The Innovation May Be Boring, but the Benefit Is Needed

First, the depressing facts: According to the often-quoted statistic from the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2018,” “If faced with an unexpected expense of $400 … 27% [of Americans] would borrow or sell something to pay for the expense, and 12% would not be able to cover the expense at all.” This translates into 127 million Americans being a hair’s breadth away from financial ruin.

Think about what a low bar $400 is in today’s world: Maybe a new set of tires for your late model automobile, an emergency room visit or even a “luxury” good like signing junior up for an after-school sport. Since most readers of CU Times likely don’t fit into this category of Americans, it might be hard to imagine what it feels like to live on this razor’s edge. Filene’s recent research report, “The Case for Workplace Financial Well-Being,” illuminates this impact by reporting: “Half or more of all workers – including more than half of credit union employees – admit to feeling stressed by their finances, and that stress is spilling over into their work …” This stress causes, among other things, employee disengagement, absenteeism and turnover. Research can sometimes be very depressing.

The Most Boring Innovation

In 2007, the United Way in Chittenden County, Vt., convened a group of employers to facilitate the development and implementation of workplace supports to improve employee productivity, retention, advancement and financial stability.

Among the needs identified by this “Working Bridges” employer collaborative was a way to help the growing number of employees requesting pay advances or quitting their jobs to gain access to retirement funds. To address the challenge, Working Bridges employers partnered with NorthCountry Federal Credit Union to design a small-dollar loan to help their employees gain access to emergency cash, avoid the high cost of payday lenders, establish or repair credit, and begin to save.

The Employer Sponsored Small Dollar Loan was first piloted at Rhino Foods, a specialty food manufacturer in Burlington, Vt., with over 100 employees. It should be noted Rhino is the manufacturer of cookie dough for Ben & Jerry’s eponymous ice cream flavor, so the well-being of these employees is of strategic importance to America’s national interest.

By 2016, the loan was available to the employees of nearly 50 companies in Vermont, through two credit unions, with loans generated in excess of $1.5 million. Since 2014, Filene Research Institute has partnered with the Ford Foundation and FINRA Investor Education Foundation to scale this program to more employers and credit unions.

Under the ESSDL program model, loans of up to $2,000 are made available to the employees of participating companies based solely on the borrower’s ability to repay, as evidenced by length of employment in good standing. The application process is simple, and the money is typically available to borrowers within 24 to 48 hours. Loans are repaid through payroll deduction and repayment is reported monthly to credit bureaus. After the loan is repaid, a deduction in the amount of the loan installment continues on an opt-out basis and is deposited into the participant’s savings account. Borrowers may only have one ESSDL at a time, with terms that range from 90 days to 12 months, and interest that ranges from 15.99% to 17.99% as an annual percentage rate.

Participating employers pay a small fee (based on the number of their employees) to help offset the costs of administering the program. Employers also agree to market the program through company channels, confirm applicant eligibility, set up payroll deductions and inform the lender if a borrower is separating from the company. Employers do not underwrite the loans and bear no responsibility for defaulted loans.

The chief lending officers are now saying, “So it’s a signature loan.” The CFOs are now saying, “So not much loan volume.” The chief marketing officers are now saying, “So not much return on investment.” The board members are now saying, “We used to have this kind of loan back in 1955 when we were a sole sponsor credit union.” To which I reply, “Yep, yep, yep and yep.” On the surface, ESSDL is a turn of the century character loan with small aggregate volume and miniscule returns. In other words, this loan is a very boring innovation.

Enter the Upside

Up until this point you are thinking to yourself, “George may have a gift for research, but he’s the crappiest salesperson in the world.” Well, you are right, but there is still a tremendous upside to this concept for credit unions.

First, the landscape of credit union business development is shifting back to a Select Employer Group focus as the promise of community credit unions has not lived up to its original hype. Credit unions can enable employers a way to offer a unique value proposition and a needed benefit with ESSDL: A simple, no-risk, stress-reducing loan product for their employees.

Second, ESSDL is an entry product for consumers not currently participating in the formal banking system. By no means is ESSDL just a product for unbanked consumers, it has proven to be a catalyst for deeper participation in the traditional banking system. An example of this journey is on display at incomeadvance.org with a guy called the “Freezer Geezer.” Get some popcorn and watch the video. On a more quantitative basis, Filene is in the process of analyzing one credit union’s experience with ESSDL and has found that consumers taking on ESSDLs generate loan volume three times higher than the original loan. In other words, ESSDL is a gateway to more credit union products.

Third, credit unions are punching below their weight in the short-term, small-dollar lending product category. According to a recent NCUA news release, “During the fourth quarter of 2017, 503 federal credit unions reported making payday alternative loans under the NCUA’s current rules. At the end of the fourth quarter of 2017, federal credit unions held $38.6 million in payday alternative loans on their books.” I don’t have to do the math for you to know that this figure represents a tiny sliver of overall federal credit union lending during that period. Fintechs like Lending Club have grown their market share in this product category from close to 0% in 2010 to nearly 40% today. The alternative financial services sector saw its loan volume grow nearly 500% from 2013 to 2017.

While the ESSDL concept may be as uninspiring as they come, the consumer impact is not. For many struggling-but-employed consumers, having the benefit of access to convenient, non-exploitative small-dollar loans through their employers, compared to the 400+% APR equivalents of payday or online lenders, is groundbreaking, to say the least.

The Ask

By now you may be as exhausted as I am – we’ve been through a series of emotions: Depression, introspection, excitement. Now is time for action! What can credit unions do to get involved in a project like ESSDL?

1. Download Filene’s implementation guide, which will walk you through the strategic, operational and regulatory considerations for ESSDL.

2. Pilot an ESSDL at your credit union with one SEG. If you need help, email me.

3. Consolidate your learnings to launch a broader ESSDL implementation. Consider an ambitious goal to reach a certain percentage of SEG employees or a specific loan volume.

If you could implement a new idea to benefit 127 million Americans, wouldn’t you?

George Hofheimer is EVP, Chief Research & Development Officer for Filene Research Institute. He can be reached at 608-852-4632 or georgeh@filene.org.