We’ve offered both check solutions and ACH payment processing solutions to payday lending merchants since shortly after Instabill opened shop in 2001.
Payday lending, which has always been a controversial industry, is about to get more interesting.
The industry has been on a roller coaster ride within the last five years, with states imposing regulations on merchants as well as the crackdown by the Consumer Finance Protection Bureau (CFPB), which has since somewhat backed off the industry.
A recent article in Consumer Affairs detailed how the federal Office of the Comptroller of the Currency (OCC) is urging banks to begin offering small installment loans to consumers, potentially making the lending industry – with payday lenders, online lenders and likely banks – a hotbed of competition.
The criticism on payday lenders – and why it might change
The payday lending industry has always had a large, passionate opposition. The main argument against payday lenders is that many are known to keep consumers in a cycle of revolving debt, unable to escape due to outrageous interest rates. As a payment processor that provides ACH payment processing solutions to lenders, we applaud the many states which have imposed regulations, though many merchants still charge interest rates as high as 30 percent.
Further enhancing the opposition’s cause is the fact that the vast majority of payday lending clientele are those with little means, living beyond those means, paycheck to paycheck. Consumers turning to payday loans borrow anywhere from $300-$5,000, are assessed a fee, and usually have two weeks to make good on it, contingent on the size of the loan. Consumers approach payday lenders when faced with sudden costs, such as an injury, car repairs or home expenses.
The majority of consumers don’t think about the repercussions of making good on loans, such as the length of time it takes to pay it off and the amount of interest incurred over time.
Competition is surging in the lending industry – only growth expected
In recent years, online lenders — such as On Deck, SoFi, and FreedomPlus – have turned the lending industry on its head, jumpstarting a need for good ACH payment processing solutions. We know one restaurant merchant near our home office in Portsmouth, N.H., USA, who needed to make necessary upgrades to his building, sooner rather than later. When he approached a bank for a loan, he was told his approval could take 4-6 weeks. Unable and unwilling to wait that long, he approached an online lender and had the necessary funds within a week.
While approvals from banks can take weeks, online lenders can use fast approvals to charge a higher interest rate. Generally, consumers prefer not to wait.
Thus, with the Office of the Comptroller of the Currency recommending U.S. banks begin offering small-dollar loans to consumers, several changes could take place.
- The ripple effect from added, diverse competition among lending entities is going to trigger a need for the ACH payment processing solutions as well as other check solutions. We’ll go a step further and predict payment processors and banks will begin offering value add-ons with their ACH solutions.
- Increased competition in the lending market could additionally see payday lenders, online lenders and banks engage in an interest war to entice consumers.
- In the past, banks have taken weeks to grant consumers approvals, even for small loans. If banks want to be contenders in this suddenly crowded market, approval windows must be significantly smaller – perhaps no more than a week – to compete with alternative lenders.
- The CFPB always had the payday lending industry in its crosshairs. As the CFPB has somewhat deflated, it could be alleged that the urging of banks could be the feds’ way of keeping payday lenders at bay by creating competition. A recent study by the Pew Charitable Trust found that 8 out of 10 consumers who use payday loans as a means to ‘get by,’ prefer to use their own banks to borrow money.
ACH payment processing solutions found here
The great thing about offering ACH payment processing solutions is a fast approval. With the proper KYC documents, Instabill can align your business with one of our acquiring banking and have your business accepting money transfers, checks and ACH payments.
We’re happy to discuss our solutions by phone at 1-800-530-2444.