So to speak . . .

The Saturday New York Times carried a piece about the role major banks are playing in supporting Internet-based payday lenders. The issues are insane interest rates and the ability of such lender’s to automatically withdraw payback straight out of a bank account, sometimes sending the account into perpetual overdrafts. What state’s provisions for reigning this in applies? The state of the lender or the state of the borrower?

The underlying technology is where we see a two-sided coin. Big advancements in online authorizations and flow of payments can greatly improve financing opportunity. That’s the good news. We covered the example of “digital factoring” in a recent post.

The bad news is first that it is amazingly easy to get sucked into a predatory situation. The second is that the speed at which an account can be pinged to withdraw even a micro-payment means the borrower gets into insufficient fund territory with limited ability to put things on hold or revoke authorization altogether.

Advocates for victims of such practices are doing what they know to do best–lobby for tighter regulations. This will surely play out as it has so many times before. One side says only regulations will protect people from predatory lenders and the lenders will say that once again, innovations in financing options are being shut down for a few bad situations.

We’re not here to take a side in this particular battle. At least not at this point although we have a strong bias toward transparency in anything smacking of credit practices. The seed we want to see planted is harnessing the power that is the Internet to create self-regulating communities around new financing products. Can we see something like a payday borrowers network emerging that rates lenders and exposes harmful practices? Wouldn’t some bankers be willing to step forward and provide great educational content that helps consumers make better decisions about this sort of thing or at least monitor and manage it? Oh, and better yet, connect to other great services such as Learnvest.

Just a thought from a recovering lawyer!

Let us know what you think of new financing options as well as the potential for self-regulating online communities.

–LaVonne Reimer, Founder