The Financial Strains of Small-Dollar Credit UsersMember-Exclusive Report from CFSI’s Consumer Financial Health Study

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We provide this CFSI Member Exclusive as a resource to create new products, calibrate existing ones, and communicate the benefits of their use to improve consumers’ financial health. The information is designed for use by product managers, segment managers, marketing managers, and community development/affairs managers to better understand consumers’ needs.

The data and visuals in this presentation are easy to use to inform ideation and business strategies that support consumer financial health. We encourage you to share this asset widely within your organization, and to use the data and visuals in external presentations and communications. When you use an excerpt of this report, please cite CFSI as the source: “Member Exclusive Report from CFSI’s Consumer Financial Health Study: The Financial Strains of Small-Dollar Credit Users”, CFSI, March 2016.

Per your CFSI Network membership agreement, we ask that you refrain from distributing this report in its entirety outside your organization. If you have any questions about this, please contact your CFSI relationship manager.

CFSI Member Exclusive

Table of Contents

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Key Findings…........................…..…………………………………………………..……………..4

Addressing Small-Dollar Credit (SDC) User Needs .…………..………………….…………....11

Financial Health Recap………………………………………..……………………...………..…..21

K1: 92% of SDC users are struggling financially…..…………………………………………….29

K2: 49% of SDC users do not save. ………………………………………………………………34

K3: SDC users budget at the same rate as non-SDC users………………….……………...…44

SDC User Demographics…..……………..…………….……………………….……………........48

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Key Findings:1. More than a third of small-dollar credit (SDC) users

are in the Coping segments, and overall 92% of SDC users are struggling financially.

2. 49% of SDC users do not save, which makes achieving financial resilience challenging.

3. SDC users report budgeting at the same rate as non-SDC users, but are still struggling financially more than non-users.

Small-Dollar Credit in the CFHS

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The Consumer Financial Health Study (CFHS) asked respondents, “In the past 12 months, have you and your household used any of the following to borrow money?” Small-Dollar Credit products included:

– Payday loan or payday advance from a payday lender – Salary advance deposit advance from a bank– Pawn loan– Auto title loan– Advance on your tax refund– Overdrew a checking account intentionally– Rent to own

*Small dollar credit is typically defined as "consumer loans of less than $5,000 with terms ranging from as little as two weeks to as long as three years.“ While the CFHS data does not delve into the dollar amount borrowed for all products or the length of loan, we are making the assumption that the vast majority of uses of the aforementioned products would fit within our standard SDC definition. CFHS respondents who indicated they used a payday loan, salary advance, and/or deposit advance in the past year were asked how much they typically borrow when using those products. 66% reported amounts under $1,000; the average reported amount was $500.

Financial Challenges of Small-Dollar Credit Users

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92% of Small-Dollar Credit Users Struggle Financially

7For more detail, refer to slides 29-33

SDC users struggle to build resilience

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Financial resilience is achieved with savings, insurance, and credit products that enable households to weather financial shocks.

For more detail, refer to slides 34-43

SDC users are more likely to struggle with day-to-day indicators of financial health

9For more detail, refer to slides 44-50

SDC users are not well positioned to pursue their financial aspirations

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What could your financial institution do to help SDC users improve their financial health?

SDC Innovations

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Combine credit products with savings opportunities and incentives

In its Accessible Financial Services Incubator, Filene Research Institute, along with the National Federation of Community Development Credit Unions developed the Borrow and Save small-dollar credit product.

With the Borrow and Save product, consumers have access to high-quality credit and the opportunity to build savings, allowing them to meet short-term cash needs while improving their ability to manage future cash shortfalls. With this product, a percentage on top of the loan amount (25% to 50%) is frozen in a savings account and is only available to the borrower, with accumulated interest, when the loan is paid in full.

There are 12 credit unions currently piloting the Borrow and Save loan, including Freedom First Federal Credit Union and Guadalupe Credit Union:

Borrow & Save loan amounts range from $250 to $5,000, repayment periods range from 3 to 36 months, and loans must adhere to the NCUA interest rate guidelines, not exceeding a 28% APR.

SDC With Savings Building

This innovation is featured in “A Snapshot of Quality and Innovation Among Small-Dollar Credit Installment Lenders”, CFSI, October 2015.

