It’s time for banks to give small-dollar lending a second look

Interest rates are down, and borrowing is set to increase. For banks across the U.S., every statement by Fed Chair Jerome Powell reads as just another stride back toward normality, with the lending engine revving up with each cut. High rates are on their way out, and I know banks will all be eagerly waiting for the onslaught of borrowers to come.

But while that is the case, I wouldn’t say banks should only limit themselves to traditional products like mortgages, personal loans and so on. In fact, there’s a real opportunity here for banks, especially the regional and community players in the U.S., to do a favor for consumers, displace predatory payday lenders once and for all and start offering small-dollar loan services.

It’s a lucrative market — and following a recent crackdown, the vacuum is well and truly ready for the taking.

Earlier this year, the Consumer Financial Protection Bureau resumed its planned crackdown on payday lenders after it resolved some constitutional tie-ups with the Supreme Court. Now freed up, the regulator is fully geared to extinguish predatory payday lending, whereby companies offer high-cost, short-term loans to consumers often from a lower-income bracket.

It shouldn’t come as a surprise, but the CFPB is 100% right to muscle up against these lenders. Predatory lending has no place in the U.S., let alone the world. The spiral of debt that these companies lead consumers into is, by all means, morally wrong and duplicitous.

That said, what goes around, comes around — and banks have already started to ramp up their small-dollar offerings. But while everyone is getting in on the action, from the largest banks to the regional and community players across the country, I think there’s a real opportunity for the smaller banks, in particular, to reap some huge, tangible benefits.

Regional and community banks are stalwarts of their local areas; yet, with the “big four” of JPMorgan Chase, Wells Fargo, Bank of America and Citi only taking more and more of the sector’s profit share, it’s imperative they combat customer churn wherever and whenever possible.

Small-dollar loans would only expand these banks’ loan offerings, making them more holistic, all-encompassing providers of banking services to their customers. It’s also been reported that introducing these products boosts long-term customer engagement and growth opportunities, giving regional and community banks more firepower to remain competitive.

It’s also an incredibly sizeable market. At the tail end of last year, the Federal Reserve Board recorded that the number of outstanding small-dollar loans at the time amounted to a whopping $1.4 billion in value. With payday lenders being rightly shown the door, for regional and community banks, it should be a no-brainer.

Yet, the message isn’t completely getting through. Last year found that over a fifth of community banks didn’t offer these services, and while I’m sure credit risk was a strong deterring factor then, now that shouldn’t be the case. Technologies like artificial intelligence and machine learning can help regional and community banks roll out these services safely and securely — all they need to do is invest.

I recognize that regional and community banks can’t quite compete with the billions JPMorgan, for example, can afford to throw at experimenting with new technology. That said, currently, banks have a huge liquidity buffer to play with, as the high-rate period allowed lenders to tally up a huge combined $1 trillion windfall in interest revenue.

More recently, regional banks also have been enjoying the highs of rising investment banking fees, even outdoing Wall Street analysts’ expectations. If there’s a time to splash the cash on integrating AI into their systems, frankly, it’s now.

AI and ML could clearly be massive drivers of efficiency on the credit risk side, automating checks of customers’ credit histories and spending behaviors, and speeding up the process accurately front to back. Banks could even partner with specialist fintech startups to help onboard these technologies seamlessly and avoid any wasted capital by experimenting in-house.

With their credit risk management desks bolstered and shored up, there could even be an opportunity for regional and community banks to offer comparatively lower interest rates than competitors. Again, I don’t need to tell you that this could boost customer loyalty — and provide an opportunity to grow their customer base.

Small-dollar loans have got a bad reputation. The market has been historically characterized by hostile, predatory lenders, pouncing on the real-life needs of customers, again, often from a poorer segment.

However, with AI and ML, the previous issues banks had in estimating the cost of risk of these loans are — largely — out the window. This is a great example of when new technology can serve both public and private ends by promoting financial inclusion, strengthening local communities, promoting competition and improving the revenues of smaller players.

I believe all banks across the U.S. should offer small-dollar loans — and aid watchdogs like the CFPB in phasing out predatory, harmful entities from this country. But, in the market vacuum left over, there’s a real opportunity for regional and community banks to secure a competitive advantage over their larger cousins.

They just need to take the leap.