Small dollar consumer loans gain traction at big banks

Six of the eight largest banks in the US by number of branches now offer small dollar loan products to cash-strapped customers, a radical departure from five years ago, when such consumer-friendly offerings were rare .

Since last fall, Wells Fargo, Truist Financial and Regions Financial have joined Bank of America, US Bancorp and Huntington Bancshares to offer low-cost loan programs, according to a recent analysis by Pew Charitable Trusts. Of the eight largest banks by number of branches, only JPMorgan Chase and PNC Financial Services Group continue to hold out.

There is increasing pressure for more banks to implement these types of products, which Pew sees as safe and affordable options compared to expensive payday loans and other alternative financial services, such as car title loans and lease contracts. Rent with option to buy.

One of the main reasons more banks are launching small dollar loans: joint regulation guide issued in 2020 that encouraged banks to offer loans that help customers with their short-term credit needs, said Gabe Kravitz, an official with the Pew Consumer Finance Project.

“That guidance is having a measurable impact,” said Kravitz, a co-author of the Pew analysis. “That’s what we see as the big change. Five years ago, no bank offered these small installment loans.”

The launch of small dollar loan programs at Wells, Truist and Regions coincides with policy changes related to overdrafts at each of those banks. Over the past 18 months, those three banks and others have taken steps that will reduce the amount of revenue they collect from overdraft fees, such as reducing or eliminating overdrafts and insufficient funds chargeseliminating certain account transfer fees and introducing grace periods for customers who overdraw their accounts.

The reforms have come in response to competition from the fintech industry and other banks, as well as demands from lawmakers and regulators that banks review their overdraft practices. Critics have long argued that charging fees for overdrawing an account is especially damaging to low-income consumers who live paycheck to paycheck.

Since May 2020 regulatory guidance, issued by Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Reserve Board, and the National Credit Union Administration, the FDIC has issued additional guidance to the banks it oversees in an effort to crack down on the practice of charging multiple non-sufficient funds fees on the same transaction.

And Rohit Chopra, director of the Consumer Financial Protection Bureau, has said the agency continue your research of overdraft practices by targeting the largest banks that rely heavily on such fees for revenue.

Not everyone agrees that overdraft reform is necessary. Lindsey Johnson, president of the Consumer Bankers Association, wrote in a July 2022 American Banker op-ed that “Overdraft remains one of the few short-term liquidity products available to consumers.”

JPMorgan Chase, the nation’s largest bank by assets, also operates the most branches: a total of 4,787 as of December 31. The megabank, which now has branches in 48 states, currently does not offer a low-cash loan product. confirmed a spokesperson.

Neither is Pittsburgh-based PNC, which operates some 2,500 branches in several states. There are no short-term plans to launch one, a spokesperson said in an email.

However, both banks have enacted other policy changes related to overdrafts. JPMorgan increased its overdraft protection from $5 to $50, which means customers are waived for overdraft service fees when their account is overdrawn by $50 or less at the end of the day.

PNC stopped charging non-sufficient funds charges on all consumer deposit accounts last summer. Previously, the PNC inserted a digital service called Low Cash Mode that warns consumers about upcoming payments that will bring their account balances below zero. The service gives customers 24 hours to prioritize payments, block transactions, and add funds to their accounts.

Other banks, including Wells, Truist and Regions, are offering small dollar loan options.

In September, Regions introduced a digital line of credit that provides overdraft protection of $50 to $500 to eligible customers. There is no annual or cash advance fee, and once approved, the line of credit is automatically linked to the customer’s account for overdraft protection.

The product is part of a series of changes the Birmingham, Alabama-based company made last year to its overdraft practices, which have come under scrutiny by the Consumer Financial Protection Bureau.

Most recently, Regions was tidy last September to pay a $50 million civil money penalty and refund at least $141 million to customers who were charged a type of overdraft fee that applied to certain ATM withdrawals and debit card purchases. Regions did not admit wrongdoing.

At Truist, a program called Cash Reserve offers an unsecured revolving line of credit. Eligible customers, who can access the program through online banking, receive a line of credit that provides between $5 and $750 in funds to help prevent declined transfers and overdraft fees, and help cover emergency expenses, depending on Truist’s website.

Truist filed Cash Reserve in mid-December, a spokesman said. The product is part of Truist One Banking, a suite of more consumer-friendly products. introduced last yearwhich includes two checking accounts with no overdraft fee.

wells thrown out its small dollar loan product in select markets beginning in November. Dubbed the Flex Loan, the product gives eligible customers access to $250 or $500 for a flat fee of $12 or $20, respectively. The loans must be repaid in four equal monthly installments, the bank said.

The number of banks offering small dollar loans is expected to increase, Pew’s Kravitz said. Pew has previously estimated that such loans are at least 15 times less expensive for borrowers than payday loans.

Millions of customers who turn to small dollar loans instead of payday loans and other forms of alternative financial services could save billions of dollars a year, Kravitz said.

“When people talk about high-cost non-bank loans, often the reason for such loans is that banks haven’t served customers with small loans and high-cost lenders are filling the gap,” Kravitz said. “But that logic is going to go away, which is momentous.”