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The Impact of Two-Tiered Banking: How Credit Unions Can Bridge The Divide

Credit unions have an available business opportunity to bridge the growing divide between the big banks and payday lenders in serving a sector of the economy that evidences a strong demand for transactional services.

Executive Summary

Policymakers and the public watch the steady rise of payday lending with concern. Why are such services in demand? Do consumers choose them because they’re convenient or because they have no other option? Where are credit unions and banks? This study traces the emergence and expansion of payday lending outlets in Winnipeg and rural Manitoba between 1980 and 2009 in order to look for shifts over time in the site location strategies of payday lenders relative to mainstream banks. Although the data presented here are limited to Manitoba, the findings are intriguing for anybody who cares about the complicated relationship between payday lenders and traditional outlets like credit unions.

What is the research about?

Location analysis examines the hypothesis that mainstream financial institutions have played a role in the rise of payday lending in poor neighborhoods where traditional branches are absent or underrepresented. This report also considers evidence for the counterargument that payday lenders are not geographic substitutes for mainstream banking but are instead complements, serving different segments of shared markets.

Deregulation and technological change together with changes in demand for consumer credit have affected the distribution of mainstream bank services over the last 30 years, culminating in the advent of the payday loan sector. This report looks at the spatial relationships of payday lenders, banks, and credit unions relative to each other and to demographic and socioeconomic factors influencing location.

What are the credit union implications?

Be prepared to rethink your assumptions about payday lending. The report concludes with a summary that highlights a growth opportunity for credit unions willing to make the investment in new markets overlooked by traditional banks.

  • Results suggest that the payday lending industry is not exclusively located in lower-income neighborhoods
  • Even when credit unions have a branch in a particular area, products and transactional services matter most to consumers who use payday lenders
  • Credit unions may not be in a position to supplant the payday loan industry, but they may be able to ward off the worst effects in underbanked neighborhoods

This report is sponsored by the Social Sciences and Humanities Resource Council, SSHRC.