By Jeanette Quick
July 9, 2021 at 5:00 am ET
The pandemic has left many Americans in dire financial situations – the number of people in poverty has jumped a full percentage point since early 2020.
Typically, this would be a boon for the payday loan industry, which benefits from economic desperation. But demand for these loans dropped by 67 percent in mid-2020 and has not rebounded, in part because of federal relief money. With relief drying up, this slowdown may not last.
Predatory payday loans have long been a clear problem without a clear solution. Their interest rates can reach over 600 percent, which wreaks havoc on borrowers’ finances. During the pandemic, Americans showed a desire to end their dependence on this predatory business model and establish healthy financial habits. They saved more money than before the pandemic and used one-third of the funds from stimulus checks to pay off payday loan-related debt.
Now is the moment to continue that progress, not lose it. As more tech companies break into financial services and new business models arise, they have an opportunity to create tools that democratize the financial system and ensure payday loans don’t come roaring back. Here are three ways tech can help empower Americans to keep control of their financial health.
1. Offer low-cost and responsible access to capital
No business should profit from people’s financial distress, but predatory lenders do just that. They trap borrowers in a debt cycle, forcing them to pay off old loans by taking out new ones.
Earned wage access products are one alternative that has been growing in recent years. EWA gives consumers access to money they have already earned before payday. But there is a right and a wrong way to provide EWA: Standalone companies that profit entirely from fee-based EWA – charging consumers to access their own money early – depend on people’s financial distress just like traditional predatory payday loan companies.
No business model should rely solely on fees from EWA, especially when those fees are hidden or hard to understand. Fees should be limited to ensure that consumers are truly accessing their earned wages and not accessing a new debt cycle. This is an important first step to help people avoid the debt spiral of predatory lending. But it doesn’t address the reason many people use payday loans — because they don’t have savings.
Virtually no economic incentives exist for short-term savings, but tech companies that provide EWA can help here too by pairing with short-term savings tools that help people build good financial habits. This also benefits employers: EWA is proven to increase retention when it’s offered with tools that set people up for long-term financial health, like budgeting support and rewards for reaching savings goals. Over time, these tools help people build financial stability so they’re not forced to use predatory loans in an emergency.
2. Partner with Community Development Financial Institutions and Minority Depository Institutions
Predatory lenders disproportionately target Black and Latinx consumers who have been systematically shut out of relationships with traditional banks and tend to have fewer financial resources as a result.
During the pandemic, tech companies proved that they can help bridge the gap between financial institutions and underserved communities. When many Black business owners were shut out from Paycheck Protection Program loans because they didn’t have relationships with banks, fintech companies helped them access aid.
Tech companies can continue that momentum by partnering with CDFIs and MDIs, which often serve low-income and underserved communities. CDFIs and MDIs issued more than 1.6 million PPP loans totaling more than $34 billion. This funding was directed toward underserved businesses at a higher rate than other PPP loans; the Small Business Administration reported that 77.9 percent of CDFI/MDI PPP loans were under $150,000 (compared to 49.8 percent overall) and 39.7 percent were in low- and moderate-income areas (28 percent overall).
Tech companies can make CDFI/MDI funding more accessible by tapping their existing relationships and digital tools to connect people who need financial support with institutions that can provide it. More equitable access to financial services is crucial to stop the cycle of poverty upon which predatory lending relies.
3. Advocate for policies that dismantle predatory lending
In addition to tools and partnerships that help people move away from predatory loans, tech companies — especially fintech companies — should support policies that dismantle the industry’s business model.
A national lending interest rate cap, which would make it illegal for lenders to charge interest above a set percentage, is a critical start. States including Nebraska and Illinois have already passed interest rate caps, but relying on state legislation is a slow, patchwork solution. Tech companies should use their platforms to support national regulation and commit within their own product offerings to cap their interest rates. This would ensure every American is protected from predatory lending.
Americans continue to face economic uncertainty as jobs return more slowly than expected. The federal stimulus that supported many households through the pandemic has ended, and predatory lenders could regain the foothold they lost during the pandemic. Tech companies have unique capabilities to disrupt predatory payday lending and help build a financial system that works for everyone. Now is the moment to use them.
Jeanette Quick is the head of compliance & public policy at Gusto.
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