More traditional banks have begun offering customers advances on their direct deposits for a fee, a practice payday lenders equate with loans they give. But because the banks are mostly regulated by federal authorities, the state law upheld by Ohio voters last week will have no bearing on them.
"Clearly they are not being held to the same standard as our industry and will not be," said Kim Norris, a spokeswoman for the Ohioans for Financial Freedom -- the campaign group that battled to defeat Issue 5 and repeal the interest rate caps for payday lenders. "It's not a level playing field."
Mark Erhardt, Fifth Third's senior vice president and product development manager, said Fifth Third has been working on its "Early Access" program for more than a year and just completed a three-month national rollout in mid-September. He said the short-term credit program is an added service the company hopes will boost both fee income and customer retention.
"It's a convenience feature -- it's not intended to be a large line of credit," he said. "We view it as a relationship product." Erhardt noted that advance users must have a checking account with Fifth Third for at least six months as well as regular, automatic direct deposits into the account. A customer can get an advance for up to 50 percent of regular monthly direct deposits up to $500 for a fee of 10 percent -- a maximum of $50.
"You can't just open up an account and get one," he said. "We've built a lot of constraints in the system so people don't get beyond their ability to manage their money -- we don't want people to become habitual users." Among the constraints, Erhardt noted that if a customer were to regularly borrow the $500 among maximum over six months, there is an automatic "cooling off" period that shuts down the customer's borrowing.
Julia Tunis Bernard, of Wells Fargo, said the bank has offered its product since 1994. "Direct Deposit Advance service is available to customers with established Wells Fargo checking relationships and recurring direct deposits," she said. "It is designed to help customers get through an emergency situation -- medical emergencies, a car repair, emergency travel expenses, etc. -- by providing short-term credit quickly. It's not intended to solve longer-term financial needs."
While Wells Fargo, U.S. Bank and Fifth Third all offer their advances for periods up to slightly more than a month, their policy is to automatically pay themselves back upon the first direct deposit of $100 or more. So if you borrow $200 three days before payday because of an unforeseen emergency, the bank takes $220 upon direct deposit.
Payday industry officials note such a scenario -- a 10 percent fee for a loan lasting just a few days -- would translate into an annual percentage rate similar to those that drew heavy fire on payday lenders. "Banks who would be exempt from the law are charging Ohio customers a minimum of $10 per $100 and can raise their fees as high as they want for their payday loans," said Jeff Kursman, a spokesman for Kenwood-based payday lender Check 'n Go.