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Friday, December 11, 2009

Banks not always the way to go

Even as the FDIC looks for ways to get more people to use banks instead of short term loan services like pawn brokers or payday loan operators, the FDIC’s own report is evidence that banks don’t want to be in this business and they aren’t good at it.

In 2007, the FDIC set up a program for 30 banks to offer short-term loans of up to $1,000, at a maximum APR of 36% but it had some hitches in its giddy up. breaks it down thusly

While payday loans are approved in a mere 15 minutes, most of these FDIC-sponsored loans took more than 24 hours to approve — failing consumers who needed their funds immediately; some required direct deposit, credit checks and possibly a financial literacy class or collateral (none of which are required for a PDL); some required a portion of the loan be put on deposit (not part of the PDL process); only a few thousand loans were made because of said inconveniences (compared to 100 million loans annually for PDLs due to their convenience); and none of the institutions actually made a profit while some lost money, even when including an origination fee of up to $50 (whereas PDL’s profitability allows them to be widespread and easily accessible).

This is a class of customers who want one thing. They want cash and they want it fast. They do not want to buy and add-on. They do not want to listen to your upsell pitch on how they can invest the rest of the money that they don’t have. They want to walk in, stand in line, sign the papers and go pay their electric bill.

I did find one flaw in big governments comments though (from looking at the FDIC report), some banks did make a profit on these services. But those banks were already providing them to the public. So there was no reason to offer incentives to the banks to do them. Even then it wasn’t a significant source of revenue to the bank, so they were primarily an opportunity to upsell to other bank services.

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