Most people who take out payday loans or installment loans will repay those loans by having the funds directly withdrawn from their checking account via the ACH transaction that all major banks utilize millions of times on any given business day. Here's the new question, have you ever repaid a loan using your debit card? If you haven't you might be doing so very soon, as the future will be filled with debit card payday loans that'll be dwarfing the use popular ACH transactions that we see so often today.
Why will the industry move from ACH checking account transactions that are so convenient to the equally convenient debt card payday loans? The answer is not a simple one but the short version is that the ACH checking account transactions are easier to monitor, control and limit by the banking institutions whereas the debit card transactions are harder to control, more numerous and they are more retail centric, which makes them more of an elective by the consumer rather than a contractual agreement (or contractual authorization) that the ACH transaction falls under.
Another way of saying this is that you as a consumer have the ability to put together a debit card transaction and most likely you've done so many times in your life with all sorts of companies.
On the other hand when was the last time you arranged an ACH transaction using the bank routing number and your checking account number? And I don't mean when was the last time you gave the authorization for a company to take funds out of your account using this method, more specifically when was the last time you conducted this type of transaction yourself?
For nearly everyone reading this the answer is never, you have never put together this electronic transaction because you are not a business and you don't own a business, you do not have access to the mechanics to push across this transaction, you only have the ability to provide a company with the agreement that they can do it for you, the consumer.
The debit card gives you the ability to build transactions and payments as you see fit, not just agree for a company to do something for you. There's a slight difference here on the surface but when you dig down it's actually a very significant difference. It's this difference that is now sweeping across the Native American lending business and to a lesser extent it's touching the state licensed payday lending business as well.
The short-term lending business has seen some big shifts in the last year, especially the part of the aspect that belongs to Native American lenders. That portion that tribal lenders have taken away from the state licensed loan companies does not have an official number but most analysts are now agreeing that the total short-term debt market that is controlled by the Native American lending industry is at least 35% of the total and possibly as high as 45% or greater.
In the second half of 2013 there was a distinct challenge put to the growing tribal lending business and that was whether or not the tribes would have access to use the ACH system that most banking customers just take for granted. What happened is a bit complex but not too hard to follow...
On August 6th, 2013 the Superintendent of Financial Services of New York, Benjamin Lawsky, did two distinct things that would start to make it more difficult for high cost state licensed lenders, tribal lenders and the customers of both of those groups to transact their business using the fast, free, simple and very convenient ACH banking transaction.
This transaction is very secure and very easy for banks to use, it simply moves money in and out of a consumer's checking account by referencing the checking account number and the bank routing number. Funds are constantly flowing around using this ACH system.
What Superintendent Lawsky did was make it harder for this to occur on two fronts.
First, he issued a cease and desist order to 35 online lenders that were found to be operating in New York State. About half of those were state licensed lenders and the other half were Native American lenders. While this action was as powerful a move as taking the companies to court with a lawsuit it did make them reconsider doing business in New York.
Second, another batch of letters went out to 117 large commercial banks that essentially stated it was in everyone's (meaning the banks and the banking customers) that these high interest loans, which New York claims violate their applicable state laws, should not be allowed to transact across the ACH banking network. Once again, even though this wasn't a lawsuit or a court order, the strong push by New York's head of financial services (with NY Governor Cuomo standing right there) got the attention of several banks that basically didn't want any trouble with the government. The reaction by different banks has been varied but overall the move made the ACH transaction for high interest loans far less common as banks started to make their preferred decision to walk away from, or simply ban these transaction outright.
Both of these efforts began on the same day in August of 2013 and by the end of the year many high cost lenders were scrambling for ways in which customers could be funded with their new loans and ways for existing customers to repay their debts.
This search touched all sorts of payment models including MoneyGram, Western Union, Green Dot and various other third party repayment methods. At the end of the day though it looks like more and more online lenders are gravitating back the banking system, only this time they will be using customer debit cards.
The debit card is a one-time authorization which a customer can transact by themselves or with the assistance of a phone clerk. These transactions are hard to monitor, hard to control, difficult to spot and they will be quite challenging to stop. Debit card use is largely a consumer choice, debit cards are a consumer tool.
While it's possible to slow or stop access to a bank's ACH platform it will not be easy at all to individually control the use of a debit card to pay a short-term loan. This will become the needle in the haystack scenario in very short order. Plus, now you are directly saying "no" to a consumer rather than disconnecting a business from access to a professional (electronic) payments platform.
Going into the future this will be the new normal for many online lenders. This will really be the case for tribal lenders, don't be surprised at all if they start pitching their new product as the debit card payday loans because letting customers know that they can pay with simplicity (the debit card) rather than going to Walmart to use a MoneyGram style product or Green Dot cards that cost money. The great thing about the debit card is that it's easy, free, quick and simple.
It's hard to understand a future that doesn't see debit cards being widely utilized for transactions for short-term lenders that operate online. Some prominent tribal lenders have already moved in this direction, like Greenline Loans where they have a prominent invitation to use a debit card for their transactions. It only makes sense.