In the last post in a four-part series, Andrew Morrison, a NILA member from Sun Loan Company, deliberates on wrong-footed policymaking, unintended consequences and the importance of safe, affordable small-dollar credit….
PART 4: TECH, TECH, TECH, THE CLOCK IS TICKING
For people in the policy-making business who don’t know about the Traditional Installment Industry (far too many of them), there seems to be a desperate need to discover and endorse anything as an alternative to payday and title loans. If banks are not the answer, and I hope that was demonstrated in Part 3 of this series, then what else is there?
The Center for Financial Services Innovation (CFSI), was pretty much formed to find a solution, which is mildly amusing, but also a little frustrating to those of us who have been providing that solution for generations. There seems to be an assumption that installment lenders are dinosaurs, and that before long, some shiny new product will emerge to consign us to the scrapheap of history. Well it hasn’t happened yet, and don’t hold your breath. Still, in the meantime, let’s take a look at the most popular suggestions:
a. Credit Cards. Not really new now. On the plus side, they offer convenience and a low rate. On the other hand, the low rate is based on the assumption that you will enjoy the convenience so much that you will build up a hefty balance over time. And many do. Structurally, cards are no better than payday loans. Rather than offering a straightforward pathway out of debt, the way a fully amortizing installment loan does, the result for many is mounting, chronic indebtedness.
b. Cards have become such a problem, and balances so high, that another entire industry has grown up promising to deal with it, and pay them off. This is the “fintech” model. In essence, this says people don’t want or need a physical office to visit. They can, and would prefer, to find a loan on their computer. Of course, nowadays you can apply for a traditional installment loan on your computer too. Everybody’s got algorithms these days. Even me (and I can’t dance.)
The fintech model has a few problems: once you’ve paid off that debt, the average credit card borrower will just start to build it up all over again. Second, if what you’re offering is that you don’t actually need to meet the borrower, fraud skyrockets, and, having no relationship with the borrower, your loan is a one-time transaction. That dramatically increases both the rate of default and their cost of acquisition, as Fintechs must spend millions on marketing to replace the customers they had.
After suffering some heavy and entirely predictable losses, fintech has pretty much given up on the subprime space, which is where the real issue is, and is building its model on prime and near prime borrowers, with larger balances. (Incidentally, many of these prime borrowers were able to become so because they built up a track record borrowing from a traditional installment lender. But that’s another story.)
What is often missed here is that bricks and mortar really add value. For marginal credits and marginalized communities, the opportunity to build up trust, to build a real relationship with a lender, is critical, and it works both ways. It is good for both borrower and lender to think they might run into each other at Walmart on Saturday and at church on Sunday. Mutual accountability and responsibility receive positive reinforcement from being in a real community. And if times get tough, there’s a real human being you can talk to.
Robo collection calls from foreign countries do not constitute a relationship. Right up there with the nuttiness of rate caps is the tendency of some more shameless activists to denigrate what they call “storefront lending,” as if the product itself was immaterial, and what was bad was that the lender operated from a physical bricks and mortar location. Seriously? That’s what’s good!
c. The latest fashion, yes later even than fintech, is an attempt to revive what in the bad old days used to be called the company store. The idea is that people can take an advance on their salaries or wages from the boss, who can easily collect what’s owed by deducting it at source from their paypackets.
“16 Tons, and what do you get? Another day older, and you’re deeper in debt. Singing… I owe my soul to the company store.”
The ethical and privacy issues are a little scary for some: do you really want to borrow money from your boss? How is that conducive to a happy and healthy workplace? And what if someone leaves, or is fired, or should be fired? This model worked much better, of course, in the bad old days, when everyone worked for a giant corporation, and had no choice but to do so for their entire working lives. The economy is much more diverse and more fluid today. And what about the millions who are self-employed, or work several low paying jobs, often in what is called the cash economy, the people who are most in need? Just as fintech wouldn’t help them, no more would the company store. Creaming off those who are lucky enough to have jobs with major employers risks narrowing the market to such an extent that it might not be large enough to sustain a company serving the remaining borrowers. Like rate caps, this model is selective and discriminatory. It favors the few, and turns a blind eye to those most in need. Companies can do what they want, of course: arguably, it is in their interest to become the convenient, first choice lending option for their employees. But this should never be part of any responsible public policy.
Meanwhile, while the search continues for the unicorn of small loan credit, a whole industry of installment lenders ploughs its lonely furrow, making safe, affordable loans, underwritten and fully amortized, repaid in equal payments comprising both principal and interest, helping borrowers to meet their credit needs, consolidate their debts and build a credit history which allows them greater financial mobility….