By Ray Birch
NEW YORK—Credit unions face a payday alternative loan problem—their small-dollar products are not readily accepted by members who need them, according to Inclusiv, which is offering a solution.
Credit union payday alternative products have not taken off and do not serve a large percentage of the underserved and low-income communities who rely on these emergency loans for two reasons, according to Pablo DeFilippi, SVP of membership and network engagement at Inclusiv: there is little consistency in the offerings and they are not simple and easy to get, like payday loans.
“You go into a payday lender and people know what they are going to get. They know the general pricing, and they know they will get their money fast,” said DeFilippi.
To address the situation, the CUSO QCash Financial and Inclusiv have entered into a partnership that seeks to make it easier for Inclusiv’s network of more than 450 community development credit unions to offer simple, consistent and easy-to-get small-dollar loans, DeFilippi told CUToday.info.
“QCash life event loans are an easy-to-implement solution that provides credit unions another way to practice financial inclusion, serve the underbanked, and allow credit unions to say ‘yes’ more often, since it uses QCash’s relational underwriting rather than traditional credit scores,” said DeFilippi.
Wrong Criteria
He added that too many credit union payday alternative products apply much of the same credit criteria and underwriting processes for standard unsecured loans, which makes the process difficult and slow.
“I think if we, as a movement, were able to offer payday lending that's going to be consistent across markets, I think that we could really make a dent on the payday lending industry,” said DeFilippi. “Not really push them out of the business, but show them there is competition. Because, today, payday lenders do whatever they want because there's no credible competition.”
But the credit union community has the scale to make an impact, stressed DeFilippi.
“We have 5,000 credit unions in this country. If we can get half of them to offer a payday loan alternative that is consistent across markets, across states, this will show payday lenders there is credible competition.”
Pablo DeFilippi
Simple & Easy
DeFilippi described the simple, easy experience consumers receive when they go to a payday lender.
“From a consumer's perspective, when they go to a payday lending shop they know what they’re going to get,” he said. “They go to a credit union and the name of the product may be different each time. The qualifications and the requirements to apply and receive for the loan may be different.”
QCash currently has 61 credit unions on its platform.
“We believe that their product offers a market-tested, competitive, scalable and turnkey solution that integrates easily with a growing number of core systems,” said DeFilippi. “Furthermore, this is an affordable and responsible product that can be delivered within the existing regulatory framework.”
DeFilippi said that QCash’s non-credit score based loan underwriting engine enables credit unions to lend deeper to existing members who may not qualify for traditional loan products and also, to meet the immediate credit needs of community residents who may be using high-cost fringe financial service providers that target low- and moderate-income individuals, particularly when an emergency arises.
“The sad reality is that the financial system doesn’t work for a lot of people,” DeFilippi said. “Twenty-five percent of Americans have credit scores below 650. One-in-five Black consumers and one in nine Latino consumers have FICO scores below 620. This is the main market for many credit unions. Let’s remember that more than half the entire industry is low income designated and that MDIs (minority depository institutions) represent 10% of our movement.”
How Product Works
QCash CEO Seth Brickman said that with his company’s product, the credit union selects the interest rate it wants to charge, based on the 28% payday alternative lending cap.
“Federal credit unions are regulated by PAL II guidelines from the government,” he said. “Our platform also supports an application or an origination fee. Again, it is up to the credit union as to whether they charge any fees. Our platform supports tiered payback periods based on loan amounts and it is fully customizable by the credit union. So, the credit union can choose the payback periods they want for different loan amounts.”
The main cost to a credit union is the QCash funded loan fee, Brickman said.
“QCash Financial uses ‘success based’ pricing,” said Brickman. “What that means is we only charge a small flat fee when the credit union actually funds the loan and will make interest revenue from that loan. In practice, that means if a member abandons, the credit union does not pay us. If the member is declined, the credit union does not pay us.”
Too Many Hoops
DeFilippi emphasized that when a consumer needs an emergency, small-dollar loan, the credit union can’t make them “jump through hoops.”
“We can’t make them go through the same or even similar procedure as when they apply for a bigger loan. This does not make sense for the for this consumer and it doesn't make sense for the institution either,” DeFilippi said. “What’s more, a more detailed loan process is costly for the credit union. They need a small-dollar loan process that is efficient and sustainable.”