First US federal rule in paydays centres around fintech

Elizabeth Barry 11 April 2016

In an effort to drive down payday loan rates, the US turns to fintech.

EZ Payday Loans StoreFintech companies could play a key role in delivering payday loans to consumers in the US, according to an announcement made by the head of the Consumer Financial Protection Bureau (CFPB) last Thursday. This would be the first federal ruling for the US, where laws pertaining to small amount loans are delivered at a state level.

The CFPB director told congress that there are opportunities for financial technology companies in the payday market and sees three types of fintechs providing small loans to consumers. The first would be payday lenders adapting their business practices to the new rule, community banks and credit unions offering alternative products and fintech companies with new business models.

The aim of the rule is to drive down the interest rates charged on payday loans. While Australian small amount credit contracts (SACCs) are capped at a national level (20% establishment fee and a 4% monthly fee) there are various fee caps between US states, and some states have no caps at all. This means some annual percentage rates (APRs) climb well over 400% annually.

Repeat borrowing is also a problem, with borrowers getting trapped in a cycle of debt as they take out new loans to repay old ones. Much of the payday market is still targeted towards those in low-income neighbourhoods, without bank accounts or on welfare. As these are some of the most vulnerable borrowers, any effort to improve the market, whether through regulation or technology, is sure to be welcomed.

Fintech companies have placed a heavy focus on lending in the US, with companies such as LendUp developing new ways for borrowers to build their credit history and access finance. Other Silicon Valley startups have been similarly invested in the subprime borrowing market, but the new fintech ruling could provide a real opportunity for fintech companies to become more invested in the US payday space.

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