No traditional short-term loan will offer value to consumers and a balance of risk and returns for banks. Payday loans popped up due to a lack of easy to access options for low-income, (traditionally) high-risk consumers.

With all of the furor following the CFPB’s proposed new rules on payday (short-term, very high-rate loans) lenders it’s time to think about how to meet customer demand with cost-effective options. Three come to mind:

Credit Unions

Credit unions often started as employer/employer-type based firms. While most have expanded beyond their initial customer sets there’s no reason they can’t return to their roots by developing relationships with key employers in their areas.

Pros:

  1. Built in new sets of customers where the CU has industry experience
  2. Low customer acquisition cost
  3. Expands on the NCUA’s PAL program

Cons:

  1. High-risk potential from this product/customer segment
  2. Would require high degree of automation to keep costs in line

Payroll Companies

Payroll companies like ADP could offer the service to the employees of the companies they serve. Operating costs would be low due to automation as would ease of application and repayment (automatic deduction). Interest rates could be kept low and even supplemented by employers as a benefit to their workers.

Pros:

  1. Easy income verification
  2. “Know Your Customer” already in place
  3. High level of automation
  4. New revenue source for payroll company

Cons:

  1. Interest rates may be higher than other options depending on funding cost and employer risk profile
  2. Risk may be concentrated by employer/industry

Employers

The most obvious solution perhaps. Employers could provide this service directly as a benefit with deductions occurring automatically from the employee’s next few paychecks.

Pros:

  1. Know their employees best
  2. Use as an incentive and benefit (to improve retention)
  3. Have positive incentive to keep workers employed
  4. Relatively easy to implement via payroll deductions

Cons:

  1. Some cost for funding
  2. Customers would lose access to loans with job switch
  3. Risk less diversified

It seems any of the above options would be better than the current system.


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