This story from the American Banker (subscription required) underscores the challenges that banks face making a profit from small, short-term loans. A few interesting quotes:
Some bankers participating in the pilot program say it is possible to make money in this line, while others say they are concerned less about making an immediate profit than about establishing relationships that might pay off down the road.
But Steve Simpson, a bank management consultant with Sheshunoff Management Services LP in Austin, is skeptical. Not only are the loans themselves unlikely to be profitable, he said, small-dollar borrowers are unlikely to become good customers in the long term.
Mr. Simpson said the borrowers the banks are courting in the FDIC program typically are of modest means, are not going have high loan or deposit balances, and will not generate much fee income.
(And this)
The $381 million-asset Savings Bank in Massachusetts will require borrowers to put 5% of their loan proceeds into a passbook savings account, which will have to be kept open at least for the life of the loan.
The bank will offer financial literacy material to borrowers but will not require them to master the information, because the CEO said he realizes a classroom attendance prerequisite would drive some borrowers away.
Filed under: Alternatives, Media, Personal Finance