SDC Innovations

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Help borrowers build better credit

*This innovation is featured in “A Snapshot of Quality and Innovation Among Small-Dollar Credit Installment Lenders”, CFSI, October 2015.

Credit-Builder Loan

Freedom First FCU offers a credit-builder loan to its members with low or no credit scores. After a member is approved for a loan, loan funds are directed to the member’s savings account where they will earn interest. Members make payments in installments, and only when the loan is repaid in full can funds be withdrawn from the savings account. These loans allow members to both develop saving habits and build their credit. In 2013, new Freedom First Credit Builder members who joined with no credit score had an average credit score of 630 after only six months.*

Guaranty Bank also offers a credit builder loan that reports payment history to the major bureaus. Borrowers receive $1,000 in a secured Certificate of Deposit (CD), and at the end of the loan term they can access these funds. There is no down payment, and borrowers may qualify for a money back refund if their credit score does not improve.

Self Lender offers small credit building loans, reported to the credit bureaus, to consumers with limited credit history. Borrowers receive $1,100 in a FDIC insured CD for twelve months. The borrower makes fixed payments of $98 each month, and at the end of the 12 month period the loan is repaid, the CD has matured, and credit is built.

SDC Innovations

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Create opportunities for debt relief

Kinecta Federal Credit Union offers a payday consolidation loan designed to help borrowers pay off one or more payday loans with affordable installment payments. To ensure borrowers pay off their prior loan balances, Kinecta only disburses funds via money orders payable to the borrower’s creditors. Kinecta evaluated this product with CFSI’s Small-Dollar Credit Test & Learn Working Group. LexisNexis Risk Solutions is offering its RiskView score to underwrite this loan.*

Lendstreet is a marketplace-lending platform which helps borrowers restructure and refinance debt, and allows investors to buy the loan at a discount. Borrowers get debt relief and payments that are structured around their lifestyle. Lendstreet is in the first class of the Financial Solutions Lab.

Debt Consolidation

*This innovation is featured in “Designing High-Quality, Small-Dollar Credit: Insights from CFSI’s Test & Learn Working Group”, CFSI, September 2015 & “A Snapshot of Quality and Innovation Among Small-Dollar Credit Installment Lenders”, CFSI, October 2015.

SDC Innovations

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Provide clear paths to products with better terms and lower prices

With Elevate’s RISE product, borrowers receive rate discounts for making consistent, on-time payments. For example, a customer (in California) could qualify for a 50% discount after one loan (or 24 monthly payments) and for a rate of 36% after two loans (or 12 additional monthly payments). 60% of RISE customers have had their rates go down over time.*

LendUp’s business model is based on product graduation. Borrowers move up the LendUp Ladder by consistently paying on time and completing free credit education courses. As borrowers pass milestones, they gain status and earn access to larger loans at lower rates. Borrowers start with a payday loan (single payment) and work toward qualifying for installment loans (multi-payment).*

Ascend provides improving-credit borrowers with a fair rate today and a path to dramatically lower rates by demonstrating financial responsibility. By incenting reduced consumer debt, increased savings, and limited credit card spending, Ascend reduces risk on current loans and rewards the borrower by lowering interest payments. Ascend is in the first class of the Financial Solutions Lab.

Product Graduation Models

*These innovations are featured in “A Snapshot of Quality and Innovation Among Small-Dollar Credit Installment Lenders”, CFSI, October 2015.

SDC Innovations

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Offer borrowers choice and flexibility

Borrower Choice

Enova's NetCredit launched an online tool that allows borrowers to select the size of their payments and the length of their term when they apply for a loan. As prospective borrowers adjust their loan, they see how the total cost and payment would change. By giving users more control over the borrowing experience they can be more confortable and confident in their ability to repay the loan.

Enova tested this feature with a subset of its borrowers for CFSI’s Small-Dollar Credit Test & Learn Working Group. Read about this and other interesting innovations in our recent publication, “Insights from CFSI’s Test & Learn Working Group.”

This innovation is featured in “Designing High-Quality, Small-Dollar Credit: Insights from CFSI’s Test & Learn Working Group”, CFSI, September 2015 & “A Snapshot of Quality and Innovation Among Small-Dollar Credit Installment Lenders”, CFSI, October 2015.

