Overcoming the Four Fears of Small-Dollar Lending03.07.2016
Credit unions have an opportunity to fulfill one of their members’ unmet needs through small-dollar lending solutions. Members frequently turn to payday lenders to address their short-term lending needs, instead of engaging with their credit union for these services. Members turn to sources outside of their credit union simply because very few credit unions are currently offering these product types. One of the major reasons credit unions have not adopted these products is fear. The four primary fears which cause credit unions to avoid providing small-dollar lending services are the financial risk of implementing a new product; pending regulatory changes proposed by the CFPB; potential reputational risk; and draining financial resources. While these fears are extremely common in the credit union community, they are easily overcome.
1. The financial risk of implementing a new product.
Many credit unions hesitate to launch a small-dollar loan product because of the perceived financial risk. Adding a new product can have certain initial costs, such as the need for additional staff. However, the right solution will pay for itself in a short period of time, and fully automated loan technology can eliminate the need for additional staff members. Credit unions have the opportunity to look to these proven solutions to find best practices to avoid any financial loss, when launching small-dollar lending solutions.
2. Evolving regulations.
While regulatory pressure continues to impact payday lenders, lawmakers and regulators realize consumers need a viable alternative to payday lenders and many agree that trusted financial institutions are ideal providers of small-dollar lending services. Credit unions should invest in technology that is easily adapted to any future CFPB regulations. By planning for inevitable alterations to the current loan standards, credit unions can ensure that they continue to offer a solution to this widespread need, while remaining fully compliant.
3. Potential reputational risk.
Many credit unions are hesitant to offer payday loan alternatives to their members because of perceived negative connotations associated with the idea of these loan types. However, failing to provide a short-term, small-dollar lending solution ignores the needs of underbanked members. Additionally, many members find short-term loan offerings helpful, such as higher income members who rely on these loans for their instant liquidity needs. The real reputational risk stems from a perception that a financial institution might take advantage of consumers by profiting from their financial distress. Credit unions avoid this risk by offering short term loans with significantly better terms and lower rates. This enables them to save their members money and help transition them towards financial stability so that they won’t have a need for these types of lending products in the future. Woes
4. Draining financial resources.
One final concern many credit unions may have when considering whether or not to offer small-dollar loans is the fear of draining financial resources. The idea that small, short-term loans are unsustainable is a myth. Other credit unions have successfully offered these loan products and have been able to provide a useful service to members while generating additional revenue that can help support additional member services. Small-dollar lending products are low-risk solutions for a legitimate need.
Small-dollar lending products are surrounded with misconceptions that have caused the credit union industry to shy away from offering these loans to their members. By addressing these fears and uncovering the truth behind these loan products, credit unions can see that small-dollar lending can easily provide a valuable addition to their existing member services. Accepting these misconceptions as truth and failing to offer small-dollar lending solutions to members ignores the urgent needs of many credit union members. Credit unions have a chance to offer members a valued service that members are currently seeking elsewhere. By providing a better solution to members, credit unions can met a legitimate consumer need and continue to promote member engagement.
Ben Morales is the CEO of Olympia, Wash.-based QCash Financial. QCash Financial is a provider of an automated, cloud-based, mobile lending platform that enables financial institutions to provide short-term loans quickly.