Markets work best when they have strong competition and consumer participation. Our current financial system stands to improve on both fronts.
According to the Federal Deposit Insurance Corporation (FDIC), 92 million Americans are unbanked or underbanked, often without access to credit and the financial know-how to pursue other lending options. At the same time, regulators are throwing up roadblocks for new business models that bring these disenfranchised consumers back into the fold by offering them legal and responsible small-dollar credit access at competitive rates. Shutting these innovative models out of the marketplace both decreases competition and consumer participation – everybody loses.
The reality is, most unexpected credit needs aren’t for tens of thousands of dollars. They’re for a few hundred dollars, to cover unexpected urgent costs like a car breaking down or an emergency root canal. When people who do bank at a traditional institution need a small-dollar loan for situations like these, they’re often surprised to find that banks don’t offer this service.
In 2008 only 31 banks in the entire country offered loans smaller than $2,500, according to the FDIC. Since then, major players like Wells Fargo, U.S. Bank, and Regions have discontinued their small-loan products due to regulatory pressures.
As a result, the situation is becoming ever more dire for the unbanked and under-banked, a group which includes 54 percent of African Americans.