Louie's Looking for You

Interesting editorial this morning in the Wall Street Journal. In its role as the defender of free markets, the Journal's editorial board usually fires back in eloquent defense of financial institutions, hedge funds and the mortgage industry. This morning the editorial board put on their jeans and tee shirts and went down market to show some love to the storefront payday lending industry.

A payday loan is a short term loan meant to tide the borrower over until his next paycheck. It is a service targeted primarily to low and moderate income households, known as LMI households. According to a payroll industry survey more than three-quarters of households now live paycheck-to-paycheck.

Payday lenders are often accused of charging usurious interest rates, being an unregulated industry, and preying on the poor. Apparently that's all the mandate the new Consumer Financial Protection Bureau needs to jump into the payday lending wars. The Bureau held it first field hearing last week in Birmingham, Alabama to discuss the small loan industry, of which payday lending is a big part.

But the CFBP needs to consider the accuracy of the charges against the these businesses. Typically opponents of the industry will accuse payday lenders of charging 391 percent annually on a $100 loan. But that's misleading. Payday loans aren't annual contracts. They're short term loans. In reality most lenders charge $15 for that $100 loan. That's 15 percent, not 391 percent. The only way you get to 391 percent is by rolling over a two-week $100 loan 26 times.

As to the charge that payday lending is largely unregulated, the fact is that over 60 percent of the states regulate the practice already. The industry's position is that payday lenders would like to see regulation in all 50 states. In the interest of fairness, I should point out that regulation of this type often becomes a barrier of entry to new, potential competitors entering a market. So when storefront lenders cry "Regulate me!"they may be motivated less from a consumer standpoint and more from a desire for territorial protection.

As to the charge that payday lenders prey on the poor, the Journal cites a Federal Reserve study that found nearly all payday loan customers knew the terms of their loan agreements and were satisfied with the loan product.

So you have to ask the question: What does the CFPB hope to accomplish by regulating payday lenders? They provide a valuable service in the communities in which they operate. Where else could a laborer bringing home $190 a week borrow $100 to fix a 15-year old Econoline van? Payday lenders are already regulated at the state level, where the regulators are closer to the businesses and can probably protect consumers better. And the customers themselves seem satisfied with the deal they get.

Payday lending is part of what the Treasury Department terms "money services businesses, " or MSBs.  These include check cashing businesses, money transfer businesses, pawn shops, gold and silver dealers in and payday lenders. These are businesses that don't prey on the poor; they offer products no one else will. The problem in regulating MSBs like payday lenders is that you can regulate them out of existence but you can't regulate the need they meet out of existence. LMI households have the same need for credit as higher income households. The only difference is that LMI households have limited options. The next rung down from MSBs on the credit ladder is some guy named Louie with a real bad temper.

Overregulating, or squeezing might be a better word, payday lenders out of business only hurts LMI households because it further limits their credit options.

I know about MSBs because I worked with this industry for ten years. I know about the Louies of the world because my father had to borrow money from him once to make the rent. Didn't end well.

This is the world in which LMI households reside. They don't live in a federal office building and they don't live in a field hearing. They live in twilight zone between almost-made-it and never-will. And always waiting for them at never-will is Louie.

I have found over the years that regulatory agencies have some of the best and brightest stars in federal service. People who really know how to get their arms around a problem. Quick studies. And good analysts. But I wish next time this comes up, as it does periodically, some regulatory agency, whether it be the CFPB or someone else, would put assets on a case that have actually borrowed money from someplace other than a bank. Have actually cashed a check without having access to a bank. Or pawned a guitar in college to pay the rent. I think those folks would inform the debate more than a photo-op road show.

That's my opinion. What's yours?

ATM Fee Signage (Continued)

According to the Beaumont Enterprise a New York man is suing a Texas credit union alleging that it failed to post a notice on one of its ATMs stating the cost of using the machine, as required by the Electronic Funds Transfer Act.

Five weeks ago we blogged about lawsuits over fee notification which are costing the financial industry big bucks. I'm sure there are cases where the disclosure notice was missing from an ATM. The court will decide if this case is one of them. But the costs of the nuisance suits will eventually be passed on to consumers like in every other industry. In "ATM Fee Disclosure: Updating Regulation to Limit Jackpot Justice" we made the argument that nuisance lawsuits over this issue have become a get-rich quick cottage industry.

I know some people find it shocking that banks actually charge people - with whom they have no commercial relationship - to use the bank's equipment. Next thing you're going to tell me is that if a perfect stranger knocks on my door and wants to use my car I can't charge him for the gas.  

According to the court filing, the plaintiff in this particular case claims that that he used an ATM of the Firestone Community Federal Credit Union  in Orange and was charged two bucks, and that the fee notification was not posted on the machine as required by law.

