Can We Improve Payday Lending?

First, a primer on the subject:

Despite the fact that they are “pretty inefficiently provided today“, Felix doesn’t expect the terms of payday loans to get any more favorable for borrowers:

[I]f I have a job, and bad credit, and short-term cashflow issues, and a bank account, and my paycheck gets directly deposited into that account, then my bank knows with a high degree of certainty exactly when I’ll be able to repay what [Raj Date, former deputy director of the Consumer Financial Protection Bureau], calls a “deposit advance”. Indeed, it can take the money it’s owed directly out of my paycheck before I get any access to it at all. This product is as low-risk as an unsecured loan to a person with bad credit can ever be. Since it’s low risk, banks ought in theory to be able to make such loans at relatively low interest rates. And because everybody loves being able to borrow at a low interest rate, a “competitive dynamic” could then drive rates down.

But that’s not the world we live in.

In this world, banks have no interest in banking the kind of people who need payday loans — unless they can extract a large amount of fee income from them. Indeed, Chase launched its Liquid prepaid debit card in large part because it no longer wanted to offer checking accounts to these customers at all, and wanted some other product to move them into. The last thing that banks want to do is to create a new product which will in any way incentivize low-income customers to open new checking accounts, which are likely to always hover around the zero balance level.

Yglesias thinks Wal-Mart should step up:

The solution to this problem, I think, would be for banking services to be performed by a firm that already has low-income clients and would have an interest in increasing its level of engagement with them even if the payday lending operation wasn’t profitable per se. In a word, you need Wal-Mart. … [I]f low-end retail chains were allowed to get bank charters, you could imagine one or more of them wanting to offer discount payday lending services for similar reasons—it’s a great way to get customers in the door at a time when you know they have money to spend.