Banks Shift From Overdraft Fees to Payday Loan Type Products: Will it Work Out?

LOS ANGELES, March 1 /PRNewswire/ -- Pay1Day.com. The implementation of the Card Act of 2009 and the Overdraft Fee Legislation marks an increasingly shifted focus from traditional loan products to payday loan type services by big banks, observes a Bloomberg article and Solomon Finance.  Although the new reforms have made it difficult to sustain profitability from credit card and overdraft fees, two of banks' most profitable products, questions arise whether the recent push for short term small cash loans, more commonly called checking advance products, will be successful for national banks while competing with direct payday loan lenders.

Checking advance products are cash loans usually ranging from $100 – $500 with annual interest rates at about 120% if paid within 30 days.  These products are not new to big banks: Wells Fargo has had these loans as part of their offerings since 1994, and then in 2008, Fifth Third Bank had also provided these types of loans.  Checking advances are similar to payday loans with comparable interest rates and repayment time frames, usually occurring on the borrower's next pay period with the added convenience of automatic payment withdrawals due to the issuance of the borrower's account by the corresponding bank.

By getting into the small cash lending business, big banks face two major issues: competition from established payday lenders with years and even decades of experience, and the real-life ability to profit from $500 loans with existing big-bank overhead, questioning whether they can be successful long term during the payday loan growth.

Established payday lenders, whether it be online payday lenders or brick-and-mortar paycheck cashing stores, have gotten quick cash loans down to a science where loans can be approved within seconds and cash can be delivered to the customer within hours. With an online payday loan lender, the entire process can be done from the customer's computer at practically any place in the world with an internet connection. In addition, the flexibility and added convenience such as faster customer support via multiple methods such as email, phone, fax, and the ability to customize loan features that stem from the smaller scale nature of payday loan lenders, presents a niche-barrier that may be difficult for national banks to overcome.

Replicating the payday loans business model while searching to fulfill the overdraft and credit card gap caused by the Overdraft Fee Legislation and Card Act of 2009 will be an obstacle for traditional banks; interesting to follow throughout the rest of 2010.

SOURCE Solomon Finance