If the plaintiff is successful in his legal quest, what would be the remedy? I personally think he should be compensated. I think a fair number would be - two bucks. If I ran Firestone Community FCU I'd issue him a bank check for two dollars and point him to one of the Lone Star State's many fine check cashiers. See how he likes those fees.

At some point ATM signage suits become frivolous. I would think, given the publicity that this issue has received within the credit union industry, that any credit union or bank would be crazy not to make sure by now that their fee notices were plastered to their ATMs with Gorilla Glue, Mighty Putty or something used in the space program.

Meanwhile, speaking of deciding,  I think its time for Congress to decide whether this whole thing over ATM signage has gotten out of hand. It's time to recognize, 15 years after ATM owners started charging for the use of their property, that fee notification on the screen, which is much more secure and visible, fulfills the intent of the EFT Act.

That's my opinion. What's yours?

Smart Cards - Just Around the Corner

   Those of us old enough to have voted for or against George H. W. Bush for president may remember the anticipation 20 years ago over a technology that placed a small microcomputing chip right in a payment card. As that technology was adopted in Europe and other places we were told that those "smart" cards were coming our way. Right around the corner, we were told.

   I thought of that reading a lead story on the PYMNTS.com website this week. The article focused on   the release of a white paper on the implementation of EMV in the U.S. The paper was sponsored by Gemalto, a significant provider of EMV-compliant card solutions, with an assist by VeriFone, an equally significant provider of EMV- compliant POS solutions.

   Leaving the motivation behind the paper aside for a moment, it does provide some interesting insights into the EMV debate. Not the least of these are some suggested reasons the migration to smart cards and EMV will be different this time around, and by implication, why it's take so long to get here in the first place.

   Let me say from the outset: I have no horse in this race. I am neither a proponent nor an opponent of EMV, smart cards, NFC or mobile payments. Like most consumers, my bank sends me a card and I use it. I don't question the technology.

  What I do wonder, like most inquisitive people, is just who pays for all this new stuff. There's a great line in the Jerome Lawrence/Robert E. Lee play Inherit the Wind. Henry Drummond, the lawyer-protagonist, tells the jury in his summation, "Gentlemen, progress is never a bargain. You always have to pay for it." So assuming that EMV represents progress in payment systems, I wonder how it gets paid for.

   Give Gemalto props for a paper that brings together most of the salient points of the EMV discussion in one pretty tight package. Unfortunately, the paper blunts its main argument - that the stars are in alignment for EMV. It does so by relying on some less-than-dynamic logic. Such as the old chestnut that the American payment system is positively antediluvian. We're reminded time and again that "(m)ost of the world has fully migrated or is in the process of migrating to EMV chip technology..." Or, "(g)iven the prevalence of EMV chip technology in the rest of the world..." we lower primates here should get with the program, lest we keep scraping our knuckles on a worn path of magnetic-striped cards.

   I have relatives in Europe. When we get together I often quiz them about their banking and payment systems, from a consumer standpoint. Just to compare notes. Far from being a bunch of silverbacks, I think we do a pretty good job in payments over here.

   The Gemalto argument also relies too heavily on Visa's August 9, 2011 announcement of its carrot-and-stick approach to goose the adoption of EMV. The carrot is a merchant dispensation, beginning in October of this year, from having to validate compliance with the PCI Data Security Standard - provided three-quarters of a merchant's transactions originate from chip-enabled terminals.

   The stick is Visa's intention to shift liability for counterfeit fraud (in the case of a chip card presented for transaction to a merchant who has yet to install chip-reading terminals) from the card issuer to the merchant's acquirer. Ouch.

   But unless merchants upgrade their equipment to accept mobile contactless NFC payments as well as chip cards, they won't benefit from the carrot -  escaping the annual PCI compliance validation. So says veteran industry analyst Avivah Litan in another article. She also points out that even if merchant processors do get to go directly to GO and collect $200, they still have to have their compliance validated by other card brands like MasterCard, American Express or Discover.

   And while you can say you'll shift liability to someone else, ultimately that cost will be shifted to someone else. And we know who that will be.

   None of this is meant to diminish the security advantages of EMV over our current magnetic-stripe card system. But if you're pinning your hopes on the American payments industry being shamed into putting on a clean shirt and adopting EMV, or on merchants, card companies, and processors all playing nice in the sandbox, given the litigious and legislative history of the last eight years, we might not be as close to EMV as you think.

   So, while EMV and chip cards might be right around the corner, the road to that corner still appears pretty long and still filled with some formidable obstacles.

   That's my opinion. What's yours?