The year 2022 reemphasized the reason small-dollar lending has consistently delivered on member need over and over since the beginning of the credit union movement over 110 years ago. The effect affordable mainstream credit had on the financial health of cooperative members and its value to the marketplace – due in no small part to the accessibility and affordability of digital fintech like QCash – was put on full display when the numbers eventually came in earlier this year.
The results are staggering: according to Pew Charitable Trusts, with the advancement of fintech and its increased adoption in 2022, those credit unions who took part in the National Credit Union Administration’s (NCUA) Payday Alternative Loan (PAL) program set a new record for loan volume at $227 million, demolishing the previous high of $174 million set in 2019.
It makes sense, seeing as six of the eight largest financial institutions in the country (by location count), who manage 23 percent of all branches, collectively, debuted small-dollar lending programs that cost at least 15 times less than average predatory payday loans.
When you make small-dollar lending available at an accessible and affordable rate, the demand will be there. That’s fortunate, because unlike the high-priced, predatory lending industry that scams consumers and wayward cooperative members to the tune of more than $20 billion annually, small-dollar loans from credit unions incorporate consumer protections, significantly lower rates, negotiable repayment terms, and regular payment programs that take up only a small portion of the member’s annual income.
Enabling the underserved with affordable mainstream credit
Those findings may provide vindication for the power of small-dollar loans, but the mission continues to make them available to every credit union member whenever, wherever they need them, and at rates they can afford.
And it’s a tall hill; according to the Federal Reserve in mid-2023, about 22 percent of American adults remain unbanked and underbanked; that is, not having a checking or savings account, or having accounts but limited-to-no activity. Even more to the point, the lack of financial inclusion is increasingly pervasive among the more youthful generations. Gen Z and Millennials currently make up 60 percent of those unbanked or underbanked, according to a survey by Morning Consult.
A big part of the challenge is that those younger consumers are more digitally astute than their parents and grandparents. That sounds like an advantage in a way, but the issue is that they have become even more comfortable with banking outside of the mainstream credit-building system. Accessing those private online lending websites only deliver financial health consequences.
Rather than partner with financial institutions like QCash does with credit unions to increase mainstream financial inclusion, these non-traditional lenders often charge higher interest rates while providing no ancillary benefits like long-term savings or counseling. They also inhibit the growth and success of credit unions who can offer all the member counseling, mentorship, and long-term financial education of which those online lenders are not capable.
Credit unions must transform themselves to be able to reach, incorporate, and then support these new generations. The cooperatives with a malleable mindset who nurture, embrace, and take action on more modern and efficient member-centric fintech will lessen the damage that comes with losing potential members as fintech strengthens its market in financial services.
Thanks to the regulatory guidance issued in 2020 enabling cooperatives to automate small-dollar loans to millions of Americans whose credit scores otherwise wouldn’t qualify them, they would soon have access to an affordable small-dollar loan they could afford with a credit union that decides to offer them.
Considering the positive expansion of affordable mainstream credit and the product’s growing success since 2018 through digital transformation, after scrutinizing the most recent consumer and market research Pew opted to update its small-dollar loan standards for offering the product. The revised features are described as follows:
- Access
Small-dollar loans should be available to existing credit union members needing the most assistance, are capable of repayment, and do not qualify for other loans.
- Affordability
Loans and lines of credit should provide ample time to repay the loan starting with a minimum of three months, for the purpose of ensuring that each installment doesn’t take up too large a share of the member’s monthly income.
- Amenable pricing
The total cost of the small-dollar loan needs only be a fraction of the loan’s principal, however enough to make sure the credit union can offer access to credit in all territories. Small-dollar loans at a credit union can begin under $1,000 with rates capped at 18 percent. Some federal credit unions also offer PALs of $200–$2,000 with rates capped at 28 percent.
- Speed
Application processes, particularly with a fintech CUSO like the QCash platform, should be near-instantaneous, with the requested funds available same-day. That’s still not enough for QCash, however, as the platform’s relational-decisioning engine deposits the applicant’s specific amount into their account within a minute, if not 30 seconds.
If you haven’t noticed already, fintech CUSOs directly reflect the forward-thinking ideals of the credit union movement established so many decades ago. They reinforce cooperatives’ member- and community-centric values while maintaining the credit union promise of “people helping people” by solving for members’ short- and long-term need.
Last year proved the promise once again: by making small-dollar lending digitally accessible, convenient, affordable, working with a CUSO helps cooperatives nurture millions of unserved and underserved individuals while guiding them back onto the path to financial stability and, ultimately, overall well-being.
