Higher Bank Costs are Affecting Low-Income Borrowers Most

Low income borrowers affected most by higher bank costs

After analyzing the impact of higher capital requirements on loan growth in “Higher Capital Costs Hinder Loan Growth” (November 11, 2010), we turn to the consumer loan market where similar trends can be seen. Stiffer capital requirements, along with other regulatory measures that restrict banks’ income from certain products or prohibit banks from re-pricing existing credit risk, have raised the cost of consumer loans. Lower-income borrowers appear most negatively affected. The average credit card rates paid by these borrowers have soared far more than those paid by less risky borrowers, and these borrowers face more restricted access to credit, leaving many of them “under-banked” or “un-banked.”

The public sector is filling in for the private one

As US consumer credit has contracted, a substitution effect has occurred: the US government is the only lender who is expanding credit to consumers. In the mortgage market, the substitution effect has been more dramatic, with the GSEs accounting for over 90% of mortgage originations.

The rise of alternative payment networks

We expect prepaid card companies such as NetSpend (NTSP; Buy) and Green Dot (GDOT; Neutral) to benefit as customers are unable to get traditional banking services. In fact between 15 to 30% of pre-paid card customers are categorized as un-banked or under-banked by the FDIC.

A boon to dollar stores; a drag on big ticket (ex-autos)

Limited credit availability, among other factors, has caused lower-and middle-income consumers to “trade down” and delay purchases of big ticket items. A shift to dollar stores has, for instance, tempered Wal-Mart’s (WMT; Neutral) growth post the crisis. Further, mainstream durable goods retailers such as Best Buy (BBY; Neutral) and Sears (SHLD; Sell) have experienced subdued sales despite the economic recovery.

Captive financing arms drive a competitive advantage

Companies with captive financing arms could gain a competitive advantage by providing credit to customers who are unable to afford or access traditional bank credit. Ford (F; CL Buy) and auto retailer Carmax (KMX; Neutral) stand out as better positioned than their peers.

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