ATM fees may not be climbing too much higher, at least for now. Image from Wikimedia Commons.

JPMorgan Chase is bringing an end to its higher ATM fee test run. Chase began a pilot program some time ago where out-of-network ATM transaction fees for non-Chase customers were raised to $4 and $5 in some areas as a test. The high fees just so happened to not be very popular with consumers.

Consumers not amused by high ATM fees

In February of this year, JPMorgan Chase announced that it was going to start testing a new fee structure for non-Chase members that used Chase ATMs. The new fees were instituted in Texas and Illinois, according to CNN. Chase maintains one of the largest ATM networks in the country, and was trying to get people to pay a little more for the convenience of using that network. So the large nationwide bank raised its fees on a trial basis to $4 in Ill., and to $5 in Texas. The Chase network comprises more than 16,000 ATMs nationwide, and there is a reasonable expectation that people should pay to use such a large network. However, people in those states were not amused.

Chase canceling program

JPMorgan Chase is canceling the higher fees. Though Chase does maintain the second largest ATM network in the nation and about 25 percent of all Chase ATMs are in those states, according to USA Today, people stopped using Chase ATMs if an ATM with lower fees or one in their network was nearby. Chase will revert to the standard $3 fee. The nationwide average fee at automatic teller machines, according to MSN, was $2.11 in January. The city that had the highest fees on average as of November was Seattle, Wash., according to the New York Times, and the city with the lowest ATM fees was Cleveland, Ohio. ATM fees have been going up, as financial reform laws have been restricting certain types of fee-assessment practices at banks.

Fewer people after loan capital

Though banks are just as willing to lend consumer loans, there are fewer people lining up to apply for them. The Federal Reserve has noted looser lending criteria for consumer loans such as credit cards, installment loans and other types of personal loans, but demand has been down for some time, according to the Wall Street Journal. If people don’t feel as secure in employment, they are less likely to want to go into debt. Interest earnings for major banking institutions has been declining for months, as fewer consumers are interested in going into more debt after the nightmare of the past few years.

Sources

CNN

USA Today

MSN

New York Times

Wall Street Journal

Consumer lending, especially for housing, has been slow to recover from the recession. Image from Wikimedia Commons.

Consumer lending — loans lent to individuals — has been slow to recover from a two-year lull. Loans such as mortgages, auto loans, home equity lines of credit and personal loans aren’t impossible to get but are harder to get approved for. Banks are loathe to repeat mistakes that made them run for government cover.

Federal Reserve data indicates borrowing has slowed

Data compiled by the Federal Reserve indicates that debt levels from consumer loans have been falling since the summer of 2008, before the recessionary period began, according to Bloomberg. Total consumer debt, which includes most loans that lenders make to consumers such as personal loans, installment loans and auto loans, but excludes mortgages, stands at $2.4 trillion. That is 6.6 percent below July 2008, the peak period before the recession. Debt from housing loans has declined by more than $530 billion since 2008 with $10 trillion in housing debt still owed by homeowners in the United States. Fed Chairman Ben Bernanke was recently quoted as saying that conditions for credit markets were tight and that he didn’t expect a significant turnaround for some time in the housing market.

Housing market still lagging

The recession began in the housing market, and the return to healthy levels of activity in the housing market has been pursued for some time. Though improvements have been made, there have also been setbacks. From December 2010 to January 2011, home sales increased by a modest 2.7 percent, according to MSNBC, but the share of first time home buyers was only 29 percent of all purchases. Foreclosure properties made up 37 percent of the homes that were sold, and 32 percent of all purchases were made with cash. Given that a high number of foreclosure properties are being sold, a lot of purchases are being made with cash. The Case Shiller Index noted that high-end home sales are rising again, according to CNN, and there is every indication that this is a fantastic market for investors, not for prospective middle-income homeowners.

New models emerging

An increasing amount of regulations, such as the CARD Act and the proposed cap on interchange fees, makes it harder for large financial institutions to be able to turn the kind of profits they are used to. Some consumer credit may not be as easy to come by in coming years. For instance, since the CARD Act was enacted, free checking accounts have been disappearing from major banks, and JPMorgan Chase has been hinting at capping debit card purchases at $50 to $100 if the interchange fee cap is passed.

Sources

Bloomberg

MSNBC

CNN

Destroying the payday loans industry creates problems and solves nothing. Balance is needed in legislation. (Photo: wikipedia.org)

Even if you’ve never been a customer of a payday loan business, you’ve likely seen or heard about the product. You probably also know that payday loan businesses are fairly easy to find in both the brick-and-mortar world and in cyberspace. With such a proliferation, it seems obvious that there is a demand for such consumer loans. Yet for a product that millions of consumers use each year, it’s interesting that the entirely legal payday loan industry has been affixed with such a negative reputation.

Throwing Stones

The most common allegation levied against the payday lending industry is that it constitutes predatory lending, exploiting helpless consumers with high rates and other loan shark tactics. On their behalf, those who offer payday loans assert that the rates charged are appropriate to protect against risk, yet much less damaging than what consumers can encounter in fees if they don’t pay their bills or have their utilities shut off. Unfortunately, there is relatively little objective analysis that looks beyond the rhetoric of both sides of the payday lending issue. Critics adopt what they consider to be a moral high ground where they use “payday loans” and “usury” in the same sentence, while lenders defend their practice by illustrating that customers are made aware of costs before a contract is signed and by claiming that current rates are necessary in light of operating costs.

Let’s Take a Balanced Look at the Stats, Shall We?

