The Obama administration certainly has the industry under fire: banks are likely to lose 70% or more of the fees they currently make from overdraft fees.  Sunday, Citibank settled with New York AG Cuomo to keep a million low-end checking accounts open and free for a year at an approximate cost of $100m: a sign of the New Order. Credit card issuers are under stress.  Payday lenders are next in line.  The legacy industry is hard pressed to “serve” the underbanked with all these sticks.

There are some carrots: $30b of non-tarp loan facilities to small banks for small business. Not consumer finance, but still productive in a trickle down kind of way.  The new budget proposal calls for $250m to the CDFI Fund (up from $107m in ’09).  Not directly consumer finance, but targeted towards underserved areas, businesses, jobs, and to a limited extent consumer products.  $50m of the CDFI Fund is to go to a “Bank on USA” initiative (up to half for administrative costs!) to, “seeding local initiatives to establish bank accounts for LMI persons who don’t have accounts with financial institutions, and providing appropriate products and services to underbanked persons and for the purpose of encouraging individuals to enter formal banking relationships and access financial services and development services.”  This could be good, but it strikes me as too little, too late.  I’d rather see it go to a “Finance On” initiative not tied to banks, or better yet, to our new venture fund targeting private sector innovation serving the underbanked.

It seems like more banks will be offering short-term loans that look more like payday loans (but will actively not marketed that way), to make up for overdraft fee losses.  Wells Fargo, US Bank and FifthThird are examples.  Meaningful to payday industry?  Seems unlikely.  I’m betting that those who are unbanked or barely-banked are likely to drift further away instead of closer to FIs.

We wish to place bets on high tech players who can access wide distribution outside of banks and offer “Good Credit” (topic of subsequent post) at lower cost with a higher margin.  Impossible?   Absolutely not.