As regional banks ready for new federal regulations expected to cut into profits, some of them are zeroing in on the down-and-out customer to turn a buck.
More banks are now doling out short-term, high-interest loans to customers in dire straits.
Observers worry that the loans signify an industry-wide shift toward making money from desperate consumers and more broadly slapping more fees on services for everyone.
If the banks want to maintain their revenue growth, theyre going to have to come up with new profits and new approaches, said Richard Bove, banking analyst at Rochdale Securities.
The net result for Tennessee is an increased cost of banking, and its anti-consumer.
In October, new Federal Reserve rules will limit how much banks can charge retailers for debit card purchases, reducing fees from an average now of 44 cents per swipe to 21 cents. The Fed had proposed limiting fees to 12 cents a transaction, but banking officials pushed back.
Regions Financial Corp., the Alabama-based bank with the largest market share in Nashville, estimated that the new fee cap will result in a $170 million annual loss for the company.
The change comes about a year after overdraft fees a key money-maker for banks were regulated by the federal government. Banks can no longer charge overdraft fees without customer approval.
Regions and Cincinnati-based Fifth Third Bank are among a new wave of banks around the country employing direct-deposit loans, which some analysts say are predatory payday loans disguised with a different name.
You either walk into a payday loan company or you walk into a bank at the end of the day, its the same thing, Bove said.
The direct-deposit loans are targeted at consumers in emergency circumstances, the banks say, and offer checking account customers a cash advance with high interest rates.
Conventional payday loans use a written check as collateral to borrow money. Direct-deposit loans, however, borrow against a customers next directly deposited paycheck.
At Fifth Third, the loans charge $10 for every $100 borrowed until the customers next paycheck, usually a week or two. This could amount to a 300 percent annualized interest rate. For comparison, typical payday loans carry interest rates of about 400 percent.
Consumer advocates say the loans will entangle low-income borrowers in a financial mess.
Direct-deposit loans typically eat up 44 percent of a borrowers next deposit and create the need to take out another loan, the Center for Responsible Lending recently found.
Thus, borrowers often stay in debt, on average, for 175 days and typically end up paying $900 to borrow $500 or less over six months, according to the study.
Regions entered the direct-deposit loan business this spring and has announced plans to roll out check cashing and prepaid debit cards in the coming months.
The bank says the new products are part of its overall expansion of fee-based services.
Wade Lindsey, Fifth Thirds head of retail banking in Nashville, said the direct-deposit loans come with safeguards such as restricting loan amounts and limiting repayment periods to 35 days to protect consumers.
Theres been quite a bit of demand for the product, but were trying to offer this as an emergency service only, Lindsey said.'Unintended effects'
Anjan Thakor, professor of finance at Washington Universitys Olin School of Business in St. Louis, said federal regulators were repeatedly cautioned that the new rules, many stemming from the Dodd-Frank Act, would squeeze consumers.
I like to call it the theory of unintended effects, when proposals introduced to protect consumers actually end up impairing them, Thakor said.
Analyst Bove said the Dodd-Frank Act, which many in the banking industry vilify, may stir consumer resentment toward banks instead of providing a feeling of security.
Banks will start service charges for everything, Bove said. They used to notarize for free. Soon it could be 20 bucks. Theyll start charging you for your statements, and so on.
He continued: The consumer is going to go crazy and start hating banks, if they dont already. Its going to result in deep problems.
Some local community banks such as Bank of Nashville view the crush of new banking fees as an opportunity to recruit customers. The bank does not offer direct-deposit loans, and it does not plan to introduce checking account service fees, according to Anne Livingston, Bank of Nashville spokeswoman.
The new regulations and rules are going to affect everyone in the banking industry, Livingston said. But were hoping theres enough dissatisfaction with debit card and other fees that it will drive customer volume to us and allow us to stay profitable.