A profitable industry naturally attracts competition. One previously shadowy corner of personal finance, payday loans, is starting to feel the heat from some unexpected sources. The frustration of industry critics over regulators' inability thus far to rein in what they view as the predatory products has attracted Silicon Valley entrepreneurs and faith-based organizations chasing something beyond profits.
Payday loans are structured to be paid off when a borrower receives his or her next paycheck. If they can't make that balloon payment, which is typically the case for all but 14 percent of borrowers according to a 2012 study by Pew Research, a monthly interest charge is collected while the debt remains outstanding. The annualized interest on the loans typically exceeds 300 percent. Twelve million consumers borrowed an average of $375 and paid $520 in interest and fees over a five-month loan life producing $7 billion in revenue, Pew estimated.
Industry researchers have noted that the 23,000 storefront payday lenders nationwide exceed the number of McDonald's, Burger King, J.C. Penney, Sears and Target stores combined. That does not begin to address the online payday lenders, both licensed and illegal operating throughout the U.S.
The industry experienced rapid growth after the Great Recession. In Minnesota, the number of legal payday loans taken through licensed lenders more than doubled between 2006 and 2012 to 371,000, according to a study of Department of Commerce data by the Joint Religious Legislative Coalition. They estimated that Minnesota borrowers took an average of 10 loans per year, paying an effective annual interest rate between 391 percent and more than 1,000 percent.
Market-based competition is starting to emerge. St. Paul-based Sunrise Banks working with a California company's proprietary software, introduced TrueConnect payroll deduction loans modeled after similar programs in Latin America. This enables employers to offer 12-month loans repaid through payroll deductions as an optional employee benefit. And similar programs are popping up around the country.
In addition, LendUp, a Silicon Valley start-up focused on serving the credit needs of subprime borrowers raised $150 million from venture funds last year to compete directly with payday lenders, offering lower-cost installment loans, financial education and the ability of borrowers to build a credit history.
It's not just business entrepreneurs seeking to do well while doing good things. Faith-based organizations are starting to enter the market, in a very different way.
When Tammi Fullman broke her neck in a car crash in 2011, putting her out of work for a year, her husband, Brian, unexpectedly became the sole breadwinner. "All the bills depended on me. It got kind of strenuous," he recalled. Newly burdened with additional medical expenses and without Tammi's income from the Minneapolis Public Schools, Brian's earnings as manager of a Brooklyn Park barber shop could not cover all the couple's bills. Lacking the credit rating or means to borrow from a traditional bank, he took out his first payday loan for $200.
