Are banks and state governments unwittingly colluding to prevent millions of Americans from being able to afford to pay their bills or profitably run their small businesses? Several pieces of economic data have raised serious questions about the ability of a whole subsection of Americans and small business owners to take the first steps toward building wealth — namely, lack of credit.
For many Americans, this will preclude their ability to meet short-term financial commitments let alone achieve long-term financial stability. What is driving these negative trends in consumer and business credit? It is the same banking regulators who are supposed to be looking out for and protecting consumers. In fact, the constriction of consumer credit is the product of banking regulators who have continued to add to the hurdles that banks must meet to make loans, including raising the banks' reserve requirements. As a result, it makes it nearly impossible for the banks to meet the credit needs of this growing population of Americans — nearly 100 million strong.
Imagine Americans with stagnant wages trying to meet their household financial obligations, save for college and even retirement. It is daunting even without access to credit. What about small business owners with declining revenues who should be driving job growth? Even in good times, they depend on their access to credit to manage their cash flow, cover operating expenses, meet payroll and — gasp — health care and other benefits. The non-bank financial sector may be the answer to the credit crisis. Although these non-traditional financial service companies have long been vilified, they provide critical access to much needed credit, as well as the only way millions of others can establish and build their credit.
It may surprise you that these non-bank financial service providers include pawnshops, payday lenders and short-term loans. As importantly, they also provide other invaluable products such as reloadable debit cards and installment loans. Yet, most people's knee jerk reaction when they hear the words "payday lender" is to accuse these businesses of predatory lending practices because of the "excessively" high interest rates. But are they really excessive? One of the most fundamental financial principles states that the greater the risk, the greater the return. In other words, these lenders need to charge an interest rate that compensates them for giving high-risk consumers money who have a history of abysmal financial management, not paying their bills, or leaving others holding the bag. The default rates are, in fact, excessively high for these businesses.