By Ray Birch
MADISON, Wis.—A loan alternative in which payments adjust up or down as the borrower’s income changes could be a “good fit” for credit unions, according to the Filene Research Institute, which has tested the unique offering.
The product is known as an income share agreement (ISA), and early stage testing has been completed by Filene in partnership with CMFG Ventures, the venture capital arm of CUNA Mutual Group, and Align—a fintech offering ISAs, according to Ryan Foss, senior director of incubation at the Filene Research Institute,
ISAs provide an alternative to mainstream credit lending products such as traditional personal loans, loan consolidation products, small-dollar loans, and credit cards. With an ISA a consumer agrees to share a percentage of their future income for a set amount of time in exchange for a specific amount of money.
Key Differences
The key differences between ISAs and personal loans, said Foss, is there is no fixed payment—the monthly payment could go up or down based on changes in the consumer’s income. If the borrower makes more money, payments increase and vice versa. There is also no accrual of interest and no principal to pay off. The consumer abides by the terms of the ISA by paying a set amount of their income for the agreed-upon period.
“This product harkens back to the key principles, cooperative values and strength of the credit union movement,” said Foss. “This is basically an investment in the member. The credit union agrees to give them money in exchange for a percentage of their income over a set period of time, generally the next three to four years.”
Foss said Align has been offering an ISA product to consumers for the last couple years and is now in seven states.
“They are doing well with this product,” said Foss, who said $6,000 is a typical ISA disbursement.
A Good Fit
Foss believes an ISA is a good fit for credit unions because it gives CUs another means of responding to the unique needs of each member. He said it is also an alternative to the “small-dollar lending problem we have as an industry.”
Foss explained that credit unions, despite their financial counseling and low-rate loan products, still lose members to predatory, high-rate payday loans. Those members are often lost when a life event occurs, such as a serious illness, and the member can’t qualify for a signature loan at their credit union.
“Align has been finding that ISAs are a real solution for some, particularly those who are hit with big, unexpected medical expenses,” Foss said. “A family gets hit with a big expense, they can’t get a traditional loan, and they are thrown into the predatory payday loan cycle.”
Foss emphasized ISAs are not for every member, and those who have a strong credit rating, for example, and the ability to get a low-rate loan would not be a good fit.
“But for those who live along the margins, with little in emergency funds and who have a difficult time qualifying for credit, this is an option for them,” Foss said.
In addition to an ISA’s monthly payments going up or down as an individual’s income changes, there is another feature: should the borrower lose their job, no payments are required.
Ryan Foss
Strong Understanding Needed
Foss stressed that contracting with a person on an ISA requires the financial institution to have a strong understanding of the individual they are working with, their income potential, and career status. He agreed that in some ways it is taking a chance on a person in an effort to help them out.
According to Foss, it is difficult to make a comparison with a traditional loan product, which carries an interest rate instead of a percentage of income requirement, and the bottom-line impact the product will have on the FI. Foss said if credit unions begin offering ISAs they should first consider it as a service to members and another option to assist their communities.
What may eventually lead to acceptance of ISAs is the membership, and even the credit union, understanding the product and grasping how it can help, Foss said. He explained Filene has conducted extensive research on ISAs, surveying consumers, and leadership staff across key CU operational areas such as lending, finance, marketing, and retail.
What Was Learned
“What we learned is there is a lot of confusion about ISAs,” said Foss. “This was true among both credit union members and staff. Even those who had some basic understanding of ISAs struggled to understand key differences between an ISA and a personal loan and the mechanics of how an ISA functioned—for instance, that no interest accrued if a consumer was not making payments on their ISA.”
Filene, which recently published a report on the ISA project, shared that education would be critical to an effective ISA rollout.
“Limited awareness and high levels of confusion among both members and staff mean a well-thought-out education plan would be crucial to ISA success,” the Filene report states. “Key points that would need to be communicated include: how the ISA functions, overall cost to the consumer over the life of the contract, and tools to help the consumer navigate choosing between an ISA and other loan products based on their need and life situation.”
Broader Appeal
While Foss contended ISAs work well with members who are struggling financially, the study revealed the product could have greater appeal.
“Going into the research, Filene hypothesized that members with lower incomes, lower credit scores, greater income instability/volatility, and higher levels of financial stress would be the most likely to value the flexibility of ISAs and prefer them to traditional personal loans,” the study goes on to say. “The survey results show no strong links between ISA preference and demographic, socioeconomic, and credit factors. Generally speaking, members did not show a strong partiality for ISAs versus personal loans. That being said, consumers also did not show any strong aversion to the ISA.”
Rather, the results show strong directional evidence that the ISA concept has broad potential for consumers across all demographic and socioeconomic backgrounds, not just for financially vulnerable populations, the study adds.
Pilot Participants Sought
“Our hope is that credit unions read this report and will become interested in ISAs and could become part of a live pilot with Filene,” said Foss, who said initially CUs would be referring members to Align. A deeper dive into the offering, where the CU might have its own ISA, would come much further down the road. “If things go well, that pilot could start within the next six months. A lot comes down to the number of credit unions interested.”
Foss said interested CU should reach out to him at ryanf@filene.org.