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  • Frank Tian

💰 Large Banks, Small Dollar Loans

Wells Fargo is the latest major bank offering small dollar loans. The loans are for $250 or $500 with a flat fee of $12 or $20.

The other major banks offering small dollar loans include Bank of America, Huntington, and US Bank.

🟧 The History

Small dollar loans used to be offered by major banks.

Back in 2013, six banks (Wells Fargo, US Bank, Regions, Fifth Third, Guaranty, and Bank of Oklahoma) offered a product called Deposit Advance.

This small dollar loan help consumers bridge the financial gap. The cost was about $10 per $100 borrowed, strong competition to the payday loan.

However, an OCC/FDIC guideline in 2013 had an unintended consequence. It aimed to reduce the risk in deposit advance practices.

But banks determined the product was not worth the regulatory risk anymore. All six banks terminated deposit advance in 2014.

🟪 The Regulatory Journey

As CFPB targeted payday loans in 2017, it realized that large banks should be encouraged to reenter the market to fill the gap.

In 2017, OCC withdrew the 2013 deposit advance guideline.

In early 2020, when more financing options were needed to mitigate the pandemic impact, regulators issued joined guidance to clarify expectations and promote small dollar loans.

🟦 The Dwindling Overdraft

With market competition from no-fee offerings and regulatory pressure, large banks are doing away with expensive overdrafts - by lowering the pricing or switching to a subscription model.

The resulting revenue gap for banks also calls for new products.

🟩 The Continuing Competition

As technology’s application in finance begins to grow mature, the product offerings begin to blend.

Major banks offer small dollar loans again, while fintechs eye bigger loans and relationships.

Good for consumers and small businesses, as competition will bring down the financial cost.

Source: Reuters, PEW

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