Opinion

Small-Dollar Credit Continues to Evolve. So Should the Policy Discussion.

The saying goes, “The more things change, the more they remain the same.” That might as well be about the way U.S. consumers access their money and credit, particularly amid the challenges created by the COVID-19 pandemic. Innovative new technologies continue to rapidly advance how people manage financial obligations, but the fundamentals remain the same.

And even amid these dramatic changes, things remain too much the same in how policymakers approach consumer financial services and small-dollar credit – relying on the same outdated approaches despite evolving consumer demand and new advancements.

It’s time to move on from arbitrary, antiquated restrictions on consumer financial services, such as the recent suggestion in Congress to impose a national interest rate cap, that don’t work any better today than they did five years or a decade ago – or even a century ago – and consider the marketplace as it builds for the consumer needs of today and tomorrow.

When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act and created the Consumer Financial Protection Bureau, small-dollar credit meant one thing in the minds of many policymakers: the two-week “payday” loan. As officials at the state and federal levels have sought to restrict these loans – despite the overwhelming satisfaction of the borrowers who use them – technology advanced amid sustained consumer demand for small-dollar credit; simply put, the credit marketplace evolved. New competitors emerged, from bank overdraft programs and credit card advances to fintech lenders, buy-now-pay-later services and earned wage access programs.

Today, the marketplace is more competitive, diverse, innovative and inclusive than ever, across a wide range of consumer financial services, not just credit products – a marketplace that has proven itself to be essential during a period of widespread economic challenge.

The federal government and states have universally recognized the “essential” classification of consumer financial services providers and the important role of basic services like check cashing, money transfers, bill payment, money orders and small-dollar lending amid the pandemic. And the industry has responded with the empathy, understanding and options consumers need, helping them to access government stimulus payments, pay bills, assist family and friends, and obtain credit when they need it.

Yet despite these changes and advancing capabilities, the policy conversation remains much the same: focused on interest rate caps floated on Capitol Hill and in statehouses, as well as ability-to-repay requirements such as those previously put forth by the CFPB and other restrictions that would only apply to a narrow range of services, and not the burgeoning array of fintech competitors. These policies rely on picking winners and losers in the marketplace, often resulting in the elimination of community-based options consumers like and value, and serious unintended consequences – for both consumers and the broader regulated financial services marketplace.

Policymakers must consider the marketplace consumers need and expect today and tomorrow, including the continuous evolution of the consumer financial services landscape and all of the options consumers compare when confronting a financial need. Small-dollar consumer loans, bank funds and income accessed early through overdraft and earned wage programs function the same and should be regulated as such.

They should also consider the growing power of data, analytics and technology to give financial services providers of all stripes the ability to enhance access to credit and assess prospective borrowers’ creditworthiness and ability to repay. For example, even in the small-dollar loan market, alternative credit data and consumer permission data is being utilized to graduate consumers to other products.

Every consumer deserves access to credit if they need and choose it, and lenders across the board should be encouraged to innovate fresh approaches for ensuring consumers can be successful, responsible borrowers and to match them with credit options that meet — not exceed — their circumstances and allow them to build positive credit experience.

Lastly, policymakers can no longer fail to address the exploding number of unregulated, unlicensed lenders and loan scammers who exploit the challenging circumstances many consumers are facing. Restrictive state and federal laws presented as tried, true and effective have only enabled the growth of this underbelly of consumer financial services, exposing consumers to harmful costs, consequences and risk (not to mention confusion and frustration). This has been especially evident during the pandemic. It’s time to make the distinction between regulated and unregulated providers and what constitutes effective regulation, which provides safeguards where necessary and preserves consumers’ access to credit.

Consumer financial services and the small-dollar credit market have changed and continue to evolve. Policy discussions need to change, too, with an eye toward strengthening consumer financial services and empowering consumer choice and financial inclusion, not simply regulation and restriction.

 

Ed D’Alessio is the executive director of INFiN, a Financial Services Alliance, the national association representing the regulated consumer financial services industry.

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