Sea Change on the Lending Horizon


Batten down the hatches, a new type of loan is in the wind. We’re going to see a sea change.

If you’re not familiar with the term, Webster’s defines “sea change” as “a marked change: transformation <a sea change in public policy>.”

As an outspoken supporter of payday lending, I know that properly regulated, payday lending is a completely reasonable vehicle to provide credit to those who have been marginalized by banks or simply need the convenience of a virtually “instant” loan.

I also know that as financing vehicles go, payday loans have been more unjustly stigmatized than any other, which is saying a lot given our recent era of interest-only, no-income, no-assets, no-job (NINJA) loans and stealth $30 bank “overdraft privilege” fees.

Unfortunately, in the wake of the mortgage crisis, it’s time to recognize where the currents of public opinion are heading.

Even with the present need for credit at all levels, the unfair stigma against deferred presentment remains strong.

Curiously, that tide runs particularly high in states that have never been willing to adopt payday lending legislation.

Like it or not, it’s time to explore alternative horizons. Amid the current sea change, “small-dollar loans” are emerging as the vessel of choice — and everyone (from lender to legislator) needs to get aboard to make them a reality.

While working on this piece, I read over a Cheklist column I’d written back in the fall of 2004 titled, “Ending Payday Prohibition” — in which I called upon the states in the Northeast to change their legislative posture.

I wanted to see if the logic behind my thinking way back then can be applied to small-dollar loans today. I was happy to see that it most definitely can.

What I Said Then: Payday Lending Exists Everywhere

“We already have payday lending taking place in all of these allegedly protected states. In most cases, deferred presentment instruments are pitched via the Internet.”

Still true. What we don’t yet have is a properly regulated storefront alternative that gives working class folks ready-access to short and medium-term credit.

In the Northeast, and perhaps elsewhere, small-dollar loans are the answer.

What I Said Then: Credit Can be Abused by the Rich and the Poor

“Economic standing has no bearing on whether a consumer will be responsible or reckless in handling credit. Those with wealth sufficient to qualify for credit cards appear no less inclined to run up debt at double-digit interest than the non-credit-card-eligible are to let payday loan rollovers get away from them. And, with proper regulation, the latter scenario could be prevented.”

Still true. These words seem eerily prophetic in light of how the middle-class has since gorged itself on credit card lines and debt sourced through phantom home equity, and the how many sophisticated investors leveraged to the hilt to buy commercial real estate and stocks on margin.

What I Said Then: The Need Exists

“Demand in this country and elsewhere demonstrates that payday loans do address a financial need that is currently unmet where they are prohibited. “

Still true. But no matter how I felt then, and how I feel now, the payday lending industry is navigating some very rough waters.

Despite payday opponents’ reliance on one negative payday loan story out of 10,0000 (as if the same story does not exist for TENS OF MILLIONS of users of credit cards, overdraft privileges and mortgage debt), they do have a following.

As a result, the real question is, what form of grassroots lending will evolve along side payday lending?

Everyone acknowledges that something needs to fill the gap between traditional banking products (loans, credit lines and credit cards — which are not available to many typical payday borrowers and certainly not to the unbanked), and the underbelly of street lending, which in my day was known as loan sharking.

Will payday lending vanish? Absolutely not, because it fills a need and it works.

Will new forms of lending emerge? They already are doing so.

Richard Kelsky is co-founder and President of TellerMetrix, Inc. a New Jersey-based provider of POS software and systems to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of New York and New York Law School grad, a Certified Anti-Money Laundering Specialist and a frequent lecturer on legal, compliance, and technology issues. He can be reached at

Posted in Spring 2010.