Sharks in the Water: The Wild West Of Online Payday Lending

From 'Brick-and-Mortar' To 'Zeros and Ones'
Last week we launched a 'micro branch' in Woonsocket, RI out of which we will be offering an alternative to payday lending (you can see photos here and read, listen to or view some of the press we got from the ribbon cutting).  The reason?  In Rhode Island, payday loan branches can charge up to 260%, trapping low-income Rhode Islanders in a debt cycle from which it can take months or even years to escape.  Funded by United Way of Rhode Island, the goal of the new branch is to divert customers from the predatory lenders to us by:

• Offering a loan with a far lower interest rate
• Reporting loan payments to credit bureaus so that borrowers build their credit
• Delivering free financial coaching to further empower clients
• Offer a customer service experience--quick, convenient and friendly--comparable to that of the payday lenders

We are confident that the program will be a success: we did five (5) loans in our first week!  Obviously, we have a ways to go (the volume of payday lending in RI is around $70 million--an astronomical number for a small state), but as a recent NPR story makes clear, the predatory loan problem runs far deeper than the Brick-and-Mortar payday loan presence.

Would You Buy A Share In Capital Good Fund?

Here are are the lessons I've learned after 5 years of running a non-profit, illustrated in a simple formula:

 X(scale + innovation + implementation + luck) = social change, where X = money

Here are those lessons put another way: the math of social change should be algebraic but rather resembles a calculus problem

Why So Hard?

Let's consider the non-profit paradigm.  Non-profit begs for money from individuals, foundations, corporations and government.  Money dribbles in.  Money is predominantly spent on programs, because funders don't like their donations to go toward "overhead" (read that: infrastructure, personnel, marketing, etc.).  Programs result in some good stories that touch the hearstrings of funders.  Money dribbles in again.  Rinse and repeat.

Notice that scale and social impact were left out of that equation.  Now consider the for-profit paradigm. For-profit pitches the investment opportunity to investors.  For-profit knows how much it need to become profitable.  Investors evaluate for-profit for profit potential.  For-profit makes necessary investments: it probably loses money for several years as it builds up back-end systems, refines the business model, markets its products and services and grows its market share.  For-profit seeks new investment as needed.  Some for-profits return profit to investors; others go under.  Those that are profitable continue to grow and either go public or are purchased by a larger company.  

Notice that social impact is left out of the equation.

The Wrong Kind Of Budget?

What if one of our most fundamental assumptions--that the first step to financial stability is the creation of a personal budget--misses the point?  A recent article in FastCompany, 'Poverty Drains Mental Energy,' seems to imply just that.  Let's put it bluntly: being poor is exhausting and stressful.  You have to constantly make difficult decisions: Do I fall behind on the utilities so that I can buy school supplies for my daughter?  Who will babysit her while I spend 2.5 hours traveling by bus to and from an appointment to apply for food stamps?

If you look at the totality of these myriad decisions and trade offs that are made month after month, you start to realize that you are dealing with a budget--only instead of a financial one, it's a balance sheet that accounts for inflows and outflows of mental and physical energy.  And according to Sendhil Mullainathan and Eldar Shafir, this budget is the one that really counts.  In their new book, 'Scarcity: Why Having Too Little Means So Much,' they argue that when thinking about social programs, "We never ask, is this how we want poor people to use their bandwidth?...When we design poverty programs, we recognize that the poor are short on cash...But we do not think of bandwidth as being scarce as well."  At first, this sounds absurd: shouldn't the poor be thankful for the free and low-cost programs we offer them?  But if you step back for a moment, the answer becomes clear: of course they're thankful for them, but that doesn't mean they fit into their budget!

Event At The College Crusade

Through the Financial Coaching Corps (FCC), a program we run in partnership with Rhode Island General Treasurer Gina Raimondo, we are building some powerful partnerships.  As a case in point, we are working with The College Crusade--whose mission is to reduce high school dropout rates and increase educational and career success for low-income urban youth--to provide one-on-one Financial Coaching to the families they serve.  Last night we presented our products and services, as well as an overview of how credit works, to 80 families, of which 25 have signed up for free Coaching!

We are very excited to continue financially empowering low-income families by working with great leaders in the government, non-profit and for-profit sectors.  Special thanks to Lisa Gallant, who manages the FCC, The College Crusade, and to Treasurer Raimondo for having the vision to work with us to create and grow this program.

