By Safwan Shah
The Consumer Financial Protection Bureau (CFPB) recently outlined its intent to make financial institutions the preferred providers of short-term, small dollar loans to U.S. consumers over payday lenders, as the majority of small-dollar loan products offered today often exceed 400% APR and are therefore a large contributor to the debt spiral impacting the 25-million middle class Americans.
There is clearly a demand for these small-dollar loan amounts, with 63% of Americans saying saying they could not cover an unexpected $500 expense without borrowing or selling something. However, small-dollar loan amounts bring a multitude of challenges, so understandably larger financial institutions have hesitancy surrounding the CFPB’s intentions to make them engage in this unchartered territory.
While small-dollar loan amounts present challenges for the bigger financial institutions, they present an opportunity for credit unions to step up and play a larger role in improving the financial wellness of the 90 million U.S. workers living paycheck-to-paycheck. But to successfully serve these financially stressed working people, credit unions must re-imagine what these small-dollar loan products should look like. Many credit unions own the business accounts where thousands of people work, so rather than providing the small-dollar loans themselves, credit unions should empower its business customers to do so. How? The answer is simple: give workers access to already earned, but unpaid, wages.
We live in an on-demand world, where consumers have access to what they want, when they want it – except when it comes to their earned income. More than $100 billion in wages is earned every week but remains stuck in transit, waiting for payday. Technology exists today that bridges the gap between this earning and spending, giving working people access to their own earned money for a nominal fixed transaction fee like an ATM, eliminating the debt spiral that often comes with payday loans.
Helping To Grab Share
This transaction would be handled quietly behind the scenes through the service offered by the businesses’ credit union, with no negative impact on the business itself – financially or operationally. In fact, credit unions’ business customers would realize significant benefits in terms of increased productivity, reduced turnover and higher employee engagement, among other benefits.
Offering strategic innovations like this to business account holders would also help credit unions take over a portion of the larger banks’ market share. Many of the larger institutions invest in hedge funds, which then invest in payday lenders – driving significant fee and interest revenue back to those financial institutions. If working people had the ability to immediately access earned funds through their employer, they would no longer have a need for payday lenders.
There is a misperception that working people who need small-dollar loan amounts are irresponsible or do not make wise financial decisions. The reality is, more often than not, these are hardworking individuals without the necessary savings or credit to deal with emergencies. The solution is not just financial counseling – the solution is purposeful innovation that helps working people save money with security, dignity and no additional debt. The unique structure of credit unions uniquely positions them to make a transformative impact on the lives of millions of financially stressed workers in the U.S.
Safwan Shah is the CEO and Founder of Silicon Valley, Calif.-based PayActiv, a financial technology company that offers turnkey, employment-based financial wellness offerings. For info: www.payactiv.com.