Twelve million U.S. households use payday loans each year to help cover cash flow shortages. Mainstream payday lenders charge interest rates as high as 677%, according to the Center for Responsible Lending, and include exorbitant fees. Yet according to Pew Research, 65% of working class households use short-term loans. Once the cycle of payday loans begins, it can be difficult to escape. Those who use payday services take out eight payday loans per year, on average.

Beyond the ethical challenge of lending to underserved communities, credit unions face a competitive challenge in the rise of P2P lenders. Morgan Stanley estimates $37 billion will be issued on P2P sites in 2016 in the U.S. alone, with the possibility of $122 billion by 2020. Alternative lending is here to stay. And to grow.

The market is so dynamic that Filene thinks we shouldn't sit on the sidelines. Instead, credit unions could dive in as investors, partners, or – most ambitiously – by building a credit union-centric lending platform. Read more in our report, “Peer-to-Peer Lending and the Future of Cooperation.”

Ideally, potential borrowers would turn to a credit union. However, a recent Filene report, “Trending: Credit Unions 2025,” showed consumers would rather borrow from family and friends or even sell their belongings instead of applying for a personal loan at a financial institution. Many have likely been turned down for a traditional loan in the past.

Responsible alternative lending options do exist and are being successfully deployed by your colleagues across the country.

One example is QCash. In 2003, Washington State Employees Credit Union's president/CEO noticed an alarming trend. Many of the credit union's members were utilizing local storefront payday lenders for their short-term cash needs and paying the price. A six-month internal review showed fees in excess of $1 million. In true credit union spirit, WSECU assembled a team with one goal: Provide WSECU's members with the best option for short-term cash. QCash was borne from that effort.

The small-dollar digital lending platform provides a fast and simple way for members to get a loan approved and funds disbursed in less than 60 seconds. Loan eligibility is determined based on the member's relationship with the credit union. In 2015 alone, WSECU funded $28 million in loans and saved its members more $4.1 million. Now, credit unions can leverage this technology through a Filene pilot program in coordination with QCash.

Seeking new and innovative ways to serve members is not foreign to credit unions. Identifying and implementing approaches in a way that is scalable and sustainable in the long term can present challenges, but many success stories exist.

Employee-sponsored small dollar loans are another example of a promising option that aligns well with existing credit union products. In one pilot, a small dollar loan, typically less than $2,000, is offered to employees of companies that partnered with a credit union. Loan payments are auto-deducted from the employee's paycheck. The average income of the borrowers was $36,500 with an average credit score of 560. Once the loan is repaid, employees may continue making deposits into savings accounts.

Borrow and Save programs, which tie small loans to mandatory savings by the borrowers, showed promise in another recent pilot. Programs like this can help members break the cycle of payday loan debt. During the 16-month reporting period, 14 credit unions funded 3,100 loans, representing $2.9 million in balances and generating $900,000 in member savings. The average loan per borrower was $944 and the average savings was $290.

Sustainable alternative lending solutions are available. More than 100 years after the credit union movement was born, we have an opportunity, and even a responsibility to our communities to provide solutions that solve our members' most pressing needs.

Erin Coleman is senior impact director for Filene Research Institute. She can be reached at 727-742-3196 or [email protected].