Banks' role in payday lending stokes controversy


There once was a day when banks large and small sniffed with utter disdain at payday lenders. Many executives agreed that they were effective shakedown artists preying on lower-income, under-banked folks. But then along came the financial crisis and credit card reform in the form of the Durbin Amendment, and banks suddenly found themselves desperate to offset a severe reduction in debit card interchange fees.

That has prompted more banks to enter the realm of payday lending, under a different name (direct deposit loans) and under the guise of improving such services. More than two dozen banks and credit unions have started offering such services, including the likes of Wells Fargo.

A recent New York Times raps mainstream banks for allowing direct withdrawals from Internet-based payday lenders to their clients, calling banks "behind-the-scenes allies." Banks say they are simply allowing such withdrawals at the request of customers.

"But state and federal officials are taking aim at the banks' role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash," according to the NYT.

Banks remain in dire need of new sources of revenue, and withdrawals from small customers can often trigger fees, which are hard to say no to these days. The actual lender of course benefits as well, as they receive payments the instant funds hit the account, which can help reduce the default rate. 

From the lender point of view, these direct withdrawals are a great idea. But if the financial crisis aftermath has taught us anything, it's this: Do not underestimate the power of broad consumer anger. If the furor over these loans and the industry's role continues, banks may be forced to make some adjustments.

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