Do Black-Owned Banks Substitute for Payday Lenders? An Exploratory Study

The annualized interest rate charged on payday loans can reach 1,950 percent, whereas similar rates charged by banks are typically less than 25 percent. Also, persons borrowing from payday lenders and paying the higher interest rates are disproportionately lower-income Blacks. This provides an incentive for Blacks seeking loans to turn to banks rather than payday lenders. This may be more likely to happen when there are Black-owned banks in communities with greater percentages of Blacks. Indeed, offices of such banks may substitute for payday loan stores, providing a greater opportunity for Blacks to avoid the higher interest rates associated with payday lenders. We hypothesize that to the extent Black-owned banks substitute for payday there is a greater opportunity for lower-income Blacks to substitute/switch firms and thereby seek lower-cost loans. We do find that there are significantly fewer payday loan stores in counties where there are more Black bank offices.

Only Sharks in the Tank

This chapter explores the coordinated relationship between banks and payday lenders by examining the recent attempts of the Consumer Financial Protection Bureau to regulate the payday lenders in Kansas City. While payday lenders and other higher-cost alternative financial services are criticized for their predatory practices, banks often escape a similar level of scrutiny despite their punishing fee structures and risk-based calculations. Both banks and payday lenders have largely escaped federal oversight. The disproportionate harms inflicted by payday lenders on Black and Brown communities are often treated as tolerable, perhaps considered causualties of doing business to dismiss these lenders from the oversight they deserve.

Regulation and Recent Trends in High-Interest Credit Markets

In this article we review the contested effects of traditional payday loans on borrowers and describe recent regulatory changes to the product. We then provide detail on the institutional features and regulation—to the extent that there is any—of new products emerging to fill demand that remains when payday loans are more strictly regulated. Little is known about the effects of these new loan products on borrowers. What is certain is that state restrictions have led lenders to modify their loans to narrowly evade restrictions on interest rates, loan lengths, loan sizes, and repayment procedures like allowing loans to roll over. We focus on the starkest changes to small-dollar credit regulation that have occurred recently, including the development of high-interest installment loans, so-called flex loans offered by payday lenders, and the fintech creation of earned wage advance products.

Online Payday Lenders: Trusted Friends or Debt Traps?

The recent Senate inquiry into credit and hardship underscored the prevalence of predatory conduct in the payday lending industry. The rise of digitalisation has increased consumer access to high-cost payday loans and the ensuing risk of debt spirals. The article examines the marketing strategies of online payday lenders, revealing that the effect of mandatory warnings on the risk of harm are often diminished through website layouts. At the same time, lenders commonly offer fast, convenient cash in tandem with blogs that provide advice on managing finances and living well on a budget, obfuscating the distinction between advertising and altruistism. The findings highlight the need for regulatory enforcement of laws aimed at safeguarding vulnerable financial consumers. Emerging challenges from the increasing digitalisation of payday lending and social media marketing raise the need for reforms to address gaps in the regulatory framework.

Financial inclusion, financial stress and debt

Exclusion from financial services in the form of bank accounts has fallen and appears less significant than informal borrowing and problem debt, which have increased dramatically and are strongly associated with poverty. The most common arrears problems are with housing, local taxes and utility bills, not consumer credit. About a fifth of households are not poor but exhibit similar signs of financial stress. Family remains more important than ‘payday lenders’ as a source of informal lendng,underlining the importance of social capital