Small-dollar consumer loans gain steam at large banks

Six of the eight largest U.S. banks by branch count now offer small-dollar loan products to cash-strapped customers — a sharp reversal from five years ago when such consumer-friendly offerings were scarce.

Since last fall, Wells Fargo, Truist Financial and Regions Financial have joined Bank of America, U.S. Bancorp and Huntington Bancshares in offering low-cost loan programs, according to a recent analysis by the Pew Charitable Trusts. Of the eight largest banks by number of branches, only JPMorgan Chase and PNC Financial Services Group are still holdouts.

Pressure is mounting for more banks to roll out such products, which Pew sees as safe, affordable options compared with costly payday loans and other alternative financial services, such as auto-title loans and rent-to-own agreements.

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One big reason that more banks are launching small-dollar loans: joint regulatory guidance issued in 2020 that encouraged banks to offer loans that assist customers with their short-term credit needs, said Gabe Kravitz, an officer with Pew's Consumer Finance Project.

"That guidance is having a measurable impact," said Kravitz, co-author of the Pew analysis. "That's what we see as the big change. Five years ago, no bank offered these small installment loans."

The launch of small-dollar loan programs at Wells, Truist and Regions coincide with overdraft-related policy changes at each of those banks. Over the past 18 months, those three banks and others have taken steps that will reduce the amount of revenue they collect from overdraft fees — such as reducing or eliminating overdraft and nonsufficient-funds fees, dropping certain account transfer fees and introducing grace periods for customers who overdraw their accounts.

The reforms have come in response to industry competition from fintech and other banks, as well as demands from lawmakers and regulators that banks revise their overdraft practices. Critics have long argued that charging fees for overdrawing an account is especially harmful to lower-income consumers who live paycheck to paycheck.

Since the May 2020 regulatory guidance — which was issued by the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Reserve Board and the National Credit Union Administration — the FDIC has issued additional guidance to the banks it supervises in an effort to crack down on the practice of charging multiple nonsufficient-funds fees on the same transaction.

And Rohit Chopra, director of the Consumer Financial Protection Bureau, has said the agency will continue its probe of overdraft practices by focusing on the largest banks that rely heavily on such fees for income.

Not everyone agrees that overdraft reform is necessary. Lindsey Johnson, the president of the Consumer Bankers Association, wrote in a July 2022 American Banker op-ed that "overdraft remains one of the few short-term liquidity products available to consumers."

JPMorgan Chase, the nation's largest bank by assets, also operates the largest number of branches — a total of 4,787 as of Dec. 31. The megabank, which now has branches in 48 states, does not currently offer a small-dollar loan product, a spokesperson confirmed.

Neither does Pittsburgh-based PNC, which operates about 2,500 branches across several states. There are no near-term plans to launch one, a spokesperson said in an email.

Both banks, however, have enacted other overdraft-related policy changes. JPMorgan increased its overdraft cushion from $5 to $50, which means that customers do not have overdraft service fees when their account is overdrawn by $50 or less at the end of the day.

PNC stopped charging nonsufficient-funds fees on all consumer deposit accounts last summer. Previously, PNC introduced a digital service called Low Cash Mode that warns consumers about upcoming payments that will drive their account balances below zero. The service gives customers 24 hours to prioritize payments, block transactions and add funds to their accounts. 

Other banks, including Wells, Truist and Regions, are offering small-dollar loan options.

In September, Regions introduced a digital line of credit that provides $50 to $500 in overdraft protection to eligible customers. There is no annual or cash advance fee and, once approved, the line of credit gets automatically linked to the customer's account for overdraft protection.

The product is part of a series of changes the Birmingham, Alabama-based company made last year to its overdraft practices, which have been the subject of scrutiny by the Consumer Financial Protection Bureau.

Most recently, Regions was ordered last September to pay a civil money penalty of $50 million and refund at least $141 million to customers who were charged a type of overdraft fee that was levied on certain ATM withdrawals and debit card purchases. Regions did not admit to wrongdoing.

At Truist, a program called Cash Reserve offers an unsecured, revolving line of credit. Eligible customers, who can access the program through online banking, receive a line of credit that provides anywhere from $5 to $750 in funds to help prevent declined transfers and overdraft fees, and help cover emergency expenses, according to the Truist website.

Truist introduced Cash Reserve in mid-December, a spokesperson said. The product is part of Truist One Banking, a suite of consumer-friendlier products introduced last year, which includes two overdraft fee-free checking accounts.

Regulators unite on small-dollar loan principles for banks, credit unions

Wells launched its small-dollar loan product in certain markets starting in November. Dubbed Flex Loan, the product gives eligible customers access to $250 or $500 for a flat fee of $12 or $20, respectively. The loans must be repaid in four equal monthly installments, the bank said.

The number of banks offering small-dollar loans is expected to rise, Pew's Kravitz said. Pew has previously estimated that such loans are at least 15 times less expensive for borrowers than payday loans.

Millions of customers who turn to small-dollar loans instead of payday loans and other forms of alternative financial services could save billions of dollars annually, Kravitz said.

"When people talk about high-cost nonbank lending, often the rationale for such lending is that banks haven't served customers with small loans, and high-cost lenders are filling the gap," Kravitz said. "But that rationale is going away, which is momentous."