend people a couple of hundred bucks until payday. That loan can be crucial to a working person who needs money to repair the car that takes him or her to work, or pay a doctor’s bill.

Attempts to rein in abusive payday lenders with regulation haven’t worked. Lenders find loopholes around the restrictions.

What the payday loan market needs is competition from somebody with the resources to drive prices down. Somebody like Bank One Corp.

As Steve Daniels writes in this week’s issue, a coalition of activist groups is urging Bank One to offer a cheaper alternative to traditional payday loans. As part of a deal to win the coalition’s backing for its merger with J. P Morgan Chase & Co., Bank One agreed to consider it.

Bank One is studying a product offered by Wells Fargo & Co., the big San Francisco-based bank. Since the mid-1990s, Wells Fargo has made short-term loans to customers whose paychecks are directly deposited to accounts at the bank. The loan is repaid from the customer’s next paycheck, with a fee of $2 for every $20 borrowed, or an annualized interest rate of 120%. That’s steep, but a lot cheaper than current payday loan rates.

We like the idea. It’s a non-regulatory approach that uses competition, rather than regulation, to bring fair pricing to an inefficient market.