Royal Bank of Scotland Group plc And Lloyds Banking Group PLC Set To Enter The Payday Loans Market

As banks, Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US) are always looking for new ways to make money, and they have just spotted a great opportunity. 

This opportunity comes in the form of the payday loans market, where the FCA has just introduced strict new lending criteria for operators. 

FCA intervention Lloyds

On Tuesday, the FCA outlined its proposed new rules for payday lenders in a move aimed at cleaning up the industry.

The regulator revealed that from the beginning of next year, interest and fees on short-term loans must not exceed 0.8% a day of the amount borrowed. That’s around 24% per month on a loan of £100. What’s more, the FCA revealed that late payment fees would be capped at £15 and there will be a total price limit of 100% of the original loan.

Industry shock

According to City analysts, these regulations will cost the payday loan industry around £420m, around 42% of the industry’s combined annual revenues. As a result, it is expected that many lenders will be driven out of business, as the cost of operating within the industry rises and profits s hrink.

Lloyds and RBS can see an opportunity here, and they have put plans in place to fill this potential gap in the market. 

In particular, Lloyds is looking into the prospect of offering smaller loan sums to customers, for shorter time periods, targeting customers who might have otherwise turned to a payday lender. 

Meanwhile, RBS is planning to speed up the time it takes to approve its existing loan offering, an initiative named “loans within minutes”. However, both Lloyds and RBS are stopping short of offering a traditional payday lender service. This has given rise to the term ‘quick credit’, as opposed to payday lending. 

Actually, RBS’s management has clearly stated that the bank will not offer small loan sums similar to those available from payday firms. The reasoning behind this is quite simple, the bank cannot afford to loosen lending standards as it remains under scrutiny by regulators. 

Still, RBS’s drive to offer loans within minutes is prompting an upgrade of the bank’s computer systems, something that has been long overdue.

Tough to analyse 

RBS's and Lloyds' entry into the quick credit market should improve the banks reputation with customers. Nevertheless, only you can decide if either of the banks deserve a place within your portfolio. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool owns shares in Standard Chartered.