SDC Innovations

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Provide support to borrowers when they have trouble repaying

Payment Support

It is important for lenders to support consumers facing unemployment, income changes, or other difficult financial circumstances. Oportun works with customers who are willing but unable to make payments, offering a hardship restructure with a reduced interest rate and extended term that result in a lower payment amount going forward. Oportun also offers reduced interest rates for customers who have demonstrated successful borrowing behavior.

This innovation is featured in “A Snapshot of Quality and Innovation Among Small-Dollar Credit Installment Lenders”, CFSI, October 2015.

SDC Innovations

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Design solutions to help consumers account for spikes and dips

Income Smoothing

Even turns the inconsistent income of hourly and part-time workers into a steady salary. It does this by saving money from higher than average paychecks (savings are directed to a separate savings account), and automatically boosting low paychecks. Even’s application smoothes spikes and dips in income, adjusting cash flows to be more consistent to help users avoid account overdrafts and the need to access short term credit. Even is in the first class of the Financial Solutions Lab.

Activehours is a smartphone application that enables customers to track the number of hours they’ve worked and access their unpaid wages before the money hits their bank account on payday. The service is open to workers paid hourly, regardless of their employer, in addition to individuals who are paid per task (e.g. Uber, Instacart).

SDC Innovations

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Innovate around social lending practices

Mission Asset Fund’s lending circles provide a no interest loan that rotates among the individuals that contribute to the shared loan fund. MAF helps participants save and build credit–especially those with thin or no credit files.

Puddle is an online platform for reputation-based borrowing, currently available to anyone in the U.S. with a debit card. Users gain access to a shared pool of capital by contributing funds and building reputation with others they trust. Puddle is based on the successful Accumulated Savings and Credit Association model that has worked offline all over the world. Puddle is in the first class of the Financial Solutions Lab.

Many people use informal savings and borrowing as complements to products and services offered by financial institutions… These consumers are participating in the formal financial system and might be willing to expand their use of formal products and services if they contained the right features.

US Financial Diaries Issue Brief, “An Invisible Sector: How Household Use Financial Tools of Their Own Making ,” Morduch & Schneider, August 2014.

Group Lending

Ask Yourself, Do Your Products Meet Their Needs?

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Do your products help your customers achieve their financial goals? Are you helping them build credit? Are you working with them to assess their ability to repay loans?

The financial health framework and Compass Guide to SDC can help you evaluate current products and services and create new ones.

What product features could you introduce to help your borrowers manage their debt responsibilities?

How could you help your borrowers build savings and boost their resilience?

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Financial Health Recap

Recap: What is Financial Health?

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Day-to-DayManagement

Resilience Opportunity

Financial health comes about when your daily systems help you build resilience and pursue opportunities.

Are you prepared for the unexpected?

Are you able to pursue your financial aspirations?

Do your financial products support resilience and opportunity?

Recap: Consumer Financial Health Study Segmentation

The Consumer Financial Health Study includes a segmentation analysis that groups individuals based upon patterns of responses to a range of survey questions. The questions correspond with subjective and objective indicators of financial health.

The seven consumer segments derived from the segmentation analysis were grouped into three tiers: Healthy, Coping, and Vulnerable. Consumers identified in the analysis as “struggling” financially are included in the four Coping and Vulnerable segments.

Income significantly influences financial health, but so do consumer behaviors, particularly those related to planning ahead and saving.

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For more on the financial health segmentation, download the whitepaper, Understanding and Improving Consumer Financial Health in America. For more on the four financially struggling segments, download the segment briefs: Financial Health Consumer Segments.

Recap: Financial Health Segmentation

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For more on the financial health segmentation, download the whitepaper: Understanding and Improving Consumer Financial Health in America.

Recap: Healthy Segments

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Individuals in the Financially Healthy Segments tend to do well across all indicators of financial health. They are able to manage their finances day to day, have a significant financial cushion in case of an emergency, and are better positioned to seize financial opportunities. Individuals in these segments demonstrate the highest rates of ownership for checking accounts, savings accounts, and credit cards.

