We couldn’t have said it any better. Talk about a reporter that gets it. Yesterday’s article in the Richmond Times-Dispatch, which took on the topic of storefront payday lending, is a perfect example of a sober economic analysis without the emotional criticism.

While A. Barton Hinkle poses the question of whether storefront lending is a convenient service or evil incarnate, the crux of the article really points to what happens when lawmakers “crack down on payday lending.” Virginia lawmakers recently changed loan terms and placed limits on the number of loans consumers could have at one time. As one might suspect, many payday lenders left the state, and the number of transactions dropped by more than 80 percent—but the demand for short-term credit certainly did not vanish. In fact, Hinkle points out those borrowers in need of payday loans will migrate to other short-term credit options, even if they are more costly.

“This is probably a fool’s errand; shutting down lenders won’t make demand disappear,” Hinkle said. “Borrowers in need of quick cash may just cross jurisdictions — or turn to even more risky sources, such as the Internet.”

And finally, a reporter who really drills down to the cost comparison of products that compete in the short-term credit market.

…”critics insist the interest rates charged by storefront lenders are so high they’re immoral. But it’s the critics, not the lenders, who are being dishonest. Here’s why:

Suppose Milton borrows $250 from a storefront lender and pays it back two weeks later. The lender charges a standard $15 fee to pay his employees, his utility bill, and so on. That is 6 percent of the loan amount. Yet critics want to express that as an annual rate — which, in this case, would be 156 percent. This sounds outrageous. What it really tells us is not that the lender’s greed is huge — but that the loan amount is small. A $15 charge on a two-week, $10,000 loan has an APR of only 3.9 percent, even though the transaction charge is exactly the same.

Banks and credit unions don’t usually offer the sort of financial services storefront lenders offer. When they do, they end up charging similar sums. StretchPay, an Ohio-based credit-union alliance, charges an annual fee of $35 for loans up to $250. That’s an APR of 364 percent on a two-week loan.”

So, what’s in a name? That which we call a rose? Hinkle addresses the correlation between payday lending and microcredit. Two financial products that look the same, act the same, but are known by two different names. And just as Shakespeare’s Juliet said, “a rose by any other name would smell as sweet,” microlenders are praised for their humanitarian aide as third-world financiers, lending very small amounts so that citizens who may not have had access to funds could start a business.

“Microlenders have been criticized because, given the small loan amounts, the effective interest rates they charge also turn out to be pretty high — anywhere from 70 to 125 percent. But they don’t ask for collateral, either. That makes them look a lot like payday lenders.

There’s one big difference, though: While payday and similar lenders are reviled for preying on the poor, Grameen Bank and its founder, Muhammad Yunus, were awarded the 1996 Nobel Peace Prize.”

Yesterday, as we blogged, the FDIC released a study showing that 821,000 households opted out of the banking system from 2009 to 2011 and that the unbanked population grew to 8.2 percent of U.S. households.

As a Washington Post article points out today, roughly 17 million adults are without a checking or savings account. Another 51 million adults have a bank account, but use pawnshops, payday lenders, or rent-to-own services, the FDIC said.

This goes to show that consumers are making the choice to use alternative financial services. As a reminder, there are certain requirements that a customer must have in order to obtain a payday advance:

• An active checking account,
• Proof of regular income,
• Proper identification,
• Upon completion of a simple application and approval, a borrower must read and sign an agreement containing disclosures required by the Truth in Lending Act (TILA), and
• Write a personal check for the amount of the advance plus the fixed fee.

When customers start to migrate and make the choice to use our services—which have collectively been called “alternative” but are now evident to be mainstream—this should be a tell-tale sign that consumers have the competency to pick what financial option works best for their given situation. More options for the consumer will force banks to lower prices and become more competitive in the marketplace. When this happens, consumers benefit.

Even payday industry critics understand the consumer’s rationale for choosing to use non-bank services:

“Banks need to have pricing and practices that consumers can trust and allow them to build wealth and have economic mobility,” said Deborah Goldstein, chief operating officer at the Center for Responsible Lending. “If the account fees will leave them worse off, then its going to be a challenge for people to use banking services.”

There are many benefits to establishing a relationship with an insured financial institution, yet according to a recent survey, a growing number of U.S. households today are either unbanked or underbanked.

The Federal Deposit Insurance Corporation (FDIC) today released the results of its 2011 National Survey of Unbanked and Underbanked Households, which revealed that “more than one in four U.S. households (28.3 percent) are either unbanked or underbanked, a slight increase from the findings of the FDIC’s 2009 inaugural survey.”

The new survey also found one-quarter of households have used at least one alternative financial service (AFS), such as non-bank check cashing or payday loans in the past year, and almost one in 10 households have used two or more types of AFS products or services. In all, 12 percent of households used an AFS in the past 30 days, including four in 10 unbanked and underbanked households.

These survey findings are a testament to a reality of our financial system – that millions of Americans turn to various financial products offered by banks and non-banks for their specific financial situation. Recognizing the need to serve different economic groups in different ways with different financial products and services is the first step toward creating a better market that works for consumers.

Pew released a study this week that shows that prepaid cards are a better option for consumers versus checking accounts.

