SOME NEW EVIDENCE ON COMPETITION IN PAYDAY LENDING MARKETS

1. INTRODUCTION The rapid and widespread growth of the payday loan market has sparked considerable controversy. One active debate in that controversy is about whether prevailing rates/fees charged by payday lenders are "too high." (1) Payday lenders argue that rates/fees for payday loans do not yield economic profit once one accounts for the full economic costs of being in the business. A counter-argument frequently voiced by banks and credit unions is that prevailing fees more than cover costs; credit unions in particular argue that they can effectively serve the same borrowers at lower prices. (2) This argument is critical when thinking about the design of sound public policy. If current fees are at break-even levels, then capping fees below their current levels will simply force payday lenders to exit, reducing the supply of credit. However, if fees are above break-even levels, then price caps on payday loans might simply result in lower prices paid by current payday borrowers from existing payday lenders. There has been some evidence to date on this point, generally finding that payday loan fees are break-even, but quantifying economic profits is difficult and that direct evidence has not completely settled the debate. This article presents several new pieces of evidence addressing the question in a different way. Even absent regulation, one might expect that other financial institutions could undercut prevailing prices, pushing payday lenders out of the market and leaving customers better off. Asking the question that way relies on what most economists consider the most powerful intuition about competition: Prices above breakeven levels should attract entry. I focus on credit unions as the set of potential competitors, because credit unions have generally been more vocal than banks in claiming to be viable competitors. I also focus on direct competition by credit unions in the payday lending market. There is already considerable evidence that both banks and credit unions provide indirect competition with payday lenders, by offering overdraft protection; that work shows that in many cases, standard payday loans can be a less expensive form of borrowing than a checking overdraft. (3) For credit unions to serve as viable competitors, credit unions must either provide functionally identical payday loans at a lower price or must offer a differentiated product with a price/characteristic mix that payday borrowers prefer. For example, if credit unions offer lower-priced payday loans, those loans cannot compete with standard payday loans if they have qualitative characteristics that potential borrowers find extremely unattractive (such as a less convenient application process) or that would screen most potential borrowers out of the market (such as tighter credit approval requirements). The evidence in this article addresses both those questions. I first summarize new data collected by the National Credit Union Administration (NCUA) on the prevalence of payday lending at credit unions. Those data cover the entire population of credit unions in the United States and allow a comprehensive assessment of whether credit unions find it attractive to offer payday loans. Those data show that very few credit unions currently offer payday loans. Fewer than 6% of credit unions currently offer payday loans and credit unions probably comprise less than 2% of the national payday loan market. I also present survey evidence in which credit unions themselves report the greatest practical obstacles to offering payday loans. Responses are generally variants on a single theme: Most credit unions do not offer payday loans because they see little chance to break even on a low-priced payday advance product--either because the rales/fees they would charge are too low or because payday loans are too risky. In sum, this evidence suggests that credit unions find entering the payday loan market unattractive; that is not what one would expect if prevailing payday loan fees were above competitive levels. …