Does Convenience Trump Rationality? Strategies that Align with (Sub)Prime Borrowers Use of Nonprime Products. J. Paul Leavell

Transcription

1 Does Convenience Trump Rationality? Strategies that Align with (Sub)Prime Borrowers Use of Nonprime Products J. Paul Leavell

2 Agenda Payday Borrowers vis-à-vis Payday-Borrowing Behavior Payday Borrowers and OD Activity ODP as Payday Lending Cultural Inertia for Payday Lending Aligning Strategy with Borrowing Behavior

3 Credit Union Context $370M in assets 47,000 members 39% of members with HH incomes less than $50K 59% of members < 670 credit score; 41% < % checking penetration NII = 53% of revenue Average member profit = $57

4 Payday Borrower Data n = 382 Regulations can limit participation Payday lending illegal in NC O'Neill, B., & Xiao, J. J. (2015) found a relationship between strong state laws and PDL usage Identified payday borrowers through payment activity ACH inbound ACH outbound Bill payments outbound 65 payday lenders were identified

5 Payday Borrower Demographics Income and convenience Carter (2015) Pecuniary mistakes-- Carter, Skiba, & Tobacman (2011)

6 Payday Borrower Demographics Nonprime101 Research

7 Payday Borrower Credit Scores Mean difference in Credit Score: 27.98; (p =.039; 95%CI [2.03; 53.91]; d = 0.12 ) SD: PDB = 82.4; NPDB = Medians: PDB=587; NPDB=618 (U = 59.9; p <.001; r = -.20)

8 Payday Borrower Profitability Mean difference in Ann. Profit: $512; (p =.001; 95%CI [$425; $594]; d = 2.43 ) SD: PDB = $802; NPDB = $210 Medians: PDB = $180; NPDB = -$85 (U = 98.5; p <.001; r =.43)

9 Payday Borrower Product Usage

10 Payday Borrower Overdraft Activity Mean difference in Av OD: 0.42; (p =.001; 95%CI [0.34; 0.51]; d = 0.86 ) Medians: PDB =.44; NPDB = 0 (U = 114,379; p <.001; r =.71)

11 PDB/ODP Behavior Matrix / Strategic

12 ODP as Payday Lending Known PDB n = 382 ODP as PDB n = 1,316 Av. Profit = $470 Av. Profit = $774 n = 45 Av. Profit = $1,358

13 ODP as Payday Lending Channel Mix

14 ODP as Payday Lending Credit Mix Mean difference in Credit Score 92; (p =.001; 95%CI [71; 113]; d = 0.96 ) Medians: PDB = 595; ODP as PDB = 535 (U = 79,374; p <.001; r =.51)

15 ODP as Payday Lending Channel Breaks

16 Over Draft Protection Program Members with up to 3 ChexSystems reports Up to $500 charged off elsewhere All checking accounts receive debit card 2 nd Chance Checking with a fee ($7.95 with DD; $10.95 without) Post limits on OLB/AVR Dynamic OD limits Based on deposit activity Tiers: $300; $500; $1,000 CO/Retention program implemented

17 Over Draft Protection Program Results ODP program revenue increased 18%-23% annually adjusted for checking growth Deposit charge offs reduced by an absolute 12% in next calendar year Items per ODP user increased between items per year (YOY) Improved member satisfaction through account retention Automation of manual processes resulted in FTE reduction (1 position $40K sal/ben)

18 Over Draft Protection Demographics 53% of all checkers bounce 1+ items/year

19 Over Draft Protection and Credit Score Mean difference in Credit Score 46; (p =.014; 95%CI [5; 83]; d = 0.18 ) Medians: NonODP = 670; ODP = (U = 31,681; p <.001; r = -.38)

20 Cultural Inertia and Payday Lending Risk-based pricing without much risk-based lending Total Loan Portfolio by Credit Tranche 75% of lending into 41% of members

21 Cultural Inertia and Payday Lending Instant Decisioning Perception of complexity Fear of loss of control Incentive program implications

22 Payday Lending as Strategy Objectives Introduce instant decisioning into organization in a limited way Re-ignite low-credit lending initiative through organization

23 A Solution Framework Qcash No endorsement/experience The framework is what matters PDB vs. PDB behavior Convenience attractive to prime payday borrowers

24 Mobile Main Menu Overcome cultural inertia with self-service functionality.

25 Short-Term, Small-Dollar Lending QCash (Fee-Based) Loan amounts $50-$700 No credit check $12 Fee/$100 borrowed 60-day term Instant loan funding Auto pay is set on the due date when the loan is booked QCash Plus (Interest-Based) Loan amounts $701-$4,000 No credit check $25 loan processing fee 36% APR Terms based on loan amount from 9 to 36 months Instant loan funding Auto pay is configurable with 4 monthly date options Targeted approaches address cultural inertia. Convenience leverages tendency of some prime borrowers for PDB behavior. QCash Financial, LLC. All rights reserved. QCash, QCash Plus and the QCash logo are registered trademarks of QCash Financial, LLC. All other marks are the property of their respective owners.

26 Summary Prime borrowers engage in PDB behavior Contemplate the prime borrower when setting up programs ODP programs can mirror PDL programs Leverage ODP parallels to expand nonprime lending through the organization and overcome cultural inertia

27 Questions/Contact

28 References Carter, S. P. (2015). Payday loan and pawnshop usage: the impact of allowing payday loan rollovers. Journal of Consumer Affairs, 49(2), Carter, S., Skiba, P. M., & Tobacman, J. (2011). Evidence for pecuniary mistakes? Payday borrowing by credit union members. In O. S. Mitchell & A. (Eds.), Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford, UK: Oxford University Press. Retrieved from Nonprime101. (August 19, 2013). Get the facts on non-prime consumer behavior. Retrieved from O'Neill, B., & Xiao, J. J. (2015). Payday Loan Usage, State Law, and Financial Capability. Journal of Financial Service Professionals, 69(6), Qcash Financial.