Feb 05 2016

Accessible Financial Services Incubator

According to the St. Louis Federal Reserve, there are now more than 20,000 payday lenders across the country—which tops even the ubiquitous McDonald’s storefront by roughly 40%.

These alternative financial services providers offer short-term loans at interest rates that can top 400%. They appeal to desperate consumers with no access to traditional, more affordable credit and offer an immediate fix that can lead to months, if not years, of financial pain. In its Payday Lending in America series, the Pew Charitable Trusts reports that Americans spend roughly $7.4 billion (B) on payday loans each year. Could traditional financial institutions find a way to deliver credit to this consumer niche without compromising their own health? The Filene Research Institute, a consumer finance think-and-do tank, hypothesized that the answer was yes.

To test that hypothesis and counteract the presence of alternative financial services in low-income communities, Filene received a generous grant from the Ford Foundation and created the Accessible Financial Services Incubator. The Incubator provided a way to test, package, and deliver viable financial products designed to address the needs of the underserved. It had three phases: Lab, Factory, and Marketplace. During the Lab phase, Filene tested five financial products specifically designed to meet the credit needs of the underserved. Each product had been launched previously on a small scale and had demonstrated the potential to be both scalable and financially viable.

Initial product recruitment started in November 2013, and between then and December 2015 Filene tested the following products with varying degrees of success:

  • Borrow and Save™—a loan with a built-in savings component
  • Employer-Sponsored Small Dollar Loans—loans offered in partnership with a credit union and the employer
  • Non-Prime Auto Loans—cost-effective loans for those with no or a low credit score
  • Pay Yourself Back—a loan program that leveraged loan payment behavior to build savings after loan payoff
  • The Trust Card—a debt consolidation credit card with a financial coaching component

Two products were selected for further analysis: Borrow and Save and Non-Prime Auto Loans. Borrow and Save and Non-Prime Auto Loans completed the Factory phase, where they underwent extensive feasibility testing to determine long-term scalability of the concepts. The Marketplace phase, which will take place in early 2016, will involve intensive promotion of Borrow and Save and Non- Prime Auto Loans to mainstream financial institutions with the goal of a large financial institution committing to implementing one of the products.

Filene thanks our generous partners for making this important research possible

Report Number 389