The Business (and Benefits) of Digital Small-Dollar Lending
By Seth Brickman, CEO, QCash
August 3, 2023
In today’s hyper-consumer-focused culture it appears we always seem preoccupied with what the member is getting out of credit unions’ products and services that we forget to take into account the value those products are providing for the credit union.
Small-dollar loans have historically been one of those financial products that institutions had begun to undervalue and overlook, especially when predatory payday lending reared their destructive heads in the early 1990s.
Therefore, in QCash’s continuing “A Case for Small-Dollar Loans” series with CUNA Strategic Services, we follow up our June article detailing member benefits to discuss the various ways small-dollar loans, particularly digital or mobile small-dollar loans, have brought a new, dynamic and financially-beneficial era to your credit union and the cooperative movement.
With the level of increased access to credit union members through their digital devices, credit unions have seen tremendous increases in revenue in the last few years since digital and mobile banking has emerged. According to Pew Research, the National Credit Union Administration (NCUA) showed that credit unions issued $227 million in loans through the agency's Payday Alternative Loan (PAL) program in 2022, blowing by the previous record of $174 million set in 2019. That's a 30 percent increase.
The amount reported each quarter in 2022 represented the highest volume ever originated under the PAL program, beginning with $195 million reported (over the previous 12 months) in the first quarter, and reaching $227 million in the fourth.
Supports Low-Income Designation
A core aspect of the NCUA’s aims to support the credit union movement is the low-income designation, with small-dollar lending a key asset for members. To qualify as a low-income-designated credit union, a majority of a cooperative’s membership must meet certain low-income targets based upon statistics available from the U.S. Census Bureau.
The numbers have been reflective of such need and the resulting successes: According to the NCUA’s recently released annual MDI report to Congress, findings revealed that minority depository institutions (MDIs) – representing one in 10 federally-insured credit unions – experienced growth in membership, assets, and loans in 2022, while expanding access to financial services for their members and local communities. Total loans outstanding were reported to be $42.2 billion, a full $8 billion increase from the year prior.
The NCUA noted MDIs’ 2022 performance metrics improved so much that several categories outpaced the growth in the credit union system itself, in no small part due to credit unions’ investment in digital small-dollar lending.
Financially-Healthy Replacement for Predatory Payday Lenders
Since predatory payday lending hit its diabolical stride in the early 1990s due to massive deregulation and the dearth of small-dollar loans by mainstream financial institutions, fintech’s rise and enablement of instant access has introduced a new era in affordable and easy-to-implement digital platforms like QCash.
It’s a can’t-win situation when well over half of Americans are currently living paycheck-to-paycheck, according to CNBC. Among that underserved segment of the population, individuals living paycheck-to-paycheck jumps to 82 percent for those earning less than $50,000. Yet for these distressed and underserved consumers, those payday lenders can always be found, waiting to take advantage, even finding ever more cunning and unscrupulous ways to evade state rate cap restrictions.
They are so available, in fact, that only 16 states in the U.S. have more McDonald's restaurant locations than payday lending storefronts. Their payday loan amounts, typically between $100 to $1,000, are available in more than half the country’s neighborhoods, with little accountability and few regulatory stipulations.
By giving wayward members an infinitely better, safer and stabilizing financial option to obtain fast funds the moment they need them – not to mention flexible loan terms – credit unions have another helpful financial asset to introduce to those members. Digital small-dollar lending represents an accessible, secure and affordable tool that helps to gain member trust while getting them back into the nurturing arms of your credit union.
CDFI Grants Eligible for Digital Small-Dollar Lending
On June 5, 2021, the United States Treasury announced they had awarded $1.25 billion in COVID-19 relief funds to 863 community development financial institutions (CDFI).
The grants were offered through the Treasury’s Community Development Financial Institution Rapid Response Program (CDFI RRP) and provided appropriate capital for CDFIs to address the economic challenges that have been exacerbated by the COVID pandemic, particularly in underserved communities.
The CDFI Fund combines federal dollars with private capital to empower credit unions to improve initiatives aimed at enhancing social and economic communities across the nation that may typically fall short of traditional financing opportunities.
That community-first perspective fits into CDFIs’ very mission of recognizing the role digital innovation plays in today’s credit union offerings. CDFIs recognize the importance fintech solutions play in helping communities move forward on the path to improved and inclusive economic recovery from COVID.
Automated Fintech Platforms Save Credit Union Overhead
CUSO fintech’s efficiency and affordability has rewritten the rules for revenue generation in the credit union movement.
A big advantage when it comes to CUSO fintech is the quantum leap in affordability and efficiency versus yesterday’s vastly outdated implementation and manual processing procedures. For example, QCash’s system takes no staff time to process loan applications, allowing executives to focus on other revenue-generating projects. In fact, automated platforms have proven to increase loan applications by 250-300 percent, with no loan processing overhead.
For example, Peoples Advantage Credit Union President and CEO Amanda Habansky offered a story of efficiency and revenue-generating results on a CUbroadcast episode with Mike Lawson and QCash CEO Seth Brickman. Before Peoples Advantage implemented the QCash digital platform, the cooperative’s lending team would get bogged down every holiday season due to the inefficiencies in their manual processing procedures. But they kept doing them because members loved them! That inefficiency resulted in funding over 200 small-dollar loans in two full months. They found themselves overdue for a smoother, more member-friendly and updated solution.
Enter QCash’s digital Life Event loans. During this last December’s holiday season, Peoples Advantage fulfilled 200 loans in one week alone. By employing the QCash platform, Peoples Advantage turned one of their most problematic inefficiencies into one of their biggest strengths by focusing on those areas that helped the cooperative weather periods of unbalanced liquidity.
Today’s application of CUSO fintech has the capability to help cooperatives bypass historical limitations when market conditions are less than optimal, especially for lower-income communities. By placing more focus on letting members know about such advantageous CUSOs for both emergency funds and monthly, everyday bills, you’re also giving your credit union the opportunity to keep a beneficial loan-to-share ratio and increase the financial health and organizational efficiency of your cooperative.
Connect with QCash to learn more.
QCash Financial offers relationship-based small-dollar loans. The CUSO’s lending platform enables credit unions to help their members responsibly when they face financial challenges from unexpected life events. From application to account funding, the process is complete in under 60 seconds, no credit check required, and completely digital, needing no effort from staff. When life happens, be there for your members anytime, anywhere and from any device.
Ready to level-up your members’ experience? Consider Life Event, Specialty, and Financial First Responder Loan programs, all using QCash’s patented relational underwriting.