The Consumer Financial Protection Bureau has embarked on supervision plan for the nonbank entities. This implies that the CFPB is geared to overseeing a number of financiers, which consumers turn to on regular basis in situations where banks fall short in offering financial help. There has been a loaming issue of crackdown on the nonbank finance service providers. Although CFPB would want to create transparency within financial products, on the other hand, the hard-lined approach that is, being applied in regulating nonbank finance entities such as the payday loan lenders would most likely hurt the many consumers who depend on these services.
There is a gap created by the banks as far as lending to the subprime and low credit score consumers is concerned. Such a gap has only been sealed by the payday loans. The nonbank service products including check cashing, payday loans, prepaid debit cards, and pawnshops are a major product for many consumers who are sidelined by banks.
While it is estimated that one in every four American households are unbanked or unbanked, besides, analysts at Jefferies have also indicated that the underbanked consumers have almost doubled from 2009 to date. This is because most of the credit card lenders or issuers have actually backed away and not serving this group of consumers.
There is a high demand for the alternative financial services such as payday loans, pawnshops, and prepaid credit cards, but there seems to be a problem in that many people do not understand what drives consumers to opt for these services despite their costs. One factor is that the traditional bank products can be misused or abused by many consumers because of their low interest on balances as well as low credit score.
Another thing is that the nonbank financial products are considered because of their simplicity, convenience, and transparency on fees. If these nonbank products are phased out from the financial market, then it means that the underbanked consumer would have to pay more on overdraft fees as well as face higher levels of becoming bankrupt.
While the regulation of the nonbank financial providers may be a timely move, on the other hand, it should not be seen as a way of crippling down or phasing out these products from the market. Besides, banks should understand the financial needs of the underbanked consumer and try to develop products, which can meet their needs.
Despite the low credit score, these consumers also need finances. If they cannot be housed by banks, they will turn to the payday lenders. In addition, if the banks do not tailor their products to suit these consumers, and they use the bank services, they will most likely part with a lot of their money in form of overdraft fees.
Worse still, they will be risking being declared bankrupt, something that can hurt them even more. If the alternative finances are used properly, and the borrowing is done in a disciplined manner, consumers may be able to benefit from them in one way or the other. The problem is that consumers tend to underrate their ability to manage such nonbank credit facilities, thus they end up borrowing more than they can manage.