Payday Lending: Serving the Unbanked

The last few decades have witnessed many innovations in the consumer finance industry. Consumers enjoy a myriad of credit programs tailored to their particular needs: credit cards, home equity lines of credit, payday cash advances, etc. Unfortunately, all these options create problems too, as the attendant responsibility of money management has left many individuals struggling to service their debt. Nevertheless those who do not avail themselves of these services find themselves marginalized in an economy structured around the use of financial assets.

Enter the Center for Responsible Lending, a government think-tank dedicated to preventing consumers from making unwise choices concerning their finances. Of particular concern to the Center is a segment of society dubbed the "unbanked." Roughly 7% of families hold absolutely no financial assets (bank accounts, retirement accounts, life insurance, etc.). The unbanked are primarily comprised of the poor (51% earn under $10,000), and of ethnic minorities (53% are Black or Hispanic). By not participating in the financial mainstream, the unbanked miss out on the convenience, security, efficiency and wealth-building opportunities that financial institutions offer. Organizations like the Center for Responsible Lending seek ways to improve the position of the unbanked by forcing them into the financial mainstream.

In a recent study, the Center took to task an industry that offers services to the unbanked, the so-called "payday lenders." Payday lending refers to short-term loans designed to tide borrowers over until their next paycheck. The Center argues that payday lending companies charge "predatory" fees that ensnare the unwary borrower into a debt trap of repeated loans—each loan used to pay off the previous loan. The payday lenders are analogous to drug dealers, addicting their clients, then bleeding them dry, and ultimately leaving behind blighted communities. Payday lending, which sprang up more or less naturally from the free-market process, may thus be an example of market failure needing the remedy of government abolition or regulation.

By : Mike Foley