Banks Still Reluctant to Heed OCC’s Call to Have Them Offer Small-Dollar Credit

Recently, The Office of the Comptroller of Currency (OCC) gave out an official statement encouraging top national banks as well as federal savings unions to include short-term, small-dollar installment funding — a move that most industry critics believe will change the face of small-dollar lending. However, most people are skeptical that many banks and similar financial providers will take to this critical type of credit because banks (who mostly see small-dollar loans as unprofitable) find it an unsustainable, expensive and risky funding product.

So far, Federal data has shown a rising demand for this type of credit. A 2015 study by Federal Deposit Insurance Corp.’s (the latest to date) on unbanked and “underbanked” home found that 7 percent of households in the U.S. households were unbanked hat year, 2015.

The report also disclosed that around 20 percent of households in the United States were underbanked, which means the home held a bank account but also went for a financial service from alternative sources like small-dollar loans. Moreover, the latest Federal Reserve data on the overall economic welfare of household in the U.S. households discovered that 40 percent could not meet or struggled to cover unexpected expenses up to $400.

Nevertheless, small-dollar lending has never been the banks’ favorite form of credit. For instance, in 2009 the FDIC researched small-dollar loans to investigate how viable banks are in issuing them. The survey allowed banks to give out small-dollar products at a cap rate not higher 36%, but still, these products proved unprofitable to banks.

In answer to the recent OCC press release, the American Banker announced that most banks are “cautiously taking on the latest push by federal agencies to have them provide small-dollar loans products to bad credit borrowers, an indication of lingering skepticism on the profitability of the venture.”

Banks have the chance to serve customers in need of small-dollar loans, but they doubt its profitability. It is no wonder they have chosen to abandon such demographics thus leaving them unbanked or underbanked most times even branding them as poor prospects. Maybe Non-bank lenders have been doing more to help these households as some also allow funding through ach echeck services, which means you get your cash as soon as possible.

Yes, competition is healthy, and there is demand for new entrants into the lending sector. However, these financial communities must be ready to tailor banking services that can assist the group that barely enjoys them. This way, the hardworking American citizens will find a way to bridge financial gaps or clear unforeseen expenses.

In conclusion

The small-dollar lending sector has been a no-go-zone for banks; hopefully, the new guidance from the OCC will bring a significant change to this fact and help the suffering percentage of U.S citizens.

Author Bio: As an account executive, Michael Hollis has funded millions by using ach echeck services. His experience and knowledge of the industry has made him a financial expert at First American Merchant.