Are banks and state governments unwittingly colluding to prevent millions of Americans from being able to afford to pay their bills or profitably run their small businesses? Several pieces of economic data have raised serious questions about the ability of a whole subsection of Americans and small business owners to take the first steps toward building wealth — namely, lack of credit.
For many Americans, this will preclude their ability to meet short-term financial commitments let alone achieve long-term financial stability. What is driving these negative trends in consumer and business credit? It is the same banking regulators who are supposed to be looking out for and protecting consumers. In fact, the constriction of consumer credit is the product of banking regulators who have continued to add to the hurdles that banks must meet to make loans, including raising the banks’ reserve requirements. As a result, it makes it nearly impossible for the banks to meet the credit needs of this growing population of Americans — nearly 100 million strong.
Imagine Americans with stagnant wages trying to meet their household financial obligations, save for college and even retirement. It is daunting even without access to credit. What about small business owners with declining revenues who should be driving job growth? Even in good times, they depend on their access to credit to manage their cash flow, cover operating expenses, meet payroll and — gasp — health care and other benefits. Although these non-traditional financial service companies have long been vilified, they provide critical access to much needed credit, as well as the only way millions of others can establish and build their credit.
It may surprise you that these non-bank financial service providers include pawnshops, payday lenders and short-term loans. As importantly, they also provide other invaluable products such as reloadable debit cards and installment loans. Yet, most people’s knee jerk reaction when they hear the words “payday lender” is to accuse these businesses of predatory lending practices because of the “excessively” high interest rates. But are they really excessive? One of the most fundamental financial principles states that the greater the risk, the greater the return. In other words, these lenders need to charge an interest rate that compensates them for giving high-risk consumers money who have a history of abysmal financial management, not paying their bills, or leaving others holding the bag. The default rates are, in fact, excessively high for these businesses.
One company leading the way in non-traditional finance is Cash America International. This company is based in
Institutions like Cash America are no different than banks or credit card companies. Is paying a 30 percent interest rate on your Visa card any better than getting a payday loan or using your car as collateral? Even with the much lauded financial reform of late, consumers can still suffer from costly overdraft fees that equate to a much more punitive interest than the rates offered by payday lenders and others. Let’s not pretend that banks and credit card companies want to care and protect their customers more so than non-bank lenders. Traditional finance institutions are in it for one reason: Money. It took an act of Congress to get mainstream financial institutions not to reap the benefits of preying on consumers through overdraft fees — to the tune of $65 billion last year. These same banks are happy to hand out credit cards like candy and bury middle class Americans in a mountain of debt and ever increasing interest rates while taking government bail-out money to cover their own poor decisions. Those establishments don’t like the fact that non-bank lenders are cutting into their business by offering products that meet a growing need in the market and provide access to credit.
Despite complaints, people from every point on the political spectrum can agree there is a terrible lack of options for people who need to access credit or need to meet their financial obligations. So why don’t traditional banks step up? One possible reason for this predicament may be that banks and credit unions have a federal oversight, whereas non-traditional providers, who have the potential to serve 100 million Americans, are at the mercy of state legislation.
Representatives of Cash America claim the main reason for offering such a limited number of products in these communities is due to state laws that do not allow them to develop and offer a full range of services. Apparently, if you are a non-bank lender, every product you offer must be passed into law by each state legislature. Those costs will be passed through to consumers in the form of higher interest rates. That cost is magnified when these providers need to comply with 50 different state laws. Imagine the great burden — and cost — that this must place on any company trying to create new financial products.
In the absence of domestic providers of non-traditional services, consumers have much more costly options such as going to offshore businesses that are largely unregulated. They can charge consumers a fee of $50 per $100 in the absence of any oversight. In states like New York, where there is virtually no small dollar or short-term lending allowed, countless numbers of New Yorkers (estimated to be as high as 100,000) are conducting financial transactions with overseas providers in a totally unregulated atmosphere. Even free marketers can see the need for enforceable rules and adequate oversight to make sure people are being treated honestly and fairly, a situation that does not exist in this offshore market place.
At the heart, protests center on the belief that law abiding Americans cannot handle the responsibility of making tough financial decisions themselves. Before every transaction, fully read and understand the terms of the contract. We need to encourage and nurture personal accountability, not retard its development. Everyone can comprehend that if you put up something of value for cash-in-hand, you are going to lose that valuable if you don’t pay the loan. By taking the stigma and legal limitations away from non-traditional lenders, Americans can lay all the cards on the table and confidently decide which financial institution best serves their needs and abilities. When it’s all said and done, cooler heads must prevail.