For more on the financial health segmentation, download the whitepaper: Understanding and Improving Consumer Financial Health in America.

Recap: Coping Segments

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Financially Coping segments generally exhibit more moderate behaviors and attitudes across the financial health indicators compared with their Financially Healthy counterparts. These individuals are more likely to struggle day to day, have less of a financial cushion, and are less well-positioned to take advantage of financial opportunities. These individuals tend to use a variety of financial products and services—traditional, nonbank, and new technology-enabled—to manage their financial lives.

For more on the financial health segmentation, download the whitepaper: Understanding and Improving Consumer Financial Health in America.

For more on the four financially struggling segments, download the segment briefs: Financial Health Consumer Segments.

Recap: Vulnerable Segments

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The two Financially Vulnerable segments are doing the least well across financial health indicators. These individuals are more likely to struggle day to day, have little or no financial cushion, and are not prepared to seize financial opportunities for security and mobility. They are the least likely of all segments to own a credit card and the most likely to be unbanked.

For more on the financial health segmentation, download the whitepaper: Understanding and Improving Consumer Financial Health in America.

For more on the four financially struggling segments, download the segment briefs: Financial Health Consumer Segments.

Four Need Cases of Small-Dollar Credit Borrowers

28Source: “Know Your Borrower: The Four Need Cases of Small-Dollar Credit Consumers,” CFSI, 2013

*Includes multiple reporting of credit needs.

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A closer look at the data…

Key Finding 1: More than a third of small-dollar credit (SDC) users are in the Coping segment, and overall 92% of SDC users are struggling financially.

Who are the financially struggling SDC users?

SDC Users within the Financial Health Tiers

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A majority of SDC users are struggling financially.

Learn more about the financially struggling segments here.

For more on the financial health segmentation, download the whitepaper, Understanding and Improving Consumer Financial Health in America.

SDC Users within the Financial Health Segments

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For more on the financial health segmentation, download the whitepaper, Understanding and Improving Consumer Financial Health in America.

SDC users are predominantly in the four least healthy segments, with the most in the At Risk segment (38%).

Learn more about the financially struggling segments here.

Paying Bills

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Most SDC users juggle which bills get paid when.

Approximately three-quarters of SDC users juggle their bills, compared to only 30% of non-users.

When asked whether they agree with the statement “I always find myself living paycheck to paycheck”, 51% of Vulnerable SDC users strongly agreed. By comparison, only 26% of Vulnerable non-users strongly agreed.

Recent Life Events

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Compared to non-users, SDC users were more likely to have experienced significant life events or changes in the past five years. These life events may lead to financial vulnerabilities, and trigger the need for SDC.

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A closer look at the data…

Key Finding 2: 49% of SDC users do not save, which makes achieving financial resilience challenging.

What are their savings behaviors?

Savings Habits

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Nearly half of SDC users do not save (49%). They usually spend as much as they earn or more.

Only 19% of SDC users save with a plan, compared to 43% of non-users.

Looking more closely at the Vulnerable financial health segments, 69% of Vulnerable SDC users do not save, compared to just 49% of Vulnerable non-users.

Liquidity

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A majority of SDC users (66%) have less than $1,000 in liquid assets.

More than a quarter of non-users have over $50,000, compared to just 7% of SDC users.

Comparing consumers in the Coping financial health segments, 45% of SDC users and 26% of non-users have less than $1,000 in liquid assets. In the Vulnerable segments, 84% of SDC users and 60% of non-users have less than $1,000 in liquid assets.

Resilience

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A majority of SDC users lack financial resilience.

Nearly 4 out of 10 SDC users would not be able to make ends meet for more than a month if faced with a sudden drop in their income.

Almost 3 out of 10 don’t know how long they could get by.

Risk Aversion

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The majority of SDC users are unwilling to take any financial risk when saving or investing.

This mindset is understandable given their lack of financial cushion and the vulnerability to a financial shock.

Emergency Funds

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When faced with an emergency expense, SDC users turn to different sources of funds than non-users. SDC users most often cite paying over time, borrowing from non-interest-bearing sources, or simply not knowing or being able to pay.

In contrast, non-users say they use cash on-hand or cash substitutes.

