Big banks get green light to make short-term, small dollar loans

Otting’s statement acknowledges that banks may not be able to serve all of this large market.

Some industry experts question whether operating in the small-loan space will be profitable enough for banks.

“Banks in the past have tried to offer these loans and found them unprofitable,” Dennis Shaul, CEO of the Community Financial Services Association of America, said in a statement. “In 2009, for example, the FDIC tested a small-dollar loan pilot program to explore the viability of banks offering small-dollar loans. Banks stopped offering these loans because they were unsustainable.”

But banks could profitably operate in this space if they leverage technology advancements that have happened in the past decade, Horowitz said.

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That would mean using automated underwriting, or an algorithm to determine a borrower’s eligibility and provide an immediate decision, versus having an employee of a bank to make that decision. Banks would also need to originate those loans either through online or mobile banking.

The demand for those loans from banks on the consumer side is there, Horowitz said. Of 826 payday loan borrowers that Pew surveyed, 81 percent said they would prefer to borrow from a bank or credit union over a payday lender.

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