Is There Competition Between Credit Unions and Payday Lenders?

The purpose of this paper is to investigate the competition between credit unions and payday lenders. Operating in a more relaxed regulatory environment than commercial banks, credit unions are in a better position to offer small dollar loans at more affordable rates than payday lenders. Because detailed information on payday lenders is not publicly available, we exploit the difference in payday loan laws across states, a proxy measure for the availability of payday lenders based on NAICS codes, and different model specifications using data at the state and credit union levels for a more detailed investigation. The paper shows that the number of payday lender establishments increases with the number of credit union offices. This can lead to the conclusion that payday lenders and credit unions target the same consumer base, and consequently compete in the small-dollar loan market. The same conclusion is reached when data at the credit union level is used. The small-dollar loans decrease when the number of payday lender establishments increases. The paper also shows that smaller credit unions experience a tougher competition.