In the mid-2000s, Washington State Employees Credit Union ($1.9B; Olympia, WA) received a wake-up call when it discovered members were taking out high-rate loans from payday lenders and quick cash shops. The information prompted the northwestern credit union to create its own, lower-rate payday loan product. The result, Q-Cash, provides up to $700 with a 60-day repayment term and $12 fee for every $100 borrowed. The offer is so popular that in 2012, WSECU introduced Q-Cash Plus as a way for members to borrow more money for a longer duration.
Over the past decade, WSECU has automated more and more components of the Q-Cash loan process, which in turn has lowered costs and, when coupled with the growing number of loans taken out, increased revenue. Here, WSECU’s chief credit officer, Mark Allen, discusses Q-Cash and the benefit of automation.
Why did the credit union decide to offer a quick cash product?
Mark Allen: About 10 years ago, we realized our members were using payday lenders and high-rate quick cash options. We did some analysis to determine how many of our members were going outside the institution to secure this type of financing and realized we had a hole in our product repertoire. We weren’t meeting members' needs in terms of convenience, speed, and availability, regardless of credit. The genesis of the idea was to offer an alternative we felt would be better for our members.
Is it bad to have members take on high-rate loans outside the institution?
MA: I don’t know if it’s bad or good. It’s not our choice, it’s the member’s choice. We’re just trying not to ignore a portion of our membership that has a need we were basically not fulfilling in the past. Our goal is to make products that are well priced, fair, and available to all our members and then let them make choices on what they feel they need.
Talk to me about the terms for Q-Cash.
MA: A few years ago, the state of Washington passed a law that requires a minimum of 45 days to repay a payday-type loan. It used to be 15. Our product is 60 days, so we give people a little more time than we need to under state law. It’s a 60-day term with a $12 per $100 fee. Our typical loan is close to $500, which means our typical fee is close to $60 for each loan. It’s pretty simple.
If members can’t pay it back in 60 days, we will extend their term and a number of people pay us back in three months or four months or another period of time. We do take losses though. We write off $10,000 to $14,000 a month in loans that aren’t paid back.
Is it an automated system?
MA: We’ve been using it since ’04 or ’05 and over the years we’ve automated more and more of it. With the build-out we’re working on this year, it’s fully automated to make it deliverable and able to plug in to other cores. We’re also adding the mobile feature so people can get the loans directly from their phone with immediate funding. We’re testing all of the new systems right now.
Over the years, we’ve done a few updates onto the core, I’d call it almost duct tape solutions internally to make it work, and it’s worked fine. The fully automated product, with mobile included, will allow us to commercialize it. Not only will it work for us, but we can make it available to other credit unions looking for a way to drive cost out of the equation in offering this product. With a lower cost, credit unions can price it wherever they want. By fully automating everything, we’re hoping we can provide a solution to credit unions that only want to charge, or only can charge, 18% interest and a $20 application fee.
What’s the timeline to roll that out?
MA: Our goal is to push it out to our members after the first of the year if possible and then give it the first couple of months, the first quarter, to work out the bugs. We want to work out whatever bugs we might have missed in the testing and get everything working well. Then we’ll start to make it available to others starting in the second quarter.
What are the terms and pricing for Q-Cash Plus?
MA: The pricing on the Q-Cash Plus loan is different than the standard Q-Cash loan. Q-Cash Plus has a $25 application fee and an APR of 36%. The dollar amount can go up to $4,000, and the term can go out to three years, so it’s a longer term. It’s a product we put out in mid-2012 to give people access to more money, give them more time to pay it back, and lower the effective APR from Q-Cash. It’s been pretty well adopted.
Do these products make a profit for the institution?
MA: The first five years we didn’t make any money. We started making some money with Q-Cash in ’08 and now we actually generate a pretty nice chunk of net income off those loans despite the fact we’re offering them at prices well below what traditional lenders in the marketplace are offering.
How did the loans become profitable?
MA: When we started automating more and more, we brought the cost down. We had a lot of people processing a lot of loans, and the process was clunky. These are small loans, $50 or $60 a pop, so if it costs you $40 or $50 to put them on the books and service them, and then you have losses on a few