Inside Financial Services

A Good Word For Payday Lenders–From An Unlikely Source

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Lisa Servon, a professor of urban studies at the New School and one-time critic of payday lenders and the like, goes to work for a check-cashing firm—and sees the light:

 

[M]y customers . . . chose to use alternative and informal financial services because they found banks to be more expensive and confusing and less service-oriented. Many of my customers complained about banks’ rising fees. The average monthly service fee on checking accounts increased 25 percent in one year alone, from 2010 to 2011. Only 39 percent of noninterest-bearing checking accounts were free in 2011, down from 76 percent in 2009. And the average overdraft fee is now $32.74. . . .

 

Check cashers and payday lenders charge high fees, too — in New York State, 1.98 percent of the face value of a check to cash it, and an annual percentage rate, or A.P.R., of between 200 and 500 percent for a 14-day loan. But a money order at RiteCheck costs less than it does at the post office. And if you think of a bank account overdraft as a short-term loan, a seven-day loan would have an A.P.R. of over 5,000 percent. People pay these fees because they have few options, and because they need their money as soon as they can get it. [Emph. added]

 

Professor Servon, I salute you! Too often, critics of check cashers, payday lenders, and other non-bank providers are merely engaged in knee-jerk moral preening, and have little understanding of low-income consumers’ unique financial needs. They may not approve of the high fees and triple-digit APRs that the firms charge—but the fact is that those fees and APRs are as high as they are because that’s the only way providers can profitably offer their services. If someone can figure out a way to offer the same services at a lower price, he’s free to enter the marketplace and make a killing. That’s the way capitalism works. So kudos to the professor for having an open mind on the topic—and kudos, too, to the New York Times (there’s something I never thought I’d write), for giving her a platform for airing her views.

 

One small quibble, though: Professor Servon rightly notes that free checking is on the decline and that the fees banks charge are high and rising fast. But one reason for free checking’s demise is that regulators have begun to restrict banks’ ability to charge NSF fees. That’s too bad. Despite what you might think, NSF charges aren’t inordinately paid by low-income consumers. (Trust me, the world’s full of middle- and upper-income consumers who are either absent-minded or not that great at math.) The NSF fees higher-earning bank customers paid effectively subsidized free checking for low-income consumers. I for one think that’s a good thing, and I bet Professor Servon would think so, too. But it’s a little much, I bet, to expect a professor from the New School to urge regulators to use a lighter touch. In the meantime I’ll take what I can get.

 

What do you think?  Let me know!

3 Responses to “A Good Word For Payday Lenders–From An Unlikely Source”

  1. Avatar William Zimmerman

    It’s the “Passion Play” of the money lenders: Consumers hang from the cross between two thieves: pay day lenders and banks.

    • Avatar Bruce

      William,
      It sounds like there is a business opportunity there for you to pursue; a more consumer friendly lender.

  2. Avatar Rick

    I agree with you. The overdraft fees are looked at as cost of borrowing for people in trouble with their current fees. I had one client challenge me about the payday lender was cheaper than the bank. His account was over draft 8 days. The same guy borrowed money for 14 days from a payday lender. The bank fees were a little less because the guy over draft was 2,000. if His overdraft was 500 the pay day lender would have been cheaper.

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