Payday Lenders, Your Time is Up.

By Colin Walsh, CEO of Varo Bank

2023 has rolled in with a wave of financial concerns: the looming threat of a recession, ever-climbing costs, and a running tally of layoffs. Consumers of all income brackets are feeling the strain of inflation. But for those living paycheck-to-paycheck, surging costs from the grocery store to daycare are forcing families to make difficult tradeoffs just to cover monthly expenses.?

For some, a job loss, unexpected expense, or yet-another price increase could tip the scales from making ends meet to needing extra cash. Our financial system has a long history of letting down those in need of a financial bridge with barriers to entry, coupled with confusing and exorbitant fees. This needs to change.?

A Cycle of Debt

Cash-strapped Americans often turn to payday lending to cover unexpected expenses, such as appliance and car repairs, as well as everyday items, like utility bills and groceries. In fact, 72% of Americans say they would experience financial difficulty if their paychecks were delayed just one week. And while short-term loans can help people facing an unexpected financial crunch, the market is largely served by non-bank payday, auto-title, or other predatory lenders. These lenders charge exorbitant fees that ensnare customers in a cycle of debt by the very loans they thought would help them.?

According to the Pew Charitable Trusts, each year, approximately 12 million Americans use payday loans that are often predatory, propagate a cycle of debt, and negatively impact credit scores.?

Notably, Americans spend over $30 billion annually to borrow small amounts of money from these lenders. And, shockingly, most borrowers end up paying more in fees than they received in credit.?

Having a low—or no—credit score can lead to severe financial stagnation and even exclusion; and when you’re excluded from the traditional banking system, it is exceedingly difficult to access loans.?

In 2020, amid the pandemic, nearly 2 in 5 American adults applied for credit, according to the Federal Reserve. Among those who applied with incomes below $50,000, almost half were either denied or approved for less credit than requested.?

When traditional avenues to credit are not an option (like credit cards), individuals, struggling to make ends meet, need to search for alternative, sub-par, short-term loan products with very high APRs, making financial stability even more difficult .??

Where are the Credit Mobility Champions?

Today, there are a plethora of small-dollar loan options available—from neobanks to Buy Now, Pay Later (BNPL) apps—that were not around during The Great Recession.?

In fact, many neobanks themselves were created in response to the 2008 financial crisis when Americans lost trust in traditional financial institutions and developed an appetite for innovative digital banking solutions, transparent pricing, and products, like small-dollar loans, that met their needs. During the pandemic BNPL providers grew in popularity, bringing point-of-sale borrowing to e-commerce to help fund everything from big ticket purchases to grocery bills.?

While newer solutions like neobank paycheck advance offerings and BNPL help struggling Americans avoid predatory payday loans, auto title loans, and pawnshops, these products are not without flaws.?

BNPL apps foster a perception of affordability that often encourages consumption beyond customers’ means. When consumers use paycheck advance solutions with regularity, they are at greater risk for frequent and debilitating overdraft fees. What’s more, these apps often saddle users with fees that are higher than traditional credit cards and do not recognize timely payments with credit score boosts.?

Most recently, more and more major retail banks have introduced small-dollar loans, including big players like Wells Fargo and Bank of America. While these products are a welcome addition to the small-dollar lending universe, to many, it may be too little too late after long histories of creating systemic barriers to wealth building and neglecting to design offerings to help those living paycheck-to-paycheck build credit.

While no solution is perfect, Varo Advance, our small-dollar credit product, provides optionality that peer digital banks and BNPL solutions do not.?

As we built our solution at Varo, we looked to remove the problematic elements found in the market and aimed to adopt the best practices. For instance, our fees are displayed up front and we do not ask for an expedite fee for instant access to the loan or voluntary tips. Further, our product allows customers with an established depository relationship to borrow money at any time and repay their loan within thirty days—not on their next payday—to limit the likelihood of undue overdraft fees. Most importantly, customers can continue to borrow if they have a demonstrated record of timely repayment, stopping the debt spiral. Varo also offers our customers one of the nation's highest savings incentives and related tools, including Save Your Change and Save Your Pay, that offer customers a pathway to building wealth that will ultimately help them become less reliant on small-dollar loans.

Americans Deserve Better

During this period of financial uncertainty, and as we push for increased financial inclusion, the need for a credit system that works for all Americans is critical. At Varo, we understand that one of the first steps to enabling economic mobility is providing the resources to build and access capital to those with damaged credit, or no credit.?

For generations, those living paycheck-to-paycheck have been neglected by traditional banking systems and denied the ability to create wealth. At Varo, we’re building a new model, and helping to shape a more inclusive future of banking.

As we collectively work to reimagine what financial inclusion really means, we need more financial institutions, digital banks and fintech apps to align themselves with consumers’ financial goals, creating solutions that offer true mobility and promote financial well-being.?

At Varo, we are committed to building solutions and innovations that break down the systemic barriers to financial growth—and push those in our industry to do the same.??

#mobilebanking #banking #abankforallofus #varo #financialinclusion #wealthbuilding #financialfreedom? #cashadvance