Bank of America will begin to offer small, short-term loans to cash-strapped customers, the Charlotte-based bank announced Thursday, a move that stands to upend the market for short-term loans.
The loans, called Balance Assist, will have a $500 limit, and will be available only to people who have had a checking account at the bank for at least a year. The rollout will start in a handful of to-be-announced states by January before expanding to the rest of the country early next year.
The move makes Bank of America -- with its tens of millions of customers -- one of the biggest financial institutions to have a small-dollar consumer loan.
It's a space historically dominated by payday lenders and other consumer finance outlets, who gained seedy reputations for their high fees. Regulators have urged banks to get into small-dollar lending for years, and in May issued guidance prodding banks to help consumers hurt by the covid-19 pandemic.
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Still, before Bank of America's announcement, among large banks, only U.S. Bank and KeyBank offered the kind of smaller loans that regulators sought despite customers indicating they want the loans.
Even before the coronavirus pandemic, about 40% of U.S. adults said they would struggle to pay for an unexpected $400 expense such as a car repair or a small medical bill, according to a survey by the Federal Reserve. This year, unemployment has soared, leaving many consumers struggling to keep up with their bills.
"Clients were telling us that they can't make it quite there from paycheck to paycheck. So, this is a bridge," said Steve Boland, Bank of America's retail head, in an interview. The bank wanted all of its customers to do all their financial business at the bank, he said, and not with higher cost alternatives.
"Customers have told us they have that need for liquidity," said Kevin Condon, senior vice president for consumer-deposit and small-business products at Bank of America. "We want them to stay within mainstream banking to do that."
Bank of America's loans -- which cost $5 regardless of their size -- will be paid back over 90 days in monthly installments. Customers are only allowed to have one loan out at a time, and can repay it early without penalty.
Successfully paying off the loan will be recorded on a person's credit, potentially boosting their credit scores.
The product was cheered by some consumer advocates for its cost and utility, but questions still linger about how many bank customers will be able to use it.
"We need more institutions to offer small-dollar credit," said Jennifer Tescher, chief executive officer of the Financial Health Network, in a statement. "It is encouraging that Bank of America has developed an alternative to overdraft and payday loans that is safe, transparent, and affordable, with the real potential to advance financial health."
It's good that a bank as large as Bank of America will offer the loans, said Alex Horowitz, a senior officer of the Pew Charitable Trusts' Consumer Finance Project.
He's waiting to see how widely available the loans will be, particularly if people with spotty credit will be able to access them.
"At a fundamental level, it's a good thing for banks to offer small loans to their customers who are struggling to make ends meet and have for a long time turned to paydays lenders, title lenders or pawn lenders," Horowitz said in an interview.
Information for this article was contributed by Jenny Surane of Bloomberg News.