Consumers' need for 'small-dollar' credit requires new strategies from lenders

A recent report from the Federal Deposit Insurance Corp. revealed that approximately 10 million American households are "unbanked," causing many experts to analyze how banks can attract customers who have chosen alternate credit sources. One strategy financial services providers may consider in the future is making "small-dollar" credit products available for consumers at their institutions. Currently, Americans are accessing quick and smaller amounts of financing at short term lenders and pawn shops. However, Rachel Schneider and Rob Levy, vice president and manager, respectively, at the Center for Financial Services Innovation (CFSI), told American Banker that financial institutions should begin the process by listening to the needs of individual borrowers. Such interviews would need to examine questions such as, "Why do you borrow?" and "Why do you choose to borrow from there?" Research from the CFSI shows that these questions can reveal structural mismatches between where consumers are seeking loans and what they need. Availability isn't the only requirement small-dollar lenders will need to meet. Schneider and Levy suggest that lenders should begin by offering budgeting and savings advice, and then address whether a loan is the right decision.