Blog: Innovation is Coming: A New Small-Dollar Credit Offering from Canada
I’ve had the good fortune several times in my life to live north of Canada.
(No, not THAT far north.)
As a two-time Detroit-area resident, I’ve headed south through the tunnel below the Detroit River on many lovely evenings to sample Windsor’s poutine and generally marvel that, “Oh my gosh, Canada really is a different country.” (Wait, you seriously won’t accept my dollars? And really? Now I need my passport to get in?)
But Canada and the U.S. aren’t really that different. Just as the mortgage mess and ensuing financial crisis dealt a crippling setback to millions of American families, so too have Canadians had trouble making ends meet as our intertwined economies limp along together. Just like Americans, Canadians are on the hunt for products and services to help manage their day-to-day finances successfully and build healthier financial lives.
Despite a Canadian law stating that everyone, save fraudsters and other criminals, is legally entitled to a no-minimum-deposit checking account at the federally regulated financial institution of his or her choice, there remains a sizeable group of Canadian consumers who choose to manage part or all of their financial lives with check cashers and payday lenders. As we’ve documented time and again here at the Center for Financial Services Innovation (CFSI), there are many valid, often complex, reasons why someone might make this choice. To wit, last year alone, an estimated 3 percent of Canadian households conducted business with Canada’s CA$2 billion (US$1.87 billion) payday loan industry, which includes both online and offline players.
As of two weeks ago, however, there’s a compelling alternative: Vancity Credit Union, in Vancouver, B.C. With more than CA$17 billion (US$15.92) in assets and 500,000 members, Vancity is the largest credit union in Canada. For the past few months, Vancity has been testing its Fair & Fast Loan, a loan product developed in consultation with CFSI over the course of two years. The Fair & Fast Loan is an installment loan with a CA$100 (US$93.64) minimum, a CA$1,500 (US$1,404.50) maximum, a flexible repayment period and an interest rate of 19 percent. Relying on a combination of traditional bureau data and relationship history with Vancity, the Fair & Fast Loan is accessible to a wide range of borrowers, accepting credit scores well below the average for comparable loans in the U.S. Decisioning takes one hour. It’s a product designed to be straightforward and transparent. And it’s built to promote long-term financial health.
Management Buy In, Customer Research
But it’s not just the loan itself that we’re excited about: it’s the set of business practices Vancity used to get to this moment. First it gathered its executive leadership team, asking CFSI to challenge the team’s knowledge and assumptions about the needs, preferences and behaviors of consumers who go outside a bank or credit union to manage their financial lives. (Given the unique law in Canada described above, it might be even more difficult for Canadian institutions to understand this particular consumer choice.) Then Vancity did its homework by conducting a series of
|The need for high quality, small-dollar credit is stronger than ever, and we know many innovators out there are thinking hard about what high-quality credit looks like here in the U.S.|
ethnographic interviews to understand the needs and behaviors of its own members. With steadfast CEO belief in the initiative as a critical manifestation of Vancity’s brand promise, it established a formal strategy team, hiring top-notch project managers and staff who worked quickly and diligently and considered not just product design and marketing plans, but lender education and change-management strategies. Vancity developed, tested, and now has rolled out its flagship product for this segment of its members—all in two years. That’s the speed of light for a financial institution which, until 2011, hadn’t targeted the “underbanked.”
Of course, it’s early days for this loan product for Vancity. Undoubtedly, there will be tweaking and adjusting and iterating in the months and years to come. And at 19 percent, this loan likely will not be a significant driver of profitability. But that’s not the game they’re playing. They’re in the relationship game, and they’re building a sustainable product—one of many—that will meet their members’ needs and help members be resilient in the face of life’s ups and downs.
The Fair & Fast Loan is a big deal for Vancity, and it’s a big deal, period. Not only is it the first of its kind in Canada, but it’s the first new attempt we’ve seen at an unsecured credit solution for the underserved consumer in quite a while. At a time when the U.S. environment is anything but conducive to new consumer credit innovation, it’s terrific to have another example of fresh innovation to point to and discuss, even if it’s north of the border. The need for high quality, small-dollar credit is stronger than ever, and we know many innovators out there are thinking hard about what high-quality credit looks like down here in the U.S. We are proud of our friends to the north. We are grateful for the opportunity to contribute to their effort. And, most importantly, we think this is a fantastic tool Vancity members can use as they strive to improve their financial health.
Feels like proh-gress to me.
Karen Andres is vice president, network engagement, at CFSI. In this role, Karen brings her experience with financial services providers and her expertise on the underserved consumer to help CFSI lead and engage a network of innovators committed to building high-quality financial products. Her work at CFSI is a direct result of her time in the investment industry with Strong Financial Corporation and Wells Fargo Institutional Trust Services, where she worked with corporate 401(k) clients, including multiple Fortune 500 companies, to develop and deliver effective participant financial education strategies that would increase employee take-up and successful usage. She can be reached at [email protected].