There are people, myself included, who love provoking innocent bystanders about how insanely high the interest rates are for various short term loan-type products: “a payday loan can cost 500% APR!”  “No! That’s criminal!” “Oh, but an overdraft charge on a normal checking account could easily be 1000% APR!”  “What is the world coming to?!”  Welcome to my cocktail party chatter; and witness the beginning and end of the conversation.

Insiders understand that offering these products costs a lot.  Companies are taking additional risk by lending to people who are often riskier.  Loss rates are actually very high.  Also, fixed costs are high too.  Further, there are people, myself included, who believe that using the normalizing metric of Annual Percentage Rate (APR), or “effective” or “all in” APR (which include all fees and interest) isn’t particularly compelling for a very short term loan.  It’s kind of like saying a hotel room costs $73,000 annually, (“No! That’s criminal!”) instead of $200 per night.  Imagine a cab fare annualized.  Even a video rental.  Still, having a normalizer is valuable to compare products.  It’s just that in the case of short term loans it provokes tremendous anger – all the way up to our national dialogue and policy-making, including the Consumer Financial Protection Agency.

Advocates, myself included, believe underserved, underbanked, lower income people deserve better.  They don’t care that it’s expensive, or complicated, or any “excuse” business people come up with (I do).  This makes for lots of antagonism and not a lot of change.  The business folks haven’t changed much and are always on the defensive.  The consumer advocates complain a lot, run tiny loss-making pilots and not a lot more (CFPA might be a breakthrough for them).

There is a new generation of players who are doing a lot.  We’re investing in them.  CFSI is helping them.  They include bankers, processors, AFSers, nonprofits, startups – all across the board.

But my point here is that these forms of credit need to exist, they are expensive, and APR, or rate, is not a good proxy for their quality.  The fact of the matter is that the underserved will always pay a higher rate.  But that’s not an excuse for not doing better.  I think how a loan improves life should be the proxy for quality, not its rate.  Does the loan help build a business?  That’s good.  Does it offer convenience or avoid embarrassment?  Also good, but less so.  Does it increase economic stability?  Good.  Does it help build assets? Super!  Does it build credit? Harder for many to assimilate, but excellent.  Does it change behavior meaningfully? Vague, but powerful.  You get my point.  I would like to shift the discussion beyond rate and towards life improvement.  Let’s look at how our short term credit products can meaningfully improve customers’ life.  And BECAUSE the customer is one usually with fewer assets, with fewer choices, business should accept the ethical responsibility to build in life improvement, not to accept doing bad business, as they are currently asked to do.  People working on the CFPA should not put rate caps in place, but instead provide carrots and sticks to build in life improvement.