William Isaac: Why Payday Loans are Good for Millions of People

By William Isaac, former chairman of the Federal Deposit Insurance Corp., and chairman of Fifth Third Bancorp.

August 13, 2013

American Banker

The Justice Department and state regulators are targeting banks that service a broad range of what they consider questionable financial ventures, including some online payday lenders. I applaud the government's efforts to weed out bad actors that engage in fraudulent transactions or violate federal laws. But I'm deeply concerned about the unintended consequences this could have on much needed financial services for underbanked people who rely on legitimate short-term lenders, commonly referred to as payday lenders.

Payday lending is pretty simple. An individual has an urgent short-term need for cash and goes to a payday lender. A person with a job, a checking account and proper identification can borrow anywhere from $100 to $500 until his or her next payday. Such borrowers write post-dated checks or provide written authorizations to the payday lender for the amount of the loan plus a fee, which is typically 15%. On the next payday the loan is either repaid in person by the borrower or the lender cashes the check or initiates an electronic funds transfer. That's it.

The typical first-time payday transaction is completed within 15 minutes. Very few banks are willing to make these loans – the transaction costs are simply too high.

Millions of middle-income Americans live paycheck to paycheck. They do their best to manage their finances so that all their obligations are met. But when something unexpected crops up, such as a blown transmission, an unexpected doctor's bill or a badly needed roof repair, their financial schedules are thrown off and the need for short-term credit may arise.

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