By Dave Adams, President/CEO, Michigan Credit Union League

About 5% of U.S. adults, or 13 million people, do not have a checking, savings, or money market account; they’re often referred to as the unbanked. Half of the unbanked use some form of alternative financial service, such as a check cashing service, money order, pawn shop loan, auto title loan, paycheck advance, or payday loan.

In addition, 18% of adults are “underbanked” – they have a bank account but also use an alternative financial service product. The remaining three-quarters of adults are fully banked, with a bank account and no use of alternative financial products.

The unbanked and underbanked are more likely to have low income, less education, or be in a racial or ethnic minority group. Just 1% of those with incomes over $40,000 are unbanked, versus one in eight with incomes under that threshold. Similarly, 11% of blacks and Hispanics are unbanked versus 3% of whites.

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With this data in mind, the question for credit unions that are committed to their social mission of serving the underbanked is, how can credit unions do more to meet the unique needs of the unbanked and underbanked?

Many credit union leaders would say they think they serve the underbanked really well. However, many forces limit credit unions’ ability and desire to serve the underbanked. The truest definition of underbanked should be credit-challenged consumers who are more likely to be lower-income, urban and/or in a racial or ethnic minority group, who are using at least one alternative financial service. The most prevalent alternative financial service is payday loans by far.

Credit unions face pressures from regulators, their own boards and sometimes executive management to hit stellar performance statistics that include high ROA, low delinquency/charge off rates and strong net worth. The problem here is that being a CAMEL 1 or 2 credit union with stellar financial performance metrics might mean that the credit union is not stretching to serve the underbanked.

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In urban Detroit, while excellent credit unions operate there, the fact is like other large, urban areas, a drive through the inner city will show alternative financial services providers on nearly every corner and very few traditional depository institution offices, including credit unions.

While the stigma on payday lenders might cause credit unions to shun the idea of competing with them, Lisa Servon, author of “The Unbanking of America,” suggests that a growing number of Americans are giving up on traditional banks and relying instead on alternatives, including prepaid debit cards, check-cashing centers and payday lenders. She also states that many of these providers are meeting needs that traditional providers have been unwilling to meet.

The growth of payday lending began in 1993 with the founding of Check Into Cash in Cleveland, Tenn. The industry grew from 500 storefronts to more than 22,000 and $46 billion. Today, payday loan stores nationwide outnumber Starbucks and McDonalds outlets.

Recently, U.S. Bank rolled out a payday loan-like product for its customers, lending them up to $1,000 short-term, with rates that climb to $15 per $100 borrowed. In 2013, the OCC halted the offering of payday loans by Wells Fargo, Fifth Third and others. However, in 2017, prior restrictions were removed and in May 2018, the Trump administration began to actively encourage national banks to get into the short-term lending business, arguing that it makes more sense for banks to compete in this sector with lending in a “safer, sound, more economically efficient manner.”

If large money center banks begin to offer payday loans through their huge branch networks, credit unions might get caught flat-footed competitively. And to be clear, in my opinion, this shouldn’t be seen as a lucrative lending opportunity for credit unions. I see it as a chance for credit unions to meet important borrowing needs coupled with financial education that transitions consumers to loans that help them avoid more expensive borrowing fees.

As mobile banking becomes more accepted by consumers, a growing percentage of payday loans are being transacted online versus in check cashing stores. Also consider the explosion of prepaid debit services from providers like Greendot, Walmart Checking (powered by Greendot), SoFi, Paypal, Ally Bank, Bankmobile, and others. All of these providers are projecting their services as “more affordable” or “lower fee” than banks for their customers.

In 2004, QCash Financial, a CUSO of Washington State Employees Credit Union, created an automated cloud-based platform to deliver short-term, small-dollar loans to WSECU’s members. The underwriting engine has been tested and proven. It does not rely on credit scores but rather behavioral metrics set by the credit union. This solution is customizable for any credit union wishing to use the solution and it complies with all relevant regulations.

CU Solutions Group has partnered with QCash Financial to market and sell this lending platform to interested credit unions across the country. Additionally, the Michigan Credit Union League sees a real opportunity to use this unique lending tool to help credit unions meet needs of the underbanked in financially challenged Michigan urban areas like Detroit.

The advent and dramatic expansion of payday lending in the U.S. is a relatively new phenomenon and should be a wake-up call for credit unions. As banks rediscover this lending opportunity, it would be a mistake for credit unions to ignore the trends and market moves by larger competitors, as well as new disruptors like Greendot and Bankmobile. The underbanked population needs the responsible lending practices and low-cost mobile banking services offered by credit unions, especially in the hardest hit urban areas of the U.S.