It wasn’t long ago that consumers seeking short-term, small-dollar credit had only the options that were locally accessible, and this often limited their choices to insufficient or inaccessible offerings. Today, however, consumers have far more choices when they need credit.
This is a positive shift, largely driven by technological advancements and greater competition that responded to the increasing demand for credit by creating an innovative and diverse lending ecosystem. Everyone benefits from this environment, especially consumers with poor or limited financial histories who now have more options than ever.
Fintech lenders in particular have played a crucial role for consumers by developing innovative, proprietary technologies that allow them to extend credit at competitively priced rates. For several reasons — like the costs associated with lending to higher-risk borrowers — loans from alternative financial providers may carry higher rates than those typically offered by a declining number of banks and credit unions. Unfortunately, partly because of these higher costs, products offered by fintech lenders are often attacked and maligned.
In recent years, a few banks and credit unions have introduced small-dollar lending products with low rates or flat fees, often generating significant media attention when their offerings were unveiled. These products are also lauded by opponents of the alternative financial services sector as the solution for credit while they advocate policies that would eliminate alternative products. As more traditional institutions enter the field, it is only logical that more customers will consider and use these options — especially now, as demand for credit is surging. However, the reality is that while some consumers may find the financial solutions they need from their bank or credit union, many will not.
We saw proof of this when the Online Lenders Alliance recently analyzed data of 1.4 million customers from several large alternative financial providers. This analysis revealed that 27 percent of these customers held accounts with one of the six major banks offering small-dollar products (Regions Bank, Truist, Wells Fargo, Bank of America, Huntington Bank, and U.S. Bank). This shows that a considerable percentage of consumers — more than one out of every four — bypassed their traditional financial institution’s options and instead chose alternative providers to meet credit needs.
Several factors likely drive this behavior: some consumers may not qualify for their bank or credit union’s small-dollar loan product, others may find alternative products better suited to their financial situation, or fintech lenders may offer faster or more flexible solutions. Ultimately, every consumer has unique financial needs, and since they do not live in a financial silo, restricting their choices is unlikely to improve their financial situation.
Over the next two years, opponents of the alternative lending industry are certain to continue pushing for legislation or regulatory action that restricts lending options and forces financial products from the market. These efforts fundamentally ignore consumer preferences — they want more options and rely on a range of credit products.
While banks and credit unions have an essential role to play, they cannot meet the full range of consumer credit needs on their own. A diverse credit marketplace ensures everyone can access financial solutions that best fit their needs. With many alternative financial products likely to face criticism in the coming years, policymakers would be wise to reject efforts that serve only to restrict consumer choice.
