💰 Why do large banks embrace small-dollar loans?

Frank Tian

Feb 2, 20232 min read

This is a trend in the making in the last few years - now it caught American Banker’s attention.

🟦 Current State

According to the latest article from Pew,

📌 6 out of 8 largest banks, in terms of # of branches, now are offering small $ loans or lines to checking account customers with low or no credit scores.

📌 Regions Bank, Truist, and Wells Fargo began offering these consumer-friendly loans in late 2022, joining Bank of America, Huntington Bank, and U.S. Bank.

📌 These six large banks combined operate nearly 17,000 branches, or 23% of all bank branches in the U.S.

🟦 What Changed

📌 Regulatory Guidance

In the multi-year fight against payday loans, regulators realized that more credit supplies are needed to fill the demand gap.

In May 2020, at the onset of the pandemic, joint guidance from multiple regulatory agencies called for additional financing options such as small-dollar loans.

This revives the small dollar loan product from banks. Wells Fargo, U.S. Bank, and Regions were all providers of a product called Deposit Advance back in 2013, which dissolved in 2014 due to perceived regulatory risk.

📌 Revenue Pressure

In the trend of more accessible, lower-cost financing, banks need new products to diversify revenue streams and fill in gaps from the retreat of traditional high-cost products.

Overdraft: with competition and regulatory pressure, banks have lowered overdraft pricing or switched to a subscription model.

Credit Card Late Fee: One year after the kick-off of an initiative against so-called junk fees, CFPB proposed to cap the fee at $8 and no more than 25% of the amount due.

🟦 The Opportunities

Thanks to open banking technology and alternative credit data, today there are more ways for lenders to assess the risk of consumers who have no or little traditional credit history.

Citing FDIC data, Pew pointed out 95% of American households hold accounts with banks or credit unions. That includes most customers of payday loans, auto title loans, and rent-to-own.