FinTech Catalyst Incubator: Align's Income Share Agreement

Executive Summary

Today’s highly competitive, disruptor-filled financial services marketplace demands that credit unions find new ways to meet consumer needs. The largely vibrant economy of the past decade has left many consumers behind. 

The coexistence of these two realities has put TruStage Ventures, the venture capital arm of TruStage, on the hunt for promising new products and services to meet the needs of credit union members. To test items in its investment portfolio and evaluate concepts that could become part of its portfolio, TruStage Ventures recently launched the FinTech Catalyst Incubator with the Filene Research Institute. Filene has a 20-plus year history of testing and scaling innovative ideas in the credit union space. The Incubator’s kick-off project: Align’s Income Share Agreement (ISA).

What is the research about?

This research study analyzed the desirability and feasibility of credit unions to offer an ISA to their members. To determine whether Align could be a fit for the credit union system, Filene conducted research with two distinct credit union populations: members and staff. Participating credit unions represented a cross section of asset levels and demographics and were located in states where Align operated at the time of the research. All participating credit unions had members with varying socioeconomic statuses. However, all credit unions expressed the presence of members with low to moderate incomes, members who struggled with income instability and volatility, and members who faced financial challenges (an initial target market hypothesis by Filene). 

Filene designed the research to test four hypotheses:

• Credit unions are an ideal channel for an Align ISA.
• Align’s ISA fulfills an unmet financial need for credit union members.
• Align’s ISA is a more desirable product to solve existing member needs than a personal loan.
• Credit unions find value in an Align ISA for their members and financial bottom line. 

Member research was conducted in two stages: a survey followed by focus group research (with a random subset of the survey participants). Participants fell into three categories: those who had applied for and received a loan of up to $13,000 in the previous year, those who had applied for but were denied a loan of up to $13,000 in the previous year, and a random sample. Survey participants were divided into three groups, based on product categories: personal loans, ISAs, and both personal loans and ISAs.

During the staff research portion of the study, Filene interviewed leadership staff across key operational areas such as lending, finance, marketing, and retail.

What are the credit union implications?

Although research at the survey level suggested that members did not have a strong preference for ISAs versus personal loans when asked to choose between the two, the survey also showed that consumers did not have a strong aversion to an ISA either. In fact, consumers had markedly positive reactions to the ISA as a concept when asked about the ISA in isolation (not asked to choose between an ISA and a personal loan). During the more in-depth conversations and information sharing afforded by the member focus group and staff interview sessions, both credit union members and employees indicated that they believed ISAs had situational benefits and allowed the credit union to meet the needs of a wider variety of members, especially financially vulnerable members. 

The broad support for ISAs, backed by credit unions’ mandate to provide affordable financial services, should lead to ISAs being a logical addition to the credit union product lineup. In addition, having Align ISAs available in more credit unions may help lower ISA costs. The additional data created by credit union relationships could help improve underwriting accuracy and reduce expenses.

Filene believes that the next logical step to proactively bring ISAs to credit union members is to conduct a live referral pilot with credit unions and Align. Given the potential regulatory barriers of credit unions directly offering ISAs or holding ISA contracts in their portfolio, a referral pilot program makes the most sense.

As a final note, it is almost impossible to overstate how important education will be to the successful rollout of Align ISAs. As this report captures in numerous ways, many consumers and credit union staff are unfamiliar with how an ISA functions. Getting these critical stakeholders comfortable with the ISA will be vital to its success.