Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 8, 2021

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The quintessential and often stigmatized payday loan can be found in inner city retail lending stores surrounded by pawnshops, high crime areas, and slow police response times. At least, that’s the average idea that comes to mind when one thinks of cash advances. Unfortunately, most questions about payday loans pertain to financing from retail lenders and not big banks. However, this interpretation needs a massive overhaul now that large financial institutions have entered the fray.

Big banks, like financial juggernaut Wells Fargo, have entered the payday lending industry hoping to reap in the profits that many lenders have enjoyed in recent years. While these banks can call their instant loan products “advance this” or “advance that,” a payday loan by whatever moniker still functions the same.

Banks like Regions Financial and US Bancorp are well known and could even be considered household names. They have the financial resources and market share to dominate the traditional banking industry. This begs the question of why they would want to expand into payday lending and rub shoulders with tribal-based instant lenders, online cash advance sites, and inner-city payday lenders—hardly their equals.

The answer lies with the recent actions of the too-big-to-fails’ most prominent nemesis: the federal government.

Cause and Effect

In 2010, the Federal Reserve ruled to limit debit-card swiping fees. Additionally the Fed also placed tougher rules on overdraft fees. In short, banks lost a sizable amount of revenue. To compensate, entering the payday loan industry—which is booming—seemed like a logical decision in pursuit of profit.

For their part, the big banks seem to at least be avoiding more overt usurious levels of interest rates on their new payday loan products. Wells Fargo is offering its cash advances worth $500 and charges less than ten dollars for every $100 that is borrowed. Unlike most payday lenders, the bank cuts off customers that default over six months—meaning that there is a safeguard against rollovers. Similarly, U.S. Bancorp offers their “Checking Account Advances” in cash amounts up to $500 for a 35 day period charging $2 per every $20 borrowed. Banks gain the added benefit of being able to automatically deduct payments from the checking accounts of their advance borrowers.

Fortunately—and for the time being—not all of the big banks have thrown their weight behind payday loans under rebranded names. Citigroup and JPMorgan Chase seem content not to enter the payday lending industry and perhaps for good reason. The cash advance industry has been increasingly targeted by attacks from state and local governments in the form of regulation. It isn’t too farfetched to imagine that a time may come when payday lending can only be found online. For the time being though, they are readily and legally found online and offline in most states. However, Citigroup and JPMorgan Chase may simply be acting wisely by not entering into what could be a shrinking market. Time will tell just how well the big banks fare in the shifting payday lending industry and how regulators face off against these new opponents.