In an independent sampling of credit unions, drawn at random from NCUA files, Stango found that few credit unions offer payday loans because of a variety of reasons. Some of the credit unions surveyed said they were too small to offer any loans, but the larger ones who responded that they didn't because those loans were "too risky." Other reasons cited were high delinquencies and the high interest rates such loans would require.

The bottom line, Stango wrote, was profitability.

"Most credit unions do not offer payday loans because, at below market fees/rates, it is too difficult to offset default risk," Stango wrote. "While this evidence is not conclusive, it is not encouraging for credit unions: it appears that break-even fees are no lower for credit unions than they are for payday lenders. In some sense, this evidence provides a market test of whether credit unions can be competitive providers of short-term credit, and right now that test suggests a negative answer."

Stango then compared, as best he could, the terms of different credit union payday loan alternative products with standard payday loans. He found this challenging because so few of the credit union products were standardized in ways that could be easily compared with regular payday loans. In general, Stango said he found that federally chartered credit unions were hampered by the 18% interest rate cap and concerns about the risks and losses from this kind of lending.

The NCUA's proposed regulations on short-term, low-dollar lending would allow a higher interest rate on those loans and meet that concern, but it's unclear whether any change in the broad parameters of CU short-term, low-dollar lending, such as interest rate, would be enough to spark those loans.

Stango's research suggested that credit unions may never be able to compete in the market for payday loans because relatively few of payday loan borrowers said they want a credit union product. Stango contracted an independent research firm to survey 40 current payday borrowers about which they would prefer, their own payday loan product or a hypothetical credit union payday loan alternative with terms "slightly better" than the terms of the Better Choice program, a credit union based payday loan alternative that is subsidized by the State of Pennsylvania.

"For every characteristic but one, three-quarters (30/40) or more borrowers would prefer a standard payday loan to a credit union payday loan. In some cases, the preference is nearly unanimous. The survey results suggest a ranking of characteristics," Stango said. "The least attractive characteristics are limitations on rollovers and short operating hours. Next are longer application/approval times and reporting of default to credit bureaus. Minimum membership requirements and savings deposits are also viewed as deterrents to taking out a payday loan. The least unattractive option is payroll direct deposit."

Further, follow up questions to borrowers which asked them to consider products that were identical, except that one came from a credit union and the other from a payday lender found that borrowers still preferred the payday lender, in large part because of things like hours of operation and requirements of direct deposit.

"The high value that borrowers place on softer features such as hours of operation and privacy are in some sense more damaging to the credit union business model, as they are inherent in the ways that the two types of institution to business," Stango wrote. "Even if credit unions decided to mimic the standard payday product as closely as possible, they would be unable to match those features."

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