Accessible financial services incubator

Drive through a low-income neighborhood in virtually any American city and it quickly becomes apparent that the area’s financial health is at risk.

The giveaway? The abundance of payday lenders. According to the St. Louis Federal Reserve, there are now more than 20,000 of these organizations across the country—which tops even the ubiquitous McDonald’s storefront by roughly 40%.1

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. 

Read the full report. 



Turning aces into assets

Ontario has just become the first province to open its legal gambling market to private internet gaming providers. As of April 4, 2022, Ontarians can play casino-style games online and place bets on sports, including single games, through sites regulated by iGaming Ontario. According to the provincial regulator, the launch of iGaming marks the triumph “of a legal internet gaming market” over “its previous grey market standing.” But as with all forms of gambling, this development has a dark side. It was only a matter of time before Ontario expanded its gambling market—not because of popular demand, but because the provincial government is addicted to gambling money and is eager to seize any opportunity to get more of it, regardless of the costs to the people it is supposed to protect.

This report provides the background of gambling in Ontario, outlines the new risks with iGaming and offers four policy options.



15 percent of Canadians are ‘underbanked’ — here’s what that means and why it’s a barrier to equitable recovery

Research shows that 15 percent, or close to five million Canadians, are underbanked, and three percent are completely unbanked, meaning that they have very limited or no access to financial services within the traditional banking sector. 

Ironically, underbanked individuals often come from low-moderate income backgrounds which put them at a higher need for accessible financial services. However, factors like low credit scores, high credit card fees, and non-sufficient fund fees are major barriers that shut Canadians out from banks.

Instances of explicit racism while banking, which include being handcuffed when trying to open a bank account, have further diminished the trust in banks for many Black, Indigenous and people of colour.  



The Role of Credit Unions in Providing Alternatives to Payday Lending

High levels of household indebtedness in Canada has been a concern for policymakers at all levels of government over the past decade. As the economic costs of COVID-19 grow, household indebtedness becomes a faster growing and increasingly more serious concern.
 
While responsive government policy, such as the federal government’s Canadian Emergency Response Benefit (CERB), has curbed some short-term impacts on indebtedness, the program was developed to fill a temporary gap. The most vulnerable households are low-income households with limited access to credit, who frequently turn to high cost payday lending for financial relief. While regulations on the payday lending industry have increased substantially, low-income Canadian households remain left with few, if any, practical alternatives.
 
The low-income households in greatest need of alternatives are the financially excluded, specifically the underbanked and the unbanked.
 
At the same time, it is important to recognize that not all payday loan clients are in low-income households. A 2016 report by the Financial Consumer Agency of Canada states that close to 40% of payday loan borrowers have household income of $55,000 or greater and 20% having income of $80,000 or greater.
 
Thus, payday loan borrowers are not a homogeneous group.
 
Some Canadian credit unions have developed payday loan alternatives for the financially excluded, however, these more reasonably priced loans are only accessed by a very small portion of would-be payday loan clients.
 
The objective of this research is to review the alternative payday loan products currently offered by Canadian credit unions, to identify the barriers to offering more payday loan alternatives, and to make recommendations to expand the offerings.



National Report on High Interest Loans

ACORN Canada undertook a study focusing on high interest loans, especially when taken online. For the purpose of the study, high interest loans were defined as loans such as payday loans, installment loans, title loans etc. that are taken from companies/institutions that are not regular banks or credit unions.

The study was conducted to examine the experience of lower-income consumers in the increasingly available online high-cost credit markets.

The study was divided into three phases - conducting a literature review and webscan which was undertaken by Prosper Canada; legislative scan to understand the regulatory framework; and a national survey to capture experiences of people who have taken high interest loans, especially online.



Does State-Mandated Financial Education Affect High-Cost Borrowing?

Using pooled data from the 2012 and 2015 waves of the National Financial Capability Study (NFCS), this research finds that young adults who were required to take personal finance courses in high school were significantly less likely to borrow payday loans than their peers who were not. These effects do not significantly differ by race/ethnicity or gender, suggesting that financial education may be useful regardless of demographics.



High-Cost Alternative Financial Services: The Customer Experience

In early 2017 Momentum reached out to over 50 community members and participants to better understand local experiences with high-cost alternative financial services. In addition to connecting with individuals through interviews, Momentum hosted community consultations in partnership with Poverty Talks! and Sunrise Community Link Resource Centre. The following document summarizes what we learned from these conversations and the loan contracts that borrowers shared with us. It also identifies several themes that emerged from these discussions.



Summary Brief: High-Cost Alternative Financial Services

Many Albertans turn to high-cost alternative financial services when they need a short-term fix for a financial issue. Though these services are expensive and unsafe, they are often the only option for low-income individuals, particularly those who struggle to obtain credit at mainstream financial institutions. High-cost alternative financial services contribute to a two-tiered banking system, in which the poor often pay more for inferior services.

Without more stringent regulation, and in the absence of safe and affordable short-term credit options, Albertans living on lower-incomes will continue to experience financial exclusion and take on heavy debt loads – both of which are major contributors to long-term poverty.



High-Cost Alternative Financial Services: Policy Options

Many Canadians turn to high-cost alternative financial services when they need a short-term fix for a budgetary issue. Though these banking and credit alternatives are a convenient choice for individuals in search of fast cash, particularly those who face barriers to obtaining credit at a bank or credit union, access comes at a steep price and with a high degree of risk. On its own, one high-cost loan has the potential to trap a borrower in a cycle of debt, not only amplifying their short-term problem, but also limiting their ability to secure the income and assets needed to thrive in the long term.

The policy recommendations presented in this brief, and summarized in the chart on page two,  are inspired by the regulatory initiatives across the country, and reflect ways in which all three levels of government can contribute to better consumer protection for all Canadians.