Direct loan industry legitimized by banks?

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There was once a day when traditional bankers scoffed at payday lending operations. The contempt was real, and in many ways understandable. Many executives argued that what these rough-and-tumble outfits practiced wasn't banking; it was usury.

But the industry has changed considerably over the past few years, and banks nowadays are in need of every extra fee dollar they can manage. That has led some banks to essentially embrace the business model.

This has been exceedingly controversial as of late, as critics accuse the banks of lowering themselves to the level of usury. Banks say they are providing a valuable service and brining a higher quality product to market.

While the old-school payday lenders, who prefer the term online lender, have reason to fear the competitive inroad made by traditional banks, they also have benefitted. They can now claim that their industry has been legitimized. "Wells Fargo, U.S. Bank and Regions Financial are now offering short-term cash advances or direct deposit loans to their account holders. This appears to be an indication that what was once thought of as a controversial form of short-term financing is now gaining popularity among consumers and acceptance among traditional banks," argues Cash Advance USA.

It went on to note a Bankrate.com article in which "all the bank spokespersons echoed the benefits of direct deposit loans. Richele Messick Wells Fargo spokesperson explained how this product was necessary to help customers through an emergency situation. Teri Charest, spokesperson for U.S. banks said the product was created for 'unexpected, short-term borrowing needs.' And Evelyn Mitchell of Regions noted that the product is intended to help Regions customers every once in awhile with urgent credit needs."

To be sure, big banks face more criticism as they drive more aggressively in this area. Wells Fargo, for example, was beaten up pretty good at recent Senate hearing.

In the end, if the fee revenue is solid, management will be willing to take the hit, even as other big banks, like JPMorgan Chase, take steps to better protect customers from some  online lenders.

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