That’s exactly what Aaron Gold does in his New York University honors thesis “Payday Lending: Grounding the Policy Debate Through Economic Analysis.” His study compares some key metrics between payday lenders (five of the largest chains, representing 25 percent of U.S. stores) and a sampling of “traditional” lenders such as banks and credit unions. In a nutshell, Gold finds that high operating expense does seem to justify the cost of payday loans. While data supports the notion that payday lenders are more profitable than traditional lenders, their profits in relation to their “break even” point aren’t as outrageous as overheated critics claim.

The Social Forces behind Payday Lending

While people from all walks of life have had the occasion to use payday loan services, averages definitely point in the direction of an upper-middle to lower class demographic. Gold cites the M.S. Barr article “Banking the Poor” in the Yale Journal on Regulation. Barr suggests that an increasing number of Americans are “under-banked” (Barr, 2004, p. 2). “Real or perceived costs and fees of maintaining traditional banking services,” suggests Barr, are simply too much of a hurdle for scores of people to clear. Considering the shenanigans of financial institutions that steered America toward the current recession, such skepticism is no surprise. Douglas McGray writes in an article entitled “Check Cashers, Redeemed” that lower income consumers and (anecdotally) some segments of immigrant communities tend to disdain the system of traditional banking and credit. Furthermore, he alludes to public relations efforts made by payday lenders in their communities (such as employing local, multi-lingual people). Thus, payday loan stores serve as comfortable, convenient one-stop shopping for those in need of quick cash during an emergency.

Payday Loans Are For Consumers with Steady Income

It is simply untrue that payday loan companies prey upon people who don’t have the money to repay. Only those with a verified steady income are eligible, a safety measure for both the consumer and the lender. An analogy Huckstep uses in his important study “Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?” (See: http://www.checkintocash.com/images/media_center/Fordham-report.pdf) is that payday loans are like a financial taxi: “Expensive for long trips, but perfectly viable for short distances” (Huckstep, 2007, p. 207). Used properly, payday loans can save consumers a great deal of money over more catastrophic alternatives. This is a fact that reputable payday lending businesses stress to consumers through their literature and service counseling.

But Are Payday Loans Too Expensive?

That’s what critics say, and the key defensive position has been that high risk justifies the price. Gold points to the 2005 FDIC study by Flannery and Samolyk “Payday Lending: Do the Costs Justify the Price?” in support of the defense, but Huckstep counters that “while loan losses may be high… that seems to be a trait of the lending industry generally, rather than a unique trait of payday lending institutions” (Huckstep, 2007, p. 230). Looking at said charge-off rates, Gold finds the ratios (dividing yearly charge-offs by the amount of originated loans during that period) between payday lenders and traditional lenders to be rather similar, and very much in keeping with overall Fed averages. In fact, the average for payday loan default is shown in Huckstep’s study to be below those of credit cards. This suggests that consumers are indeed able to handle their payday loans when compared with other kinds of consumer lending.

Do Payday Lenders Reap “Obscene” Profits?

Overall, multiple sources confirm the truth that payday lenders have enjoyed greater profits in recent years than traditional lenders based upon similar products. But Gold would have us understand that from 2006 to 2008, the profit margin above the “break even” point for the major payday loan companies decreased dramatically. There are numerous reasons for this, but Gold intimates that a lack of growth opportunities within the payday lending industry may have something to do with it. Whether this is because the industry has become overgrown and needs pruning or overzealous regulation has hamstrung businesses in too many states is debatable.

From the standpoint of the numbers, loan volume is considered to be the key to payday loan store profitability (rather than exorbitant rates). Growth and competition have a definite impact upon loan volume on a per store basis. Gold believes that consumers are attracted to payday loan locations primarily because of convenience, so expansion of store locations and operating hours are necessary to compete. However, venturing beyond a saturation point may actually decrease profits.

Good Return on Assets and Equity

Payday loan business, according to Gold’s findings, produce a greater return on assets (ROA; the ratio of operating income to average assets), which indicates that they are more efficient at what they do than banks and credit unions that offer similar products. Considering that payday loan companies tend to have a relatively small number of physical assets when compared with big traditional lenders, the payday lenders experience much less loan turnover and require much less operating capital in order to produce positive returns.

Does this mean that shareholders of payday loan companies are making a killing? Relative to traditional lenders, the equity tale of the tape says no. Gold finds that from 2004 through 2006, payday loans originators and traditional lenders were basically dead even. By 2008, however, the subprime mortgage crisis sent traditional lenders plummeting. Payday lenders readily took up the slack of consumer demand and posted a much more positive return on equity.

Scale Down, Payday Lenders?

Gold appears to lean toward the idea that if “store density is a function of price, then a reduction in density would increase loan volume and profit at remaining stores.” In such an instance, payday lenders could conceivably charge less and still collect a decent profit. A reduction in competition would then help consumers.

Payday loans could continue to satisfy consumer demand, provided the constant attack mentality of legislators (who no doubt receive sizable campaign contributions from traditional lenders). Some regulation is beneficial (since there are lenders with room in their profit margins to decrease price), but a 50 to 75 percent reduction in APR will only serve to put legal businesses down and increase unemployment. Cooler heads must prevail. As Gold puts it,

For real progress to be made toward finding an equilibrium that works for all involved in the payday debate, interested parties need to move away from inflammatory rhetoric and legislation that views the industry in binary terms. They must move toward defining acceptable interest rates and profit margins and take cautioned steps to satisfy the credit demand in an economically sustainable way.

Follow the Numbers

In America’s recessionary economy, sustainability is a highly desirable goal. Payday loans are here to stay. When will legislators admit that and work toward economic harmony?

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