By: Joe Adler
April 25, 2014
The issue of serving so-called "underbanked" borrowers has taken on a new urgency since regulators began cracking down on payday and certain other low-dollar, high-interest loans, prompting fears of a credit crunch for low-income consumers.
Even as the Consumer Financial Protection Bureau writes new rules for payday loans and the Justice Department continues "Operation Choke Point," which is designed to force institutions to sever relationships with online lenders, regulators are trying to create and promote safer, viable alternatives that can expand access to the banking system.
The Federal Deposit Insurance Corp. convened an advisory panel for the 20th time on Thursday focused on exploring ways to reduce the number of unbanked and underbanked borrowers. Following the committee's earlier studies on bank-offered small-dollar loans and safe transaction accounts, officials presented a new paper exploring how the use of mobile phones could broaden banking access. They also announced a joint financial literacy initiative with the CFPB to expand the FDIC's well-established Money Smart education program.
"Mobile financial services is becoming more and more widespread but for a variety of reasons "\xA6 it's not always designed for or used in ways that are increasing economic inclusion," Susan Burhouse, senior consumer researcher in the FDIC's division of depositor and consumer protection, said in a presentation to the advisory committee. "We found through our research that there are many ways to fine tune MFS [mobile financial services] offerings to make them even more useful tools for the underserved."
The committee's white paper on mobile financial services, which the agency said was released "for discussion purposes" and not as "official policy," noted that 90% of underbanked adults own a cell phone - of which 71% are smartphones. Meanwhile, 68% of unbanked adults have access to a cell phone, of which 49% are smartphones.
Among the study's recommendations were steps to bridge the delivery of mobile financial services with the traditional payment methods underbanked consumers use, such as checks, money orders and cash.
"MFS is likely to be a more useful financial tool for the underserved if ways can be found to reconcile and meet the underserved's needs for electronic transactions with their need for paper payments or cash," the report said.
Other obstacles to leveraging mobile technology to serve the underbanked, the study noted, include the fact that customers typically need access to a bank's online service - which some consumers lack - to enroll in mobile banking or manage their mobile banking settings.
"These requirements could be obstacles to MFS use for those who rely on a mobile phone to access the Internet," the study said.
The paper also called for further efforts to study examples where banks have successfully created mobile services platforms that can be used by the underserved and for regulators to "evaluate incentives that could encourage banks to offer and demonstrate the benefits of offering specific MFS features that are relevant to underserved consumers."
But committee members raised other issues about expanding access through mobile technology.
Alden McDonald, chief executive of the $550 million-asset Liberty Bank and Trust Co. in New Orleans, urged policymakers to be sensitive to the cost burden on smaller institutions - including the compliance costs - of making changes to their mobile banking offerings.
"It becomes a point where "\xA6 community banking may not be as competitive with the larger banks," said McDonald, a member of the advisory panel.
FDIC Chairman Martin Gruenberg, who has maintained the agency's focus on unbanked issues following the creation of the advisory committee under his predecessor, Sheila Bair, said the report would serve as a "foundation" for further exploration. He also acknowledged that future discussions on how mobile technology can benefit the underbanked should address advances by nonbank startups, not just banks.
"In order to think thoughtfully about how to utilize banks' potential we probably need to have at least some awareness and understanding of what's happening in the nonbank space," he said.
Many consumer groups credit the FDIC for continuing to focus on the issue.
"The imperative of finding ways to help people get into the banking system is in the DNA of the FDIC," Adam Rust, director of research at Reinvestment Partners in Durham, N.C., and author of the blog Bank Talk, said in an interview.
The issue of how banks and other providers meet the needs of the underserved is likely only to grow in prominence as regulators impose new restrictions on products utilized by lower-income consumers.
The FDIC recently joined the Office of the Comptroller of the Currency in releasing new rules for banks' deposit advance products - that many observers say resemble payday loans - and banks responded by announcing the end to certain offerings.
Meanwhile, bankers and industry representatives say the federal government's "Operation Choke Point" - which has forced many banks to cut ties with online payday lenders and other nonbanks accused of consumer violations - has narrowed product choices for consumers.
Observers say coming rules expected from the CFPB to set national standards for payday lenders may provide needed certainty for what short-term credit opportunities are sanctioned.
The FDIC and OCC's guidance on deposit advance "gives something of a roadmap" but "the CFPB is the next shoe to drop in terms of establishing clarity about the small-dollar lending marketplace," Paul Leonard, the director of the California office for the Center for Responsible Lending, said in an interview. "Many institutions are probably waiting to see what the CFPB does in terms of its small-dollar regulations."
Among the FDIC advisory committee's earlier initiatives was a two-year pilot to evaluate the characteristics and performance of small-dollar credit products - those with more affordable features than payday loans - at 28 banks that participated in the study. The small-dollar loan pilot monitored loans of amounts between $1,000 and $2,500, as well as those below $1,000. Average interest rates ranged from 13% to 16%.
Following the study, the FDIC released a product template for other banks to consider. Under the template, loans had terms of at least 90 days, a 36% cap on annual percentage rates, low or zero fees and a streamlined underwriting process. Later, the agency tested the feasibility of banks offering low-cost transactional and savings accounts designed for underserved consumers.
But Rust said an obvious challenge with creating products tailored for underserved consumers is, "How do you make a product that is profitable enough that banks outside of the pilot will want to do it?"
Observers agreed there are limits to a regulator's ability to meet the unbanked issue head on.
"The FDIC can shine light on the problems, explain or identify innovative best practices and obviously prohibit practices that violate existing law or norms of safety and soundness" but "they can't on their own shape the nature of the market," Michael Barr, a University of Michigan law professor and a member of the committee, said in an interview.
Yet some said the FDIC committee could look at other product ideas in the market to test their feasibility for attracting new consumers into the banking system.
Rust noted the example of secured cards, which are credit cards secured against a borrowing limit that corresponds with the amount of funds in a customer's bank account that serves as collateral.
Unlike a debit card, Rust said, "the reason it makes a difference is it has the effect of creating a credit record."
Rachel Schneider of the Center for Financial Services Innovation said the panel could also invite banks to develop their own pilot projects rather than setting the parameters for products for institutions to try.
"It's hard for the FDIC to determine the criteria," Schneider, the CFSI's vice president for innovation and research, said in an interview. "Innovating around financial service delivery is not that easy."