U.S. Bank will begin offering small-dollar loans to its depositors via a digital process, aiming to provide cash when customers get in a short-term bind.
The product, called Simple Loan, is being unveiled Monday and puts the nation’s fifth-largest bank in more direct competition with payday lenders and other financial firms that offer a few hundred dollars on a short-term basis, often at high interest rates.
Consumer-advocacy groups have long pushed banks to offer small-dollar loans that compete with credit cards and other forms of short-term lending that can be expensive and, in cases where lenders hide fees and requirements, detrimental to borrowers.
U.S. Bank, the bank unit of Minneapolis-based U.S. Bancorp, is the first of the nation’s large banks to bring such a loan to market. Executives spent recent weeks demonstrating the product to regulators.
Simple Loan fits its name; the loan is for any dollar amount from $100 to $1,000 and has to be paid back in three payments over three months.
The bank will charge $12 for every $100 borrowed if the borrower repays the loan via autopay from their existing U.S. Bank savings or checking account. The charge will be $15 for every $100 borrowed if a customer repays the loan manually, such as by writing a check and sending it in.
For instance, a person who borrows $300 will wind up paying $336 over three months if the repayment amount is deducted automatically from their existing U.S. Bank account.
U.S. Bank piloted the loan product for a few months in late 2016 and early 2017. It polled customers to find out why they needed the money, and most responded to fill a gap in cash flow or to pay for a surprise expense.
“It’s a real short-term need,” said Lynn Heitman, executive vice president in U.S. Bank’s consumer sales and support unit. “They were looking to bridge themselves through an unexpected scenario, or they’ve got inflows and outflows that are just mismatched.”
Bank regulators last year cleared banks and credit unions to issue the small, short-term loans. For years, banks declined to offer them because it took too much work to process loan applications. A loan that yields only $12 in fees or interest — as the $100 loan will — is not viable if it takes up the time of even a single loan officer.
But the advent of mobile phone apps and other forms of digital banking, along with inside-the-bank processes that support them, have made it possible for banks to offer the small-dollar loans and still make money doing it.
“Financial institutions are in a place where so much of what was manual is now automated, and customers are more comfortable with automated solutions,” Heitman said. “It’s an alignment of the stars that the time is right now for us to get out there.”
The company will require borrowers to have an established credit history. It has arranged for agencies that issue credit ratings to consider the loan in building individuals’ borrowing records.
U.S. Bank does not plan to advertise Simple Loan broadly, partly because it will only be available to existing depositors and partly to hold down expenses associated with it.
“This is a solution where it’s going to be episodic for the customer,” Heitman said. “We want to make sure they are aware that the product exists for them to access if they have a situation.”