Economist Christopher Thornberg has provocative column on payday lending in the Los Angeles Times. Great quote from the piece:
Despite high fees, people continue to use payday lenders with some frequency. Fool me once, shame on you; fool me eight or nine times, and clearly something else is up. It might be easy to accuse the firms of taking advantage of people and earning unfairly high profits, but if profits are so high, why hasn’t there been a mad rush by the very competitive banking industry to provide these services in underserved neighborhoods? Given my personal financial institution’s predilection for hidden fees and what would seem to be unfair charges for even simple services, I wouldn’t chalk it up to an ethics issue.
He goes on to advocate competition as the best answer to payday lending. That’s something the industry has said for years. Competition drives prices down and serves consumers best.
Well, there’s plenty of competition here in Los Angeles. But the payday lenders stay in business.
We advocate for choices for consumers so that they can have continued access to credit. Approximately 19 million households a year use the payday advance product, producing a total of 120 million transactions. While access to credit (both in the number of institutions and the amount of credit available) has decreased over the past few years, consumer demand continues to grow. Policymakers and small-dollar credit providers must find the right balance between product sustainability and ensuring affordability, while protecting consumers in ways that do not overly constrict product offerings. At some level, restrictions that are too tight on providers could make it unviable to offer small-dollar loans to the underserved, causing regulated companies to exit the market and leaving consumers without access to legitimate consumer credit.