Article

Challenging Payday Lenders

neon sign displaying cash and checkmark with text loan approved
Contributing Writer
member of Bellco Credit Union

2 minutes

Credit union service organization’s artificial intelligence solution allows CUs to offer safe, quick small-dollar loans.

Super smart technology for CU members is usually an infrastructure project, but it sometimes surfaces around specific products developed by marketing for automated delivery. $3 billion Washington State Employees Credit Union, Olympia, made one such foray when it decided to challenge payday lenders with a small-dollar credit product for borrowers with marginal credit. It was an effort to win back members using payday lenders with something that could put them on the way to financial health and stability, explains CUES member Ben Morales, CCE, chief technology and operations officer.

When it worked, WSECU turned the program into a wholly owned credit union service organization called QCash Financial and started offering it to other credit unions. So far, over a dozen U.S. and Canadian credit unions have made over 300,000 unsecured loans ranging in size from $50 to $4,000 totaling more than $200 million in outstandings. Morales now has the additional role of CEO at QCash Financial.

With its QCash technology, WSECU needed to offer members an experience for getting credit that was at least as good as the payday lender experience—and the payday lender experience was pretty good. “One of our people applied for a payday loan to find out what it felt like, and it was pretty easy. It was highly automated, and the loan was approved in a few hours if not minutes,” Morales reports. “Initially, it was taking us a couple of days.

“So, we pulled all of the manual activity out of the process and automated the whole front end. We already had the member data, so we could eliminate the input chore for the member,” he reports. “We eliminated credit reports because we had confidence in our member data. That took out a step, saving us both time and money. We got it down to just six clicks by the member until the loan was approved and good funds were sitting in their deposit account. We put it all on our online and mobile banking platforms so members could do it all with a smart phone or PC. It’s a smooth-running workflow engine. We reduced the loan origination cost by about 50%.”

One caveat is that there is no provision for escalating a borderline application to a live person. “They’re either approved or denied,” Morales explains. “About 75% of the time, they are approved for something, not always the full amount they applied for.” Skimpy industry statistics indicated that a loss ratio of about 10% for such small-dollar loans was likely, he notes, “so we priced it to sustain a margin at a 10% loss ratio.” In practice, QCash at WSECU has experienced losses in the 9-12% range. cues icon

Richard H. Gamble writes from Grand Junction, Colorado.

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