Treasurer Raimondo speaking to the families

A group photo of paricipating families

Girding For A Fight

As a financial services non-profit, it is natural for us to define our enemy--and more importantly, the enemy of the poor families we serve--as the predatory service companes that, taken together, represent a $100 billion / year industry (and growing).  This industry consists of payday lenders, check cashers, pawn shops, rent-to-own stores, refund anticipation lenders, and auto title lenders.  Before getting to the meat of this post, I'd like to quickly lay out why these companies are so damaging to our clients and the economy as a whole.  Let's take payday lenders, which are, according to a report by the Center for Community Economic Development (CCED), "...small, short-term, very expensive consumer loans...which [average] $375, plus the fee--which is typically in excess of 300% APR...the high fees and short-term lump-sum payment create a debt trap that causes consumer harm."  CCED found that, in 2011 alone, "The payday lending industry had a negative impact of $774 million...resulting in the estimated loss of more than 14,000 jobs.  U.S. households lost an additional $169 million as a result of an increase in Chapter 13 bankruptcies...bringing the total loss to nearly $1 billion."

I could continue to outline why the other services are equally damaging, but you get the point.  Now comes the question: what to do about it?  From our perspective, the answer lies in a three-pronged strategy: legislation to ban abusive practices; financial coaching to obviate the need for the services to begin with; and offering a more afordable and equitable product that out-competes what predatory companies can offer.  On the legislative side, for instance, we are part of a coalition that has been trying--unsuccessfully--in Rhode Island to cap at 36% APR the interest rate that payday lenders can charge (they can currently charge up to 260% APR).  Were that legislation to pass, the consumer would immediately be better protected from the most abusive practices.  On the financial coaching side, we are working one-on-one with hundreds of families to help them budget and build savings so that, when emergencies arise, they don't need a loan at all.  And finally, recognizing that access to credit is essential in our economy, we offer payday loan alternatives of up to $500 at 36% APR, and loans of $501 to $2,000 at 20% APR.

Financial Coaching Fellow Profile - Austin Mertz

When CGF Financial Coaching Fellow Austin Mertz first told his mom about the Fellowship, her response was less-than-enthusiastic: “Why would you be a Financial Coach when I’m still teaching you how to manage YOUR money?”  However, as an economics major at Brown University, Austin was seeking opportunities to apply his skills in the community, and he already felt comfortable in a one-on-one setting: in high school he served as a tutor, a role in which he thrived.

That said, he had a lot to learn about the curriculum content and he had never worked with people that are older.  Fortunately, his extensive training at CGF taught him how to establish his credibility in a way that would allay any such concerns.  Still, Austin notes that coaching “Is an interesting relationship and one that no amount of training can truly prepare you for.  Each client is different and [being successful] takes a lot of on-the-fly thinking.”

During the first term of the Fellowship, which began in January of 2013, he served three clients.  One of his favorite clients came to him bearing the burden of a seemingly insurmountable mountain of medical debt as well as the threat of foreclosure.  “It was a tough introduction to poverty in Providence,” he says. “My strategy was to refer him to Rhode Island Legal Services to advise him on both foreclosure and the possibility of filing for bankruptcy.”  The ability to know when to refer clients to community partners is something that was emphasized during his training, and it made a huge difference: the client was able to save his house and avoid the need for bankruptcy.  This was in part thanks to a new job he was able to secure, and in part because Austin helped him to face the fear of looking at his financial situation.  “With this client, it felt more like ‘Financial Therapy’ than Coaching.  He really came out of our sessions with a feeling of hope and a sense of confidence about his financial future.”

Austin is now beginning his second term as a Fellow, and he is excited to serve more families, pointing out that “The first term was a rude awakening to the nature of poverty, but it was very rewarding and I now feel more confident than ever in my ability to serve my clients.”  The impact of the Fellowship has gone beyond the lives he’s changed: when he first applied for the position he was unsure of what path he wanted to pursue after graduation.  “Now that I have had a chance to see how CGF operates, I have become interested in non-profit consulting and social impact investing.  I’ve been mentioning the Fellowship in cover letters for jobs, and this past summer I worked at a social innovation non-profit.”

In short, for Austin the Fellowship has given him the opportunity to expand his understanding of finance, crystallize his career path and, of course, empower families.  When thinking about his upbringing, he recalls that his parents were very financially conscious, which has translated to his own aversion to needless spending.  Nevertheless, Austin recognizes that every person’s experience is unique, which means that every Coaching session is unique.  As he likes to put it, “Sometimes Coaching is therapeutic, sometimes it’s educational, but regardless of one’s situation, it is always transformational.”

Financial Coaching Fellow Profile - Mike Casinelli

Mike Casinelli found himself in full business attire at a Starbucks in Providence, RI, waiting to meet with George, a CGF Financial Coaching Fellow.  His background as a finance major at Bryant University colored his expectations for the interview: leather stuffed chairs, mahogany desks, book cases filled with leather bound tomes, large windows overlooking a body of water or expanse of greenery.  So when George, wearing a t-shirt and shorts, shook Mike’s hand and sat across from him on a plastic chair, he immediately knew that this would be something different—finance related, yes, but with rather nontraditional goals.