The report divides consumers into three types in terms of their banking expertise: “savvy,” who use direct deposit and avoid fees whenever possible; “basic,” who aren’t as proficient at avoiding fees and have at least one overdraft fee a month; and “inexperienced,” who make heavy use of services but typically pay two overdraft fees a month.

Then, the researchers applied those characteristics to more than 200 checking accounts offered by the 12 largest banks, and 52 prepaid cards available online, to see which accounts best-suited each category.

Interesting take away from the study:

Most consumers use prepaid cards as a way to keep spending within their means; overdraft options run counter to this goal and should not be offered.

Check out the fees below.

Along with the report, “Loaded with Uncertainty,” Pew introduced an online tool to help consumers determine which option is best for them. Which one is right for you? Fill out the quick Pew survey below and find out.

A recent opinion piece in The Huffington Post (“New Name for Payday Won’t Fix It,” 08/29/12) is riddled with inaccuracies about the payday loan industry and the millions of Americans who turn to our product to manage financial obligations that come due before their next paycheck.

To be clear, CFSA does not advocate for H.R. 6139. And to be even clearer, H.R. 6139 does not include the payday loan product or any credit product with a term of 30 days or less.

CFSA member companies have long operated in a highly regulated environment – at both the state and federal level – and we believe such regulation is effective, balancing credit availability and consumer protection.

Lawmakers have acknowledged that consumers understand a payday advance is for short-term use. Just as a taxi is great for a short trip across town, it wouldn’t be economical on a journey from Los Angeles to Boston.

In fact, a payday advance can be the best option for short-term credit. It’s safe, reliable, and often less expensive than other alternatives, which include unregulated loans, overdraft usage, bounced checks, late payments to credit card companies, and utility reconnection fees.

Payday lenders provide a valuable service to American consumers, who can then keep their families and the economy moving forward. That’s a service we’re proud to offer.

And just to give our audience more color on the importance of competition in the marketplace, and how it drives innovation and reduces costs for the millions of consumers, here’s another quote from Martin that CFSA supports:

“A strongly regulated short-term credit market is desperately needed by millions of Americans trying to manage tight budgets in a tough economy. The Birmingham News should take time to better understand this important issue before taking a position, and should be encouraging competition, new services and entrepreneurship in this market, not the elimination of a single service.”

Back in July, CFSA’s D. Lynn DeVault sent a letter to the editor to American Banker discussing the same issue. Here’s a look at what our Board Chair had to say:

“The storefront payday lenders represented by the Community Financial Services Association welcome banks and credit unions into the payday lending market. Increased competition will drive innovation and reduce costs for the millions of consumers who need help managing unexpected and periodic financial difficulties. Our members offer a regulated mainstream financial service that competes favorably with deposit advance and overdraft protection products. What is important is that the CFPB ensures all short-term credit options are simple, fully disclosed, transparent and cost competitive.”

Barbara Martin, Divisional Director of Operations for Advance America, had a great response to an article that came out last week in the Birmingham News online.

“Your uninformed conclusion to eliminate this service from the marketplace would only force consumers who rely on payday advances to use other, less-regulated, more-costly, short-term credit products such as illegal offshore Internet loans and overdraft protection, or pay late fees on credit cards and utility bills.

In Georgia and North Carolina, where payday lending was effectively banned, a Federal Reserve Bank of New York staff report found bounced checks, personal bankruptcies and complaints about other types of lenders jumped significantly when consumers no longer had the regulated payday-loan option.”

The bank industry, according to the Baltimore Sun, is using the struggles of another industry for its marketing: The Postal Service. JPMorgan Chase & Co , Bank of America Corp , Citigroup Inc, and Wells Fargo & Co are all using the looming threat of postal service cuts to sell bank services such as electronic payments and remittance pickups that can speed payments likely to be slowed by diminished mail service.

“It is a conversation starter,” said Daniel Peltz, head of Wells Fargo’s Treasury Management division.

Customers may have to wait up to four days longer for invoices to be delivered and payment returned if Saturday postal service is eliminated, according to one bank official.

From the op-ed we just posted:

Under-banked Americans don’t want charity and they certainly don’t want moral superiority; they just want financial products that meet their needs for convenience, speed, and transparency of pricing. And they are smart enough to determine the best financial option for their unique situation.

Let’s focus our efforts on expanding the financial options for under-banked consumers. This will likely involve innovative new products and new applications of technology and will need to be supported by a progressive regulatory environment.

The last thing Americans need in these difficult economic times is to be given “The Boot” as their only financial option.

Great op-ed from Ken Rees, the CEO of Think Finance, the came out today. Instead of giving customers “The Boot” (the one you might wear and use to panhandle to get money from passerbys), Rees says policy elites should change their “callous view of the real-world needs” and recognize that the underbanked need short-term credit as a viable option.

Most opponents of short-term credit products like payday loans believe that eliminating options for consumers is the right thing to do because they legitimately believe consumers can’t be trusted to make their own financial decisions. That is a dangerous and patronizing point of view.

The truth is that all surveys of under-banked consumers who use products like payday loans show that they are educated, hard working Americans who fully understand their options.

The average payday loan customer has at least some college education, is meaningfully employed, and makes between $35,000 and $50,000 a year. They understand the bottom-line costs (both economic and psychic) of their options and can be counted on to make the best possible decision for them from the options that are available.