The world of high risk merchant processing is never boring. Now it’s the lending industry that’s about to face its most significant disruption…maybe ever.
While the payday loan industry for years was in the crosshairs of Operation Choke Point, the Consumer Finance Protection Bureau’s effort to squeeze out certain high risk industries, it survived (Operation Choke Point has since flamed out). But the lending industry will arguably be facing its biggest challenge yet: competition from banks.
It’s ironic: As Operation Choke Point aimed to weaken the payday loans industry, who knew the folks behind it were taking the wrong approach? Competition was the answer.
U.S. Bank recently launched its new lending program, Simple Loan, in which it offers consumers quick, small loans — up to $1,000 — for unexpected expenses with low interest. It should all sound familiar except for the part about low interest.
More banks are guaranteed to follow U.S. Bank’s lead. And payday lenders will have no choice but to change their models in order to compete.
Payday lenders will have to adapt (re: lower interest rates)
Everyone in the high risk merchant processing industry saw this coming.
For years, the knock on payday lenders has been the typical astronomically high interest rates they pose, often draining money from consumers and keeping them in a prolonged cycle of revolving, worsening debt. For example, most payday loans need to be repaid within two weeks. If the consumer fails to make good, they’ll take out another loan, and another, falling further behind.
In fact, many states have stepped in to impose caps on loans and interest rates, which remain high.
U.S. Bank’s Simple Loan program works as such:
- Upon the application approval, consumers may borrow up to $1,000 in $100 increments, and pays the loan monthly until paid in full.
- S. Bank charges a $12 fee (for automatic payments from consumers’ checking accounts) and a $15 fee for manual payments for every $100 borrowed. For instance, if a consumer borrowed $300 with automated monthly payments, s/he would pay back $336.
- Borrowers must have a checking account with U.S. Bank with three months of direct deposited funds and a social security number.
This is not the end of payday lending
High risk merchant processing providers need not worry. This isn’t the demise of the payday lending industry.
However, it’s simple math. Which entity will a consumer choose in a situation of urgent financial need: A bank which offers relatively low fees and flexibility, or a payday lender which has very high interest rate and non-negotiable windows for settlement?
To compete with the likes of U.S. Bank, payday lenders will be forced to revisit (and lower) their interest rates, but they will still be able to draw clientele. The U.S. Bank Simple Loan has a cap of $1,000 while payday lenders often offer loans for much higher.
A boost for ACH?
It is safe to say the majority of consumers enrolling in U.S. Bank’s Simple Loan will opt for the $12 option, to repay the loans in automatic installments (we hope anyway). As Simple Loan grows more popular — which it will — and other banks roll out similar programs, the result will be a boon to ACH transactions, strengthening its value as a necessary payment option.
High risk merchant processing with Instabill
Along with payday lending businesses, Instabill has proven payment processing solutions for high risk businesses. Behind our network of partnerships with domestic, international and offshore acquiring banks, we find custom high risk merchant processing solutions for merchants who often have difficulty.
We encourage you to telephone us for an initial conversation at 1-800-530-2444.