Small-dollar loans made by community banks are often positioned as “win-win” opportunities: They can be profitable for the bank while also being affordable alternatives to predatory payday loans for bank customers, which charge an average 391% interest rate, according to NerdWallet. But would it be feasible for a community bank to take the small-dollar loan concept a step further and offer it to employees of the bank’s business customers?
According to some bankers, there might be potential in the concept.
“At the end of the day, community banks want to serve their communities,” says Rhonda Thomas-Whitley, senior vice president and regulatory counsel for ICBA, who notes that she is not aware of any ICBA members currently offering small-dollar loans through employers. “They want to provide customers with access to safe banking services and responsible lending products that help keep them away from predatory lenders.”
The market: Why consumers need small-dollar loans
Everyone needs cash at one time or another, but not all people have convenient or affordable access to it.
“Everyone, rich or poor, needs liquidity,” says Brett Theodos, practice area lead for mission finance and community and economic development at the Urban Institute, a think tank based in Washington, D.C. “You need a way to manage life’s expenses, and whether that’s money to buy a new car, whether that’s a student loan or whether that’s a small-dollar loan, we all need and benefit from liquidity.
Theodos says people with moderate or little means, and especially those with a subprime credit score or no credit score, pay much more for credit compared with those with high credit scores who can get liquidity at an affordable price.
Today, small-dollar loans exist in several forms, such as payday loans that use upcoming payroll as collateral, credit cards and regular consumer loans. But some consumers do not qualify for credit cards or regular consumer loans, and payday loans carry high APRs.
That’s why some people in the banking world say small-dollar loans offered through employers could be a solution. Employees benefit, because the application process is streamlined and the interest rate is manageable. Lenders profit if they build a large enough base of borrowers—borrowers who are less risky than they would otherwise be because they repay the loans through automatic payroll deductions.
How employer-sponsored small-dollar loans work
391%
The average interest rate on loans from payday lenders—something employer-sponsored small-dollar loans could address
Source: NerdWallet
In 2025, Theodos coauthored a paper titled “Expanding Small-Dollar Credit Through Employer-Based Programs,” which evaluated an example of this type of program operated by the Community Loan Center (CLC) of the Rio Grande Valley in Texas.
That program launched in 2011 with a $350,000 award from the Community Development Financial Institutions Fund. It operates through participating employers who agree to verify potential borrowers’ employment status and income. Eligible employees can borrow up to $1,000 or 50% of their gross monthly wages, whichever is less. They repay the loans through payroll deductions.
The lenders—the CLC has expanded its program through franchising—typically charge a $20 loan origination fee and 18% interest. Theodos noted in his report that the franchisees need a portfolio of 1,500 to 2,500 active loans for the program to become profitable. The overall charge-off rate for the program is 6.2%.
Among the franchisees is only one bank. Theodos attributes that to the fact that the typical consumers of these loans are not likely to generate a great deal of income for the lender.
However, he notes that if the maximum loan were increased to $2,000 or more, or a point or two were added to the interest rate, lender profits would increase. And the incremental value of the borrowers as bank customers would increase if companies with relatively stable employees, such as hospitals, took on the program.
Barriers to entry
There are a couple of potential barriers to entry to this market for community banks. For one, signing up employers has been a challenge for the CLC program franchisees, Theodos says, but a community bank with a strong business customer base might find it less difficult.
Additionally, Thomas-Whitley says any community bank interested in this type of program would have to ensure it meets regulatory requirements.
“No one wants to see a consumer in a negative spiral or a negative and recurring pattern of debt—an outcome too often associated with payday lending,” she says. “So, because community banks are on the front line for these communities, when they offer these small-dollar products, those communities are better served. But for some community banks, the regulatory framework that was put into place several years ago for small-dollar lending creates more burden than the loans are worth.”
Nevertheless, considering the profit potential and the opportunity to better serve the community, an employer-based small-dollar lending program might work for some ICBA member banks.
“At the end of the day, from a concept perspective,” Thomas-Whitley says, “yes, it would make sense.”