Salinas: Improving Access to Credit for the Middle Class
Latin America’s lessons for improving credit for the American middle class
By Ricardo B. Salinas
January 31, 2015
MEXICO CITY -- Latin America is one of the very few regions in the world to see the gap between rich and poor narrow over the past decade, even in the face of a severe global economic slowdown. The president of the World Bank declared earlier this year that Latin American poverty and inequality are plummeting, while the number of people in the middle class – more than a third of the population – for the first time surpassed those living in poverty. I attribute that shift to the gradual opening of our economies to competition and consumer orientation.
At the same time, the American middle class is eroding. Jobs that once vaulted millions into financial security were lost during the financial crisis and have yet to return. For the first time since the Great Depression, the typical American family earns less than the typical family did 15 years earlier. According to a new study from the Center for American Progress, real median incomes declined while costs key to middle-class security rose by more than $10,000. The American middle class is no longer the world’s wealthiest.
The American regulatory framework is exacerbating these economic challenges. It is essentially creating a two-tiered system – those with access to credit and those without it – which is increasingly inhibiting economic mobility in general and restricting consumers’ ability to migrate among financial services in particular. Instead of creating a more fluid and flexible environment – reflecting the reality of how people actually use credit – American officials are moving in the other direction.
Under the current regulatory framework, many non-bank lenders fall through the regulatory cracks altogether, operating without licenses and skirting national and state laws; others are subject to uneven rules and regulations governing products that consumers view as natural substitutes – undermining consumer protections and stifling innovation.
And FDIC and the U.S. Office of the Comptroller of the Currency (OCC) rules related to short-term, small-dollar loans offered by some banks proved so stringent that they have discontinued the service, leaving consumers with fewer credit options and dampening the competitive marketplace.
With potentially market-changing implications, the Consumer Financial Protection Bureau (CFPB) has announced that it plans in 2015 to establish the first federal regulations for small-dollar consumer loans – a category that comprises a variety of state-regulated non-bank credit products from so-called payday loans to auto title loans to installment loans.
Unfortunately, the CFPB seems to be considering a similar approach as other federal regulators in the past, which would inevitably hurt consumers even more. In this environment, it is therefore more urgent than ever that a new Congress in Washington ensures that regulators seek a balanced regulatory environment, one that recognizes contending products from banks and non-banks for what they are: competitors.
Borrowers and credit providers alike stand to benefit from clear and consistent guidelines by which bank and non-bank providers can offer accessible, affordable credit options. A marketplace that balances consumer safeguards with reliable access can empower consumers to make informed decisions that match their personal situations. Every lender would compete for business under the same set of rules, with proper incentives to ensure a reliable and competitive flow of credit.
But consumers are already turning away from the traditional banks they previously used for their financial needs, as these institutions drift further away from their expectations. The Federal Deposit Insurance Corporation (FDIC) recently reported that 68 million Americans – 20 percent of the population – are “underbanked,” choosing services offered by a variety of non-bank credit providers despite already having a bank account. These providers, including consumer lenders, big box retailers, and high-tech start-ups, offer both the flexibility and affordability underbanked Americans need and demand. Meanwhile, traditional banks have abandoned lower-income neighborhoods and most small-dollar services.
Under current regulations, similar financial services are often subject to sharply different disclosure rules. Regulated short-term lenders, for example, must advertise their flat fee as an annual percentage rate (APR), a requirement that confuses the true cost of short-term loans. Banks, in contrast, are not required to disclose the APR for overdraft credit, even though consumers use the services interchangeably. CFPB Director Richard Cordray ceded this disconnect, remarking that if a consumer were to get an overdraft loan on similar terms, “that would equate to an annual percentage rate of over 17,000 percent.”
Even more starkly, bank overdraft programs often have no limit on the number of times consumers can overdraw their accounts, a requirement that many states have forced on short-term lenders. This patchwork of confusing and uneven rules discourages competition, deters innovation, and undermines consumer interests, especially among the most vulnerable.
I have personally seen how retail lenders can empower families and bolster social mobility by providing accessible credit to the underbanked population. Over the last decade, my consumer goods company, Grupo Elektra, substantially expanded its financial offerings throughout Latin America. Noticing a similar, robust demand in the United States, my company acquired Advance America, a leading provider of consumer credit. Both companies are committed to using their broad storefront networks to strengthen credit access among the middle class and financially underserved.
Making credit more accessible promotes a stronger middle class. Expanded credit has allowed millions of Latin American consumers to better manage financial shocks, buy consumer goods that define a middle-class lifestyle, afford their first home, establish a credit history and build savings and wealth.
Working families – in Latin America and the U.S. – deserve access to quality products and services with affordable terms of payment. These middle-class families are the bedrock of a prospering modern economy, and have tremendous potential to serve as an engine for economic growth. Unfortunately, they seem to be overlooked and undervalued too often on the northern side of the border.