By Ben Morales
In 2016, the payday lending industry came under rigorous scrutiny by the CFPB, which resulted in proposed regulations that could potentially end traditional payday lending. With 2017 well underway, this ruling may still be in the works, although the industry is uncertain when, if ever, the anticipated regulations will finally appear.
While so much is currently unknown, credit unions are a natural fit to offer their members cheaper alternatives to payday loans and other valued services that promote financial well-being.
American consumers have shown a strong need for small-dollar lending as a financial service. A study by the CFPB indicates that more than 19% of adult Americans have credit histories that cannot be scored, meaning their histories are lacking altogether or have had such little activity in recent history that their former scores are no longer accepted, or are credit invisible. With such a large proportion of the population without the type of credit records that give consumers access to traditional financial services, such as large personal loans through a financial institution, many are forced to turn to less-traditional alternatives for their lending needs.
Beyond offering underbanked consumers access to instant liquidity, small-dollar loans also help support overdraft protection. Recently, Pew Charitable Trusts published an issue brief entitled Consumers Need Protection from Excessive Overdraft Costs, which discusses a number of the issues related to the high costs of overdraft charges and key findings on how to reduce or eliminate the need for these charges. One of Pew Charitable Trusts’ recommendations based on the institution’s findings was to encourage financial institutions to offer access to small-dollar credit as a method of avoiding these charges. Affordable small-dollar lending programs could easily help consumers regain financial stability, instead of facing expensive overdraft charges for insufficient funds.
'Cash Flow Issues' Affect All Demographics
While small-dollar lending services are seen as attractive loan-types for low income consumers, in reality, consumers from a broad range of incomes and lifestyles value member services that provide instant liquidity. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households, a large proportion of consumers report regularly spending more than their incomes. This is the most common in households earning less than $40,000. Of these households, 27% report spending more than they earn. However, this is not isolated to low-income households—18% of households earning between $40,000 and $100,000 report spending more than they earn, and that’s true even among 15% of households earning more than $100,000 annually. A significant portion of each of these demographics admits has demonstrated cash-flow issues in their households’ budgets. Members of all income levels often struggle to manage their spending, which can be especially difficult when unexpected expenses occur.
Small-dollar lending services that prioritize members’ needs and offer low-cost alternatives to traditional payday loans are ideal to help member transition from periods of financial instability to mature spending and saving behavior. By providing these loans, credit unions are able to offer their communities valued services that help the financial health of individuals and create a sustainable revenue stream for the credit union.
The right small-dollar lending program is an ideal way to offer members a service that meets an established need, while proactively establishing a safety net for members of all incomes.
Ben Morales is the CEO of QCash Financial. QCash Financial is a CUSO providing automated, cloud-based, omni-channel small-dollar lending technology that enables financial institutions to provide short-term loans quickly to the people they serve. For more information about QCash, visit Q-Cash.com.