Savings Time Frames

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SDC users have a shorter savings time horizon than non-SDC users.

Retirement Savings

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A majority of SDC users have less than $1,000 in retirement funds (55%).

There is a significant disparity in retirement savings between SDC users and non-users. Only 10% of SDC users have at least $50,000 saved in retirement funds, compared to 40% of non-users.

Savings-to-Income Ratio

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The savings-to-income ratio illustrates amount saved including, liquid and retirement funds, as a function of annual income. The higher the ratio, the better positioned a household is to weather shocks and pursue financial opportunities.

More than half of SDC users have less than one month’s worth of income in savings, compared with just over one-fifth of non-SDC users.

Informal Saving and Borrowing

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In many cases, people borrow informally because it costs less, in ways both direct—informal loans generally do not include interest charges—and indirect—loans taken out from family or friends may be faster and easier to obtain, with less hassle from an application or approval process. US Financial Diaries Issue Brief, “An Invisible Sector: How Household Use Financial Tools of Their Own Making,” Morduch & Schneider, August 2014.

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A closer look at the data…

Key Finding 3: SDC users report budgeting at the same rate as non-SDC users, but are still struggling financially more than non-users.

What are the key planning habits of SDC users?

SDC Users and Budgeting

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Budgeting is an indicator of financial health – but despite a strong budgeting practice, 92% of SDC users struggle financially.

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SDC Users Feel They Cannot Plan Ahead

Does your household plan ahead to make sure you have the money to pay for large irregular expenses (for example, bills not due each month, such as insurance, property taxes, car registration, etc.)?

Despite the high rate of budgeting, SDC users are less likely to report planning ahead for large irregular expenses, and answer that they ‘would if they could’ at a higher rate.

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Unexpected Expenses

While SDC users report that they cannot plan ahead for large irregular expenses, they are also more likely to have unexpected expenses crop up. This combination likely contributes to their credit needs.

In the past 12 months, how often have you and your household had an unexpected expense crop up?

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Small-Dollar Credit User Demographics

Product Mix

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Notable Facts About Small-Dollar Credit Users

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Demographic Details

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Consumer Financial Health Study

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The Consumer Financial Health Study survey data was captured from June – August 2014. The nationally representative survey sample includes more than 7,000 consumers.

The Consumer Financial Health Study benefited from the financial support of its funders, which include CFSI founding funder, the Ford Foundation, and MetLife Foundation.

• Segmentation whitepaper

• Segment briefs

• Credit score whitepaper

• Survey instrument

• Financial health and child well-being whitepaper

MetLife Foundation is a major sponsor of CFSI’s ongoing consumer financial health work.

• Segmentation whitepaper• Segment briefs• Credit score whitepaper • Survey instrument• Financial health and

child well-being whitepaper

Consumer Financial Health Study Methodology

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• CFSI partnered with GfK, a global market and consumer research firm, to field the Consumer Financial Health Study survey.

• E-mail invitations were sent to a random sample of GfK’s KnowledgePanel® participants from June -August 2014, yielding 7,152 survey respondents. KnowledgePanel® is a large national, probability-based panel that provides a representative sample for online research.

• The sample is comprised of adults (18 and older) residing in the U.S. at all levels of the income spectrum; consumers with annual incomes under $50,000 were over-sampled to provide a robust set of data on consumers in the lower half of the income distribution. The target over-sample was 1,500 consumers with incomes under $50,000, to augment the generally representative pool of respondents. All data contained in this report has been weighted back to the total U.S. population to ensure that it is nationally representative.

• Standard, baseline incentives were given to respondents for survey completion; in addition to a sweepstakes entry, respondents each received between 1,000 and 1,500 points. Panelists typically receive 1,000 points for every survey session they complete, which is equal to $1. Respondents were offered a $10 incentive to provide consent to pull their credit score range.

• For more information about the survey instrument and methodology, download the segmentation whitepaper: bit.ly/ConsumerFinHealth

Want More?

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The Consumer Financial Health Study data set contains a host of demographic, behavioral, and product information in addition to some information about financial institution relationships.

Looking for some targeted information to help you make product or marketing decisions? Reach out to your CFSI Relationship Manager to discuss how we can help.

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