SOME NEW EVIDENCE ON COMPETITION IN PAYDAY LENDING MARKETS

A critical question in the policy debate about payday lending is whether other financial institutions can plausibly provide attractive and lower-priced substitutes for standard payday loans. I present several new pieces of evidence addressing the question, focusing on whether credit unions, which are often held as the strongest potential competitors to payday lenders, do (or might) viably compete in the payday loan market. National payday loan offerings by credit unions show that very few credit unions currently offer payday loans. Credit union industry reports suggest that those credit unions offering such loans seem unwilling or unable to undercut substantially the prevailing prices set by payday lenders. Those industry reports also reveal that lower-priced credit union loans generally ration riskier borrowers out of the market by imposing greater restrictions on approval and repayment; risk-adjusted prices for credit union payday loans may not be lower at all. Survey evidence suggests that most current payday borrowers prefer higher-priced but less restrictive standard payday loans to lower-priced but more restrictive alternatives offered by credit unions. The combined demand- and supply-side evidence suggests that one should not expect credit unions (or by extension banks) to offer lower-priced, higher-quality alternatives for consumers who currently use payday loans. (JEL G2, L0, L5)