In what can only be described as “back to basics” – it looks like a new banking revolution is upon us.

In the UK today we have an economic phenomenon “pay day loans”. I must admit, I knew this market would grow but, certainly not explode as it has done.

In a recent article in the New York Times http://nyti.ms/zkWkiQ it’s reported that the big US banks are about to enter the pay day loan arena. Madness? Well not really.

One of the reasons the UK Government are currently scratching their heads not knowing what to do about pay day loans, is that a large percentage of pay day loans are used to prevent excessive bank charges for bounced cheques and direct debits. If you applied an APR figure to the banks £20-35 charges for bouncing a £5 direct debit the APR would run into the 10,000′s of percent. So, they can hardly criticise the likes of Wonga.com for saving someone from such excessive charges. If used properly pay day loans are actually cheaper than the banks.

Example;

Miss A.N. Other has a week to go until her month end pay day.

Miss A.N is up to her limit of a £300 over draft and has 3 direct debits to be paid for less than £80 before her next pay day. Her bank refuses to extend her overdraft, therefore they go on to bounce her direct debits, charging her £25 for each one! So that’s £75 in charges and the bank has not even paid the £80 direct debits.

A £100 pay day loan would cost her about £20 in charges and her direct debits would be paid if she paid it off within a couple of weeks at pay day.

In this example Miss A.N. would be massively better served by a pay day loan than her less-than-understanding current bank who’s computers keep saying no.

Where’s this all leading to? Well, UK consumers in particular are sick of the way they have been treated lately, only being offering an umbrella by their banks when the Sun is shining!

You may have noticed some little known bank names topping the “best savings rates” in the weekend papers. These are new type of bank we are talking about.

What these banks are doing is lending to the masses that are being turned away by the mainstream clearing banks. In my mind this is great news for savers and borrowers alike. To borrow from these common-sense type banks you pay a higher rate, as your applications are normally personally underwritten and approved on merit, and not solely by a computer, so a risk-to-reward higher interest rate loading is applied.

The above strategy is great news for savers. These banks offer better savings rates as they lend cautiously to customers deemed a higher risk, but at higher borrowing rates thus delivering attractive margins to the banks and therefore feeding back to savers.

So, will UK clearing banks be moving to pay day loans? On the face of it they would have to reduce their current margins to compete! But, watch out for more stars and stripes on the high street.

Arise a new type of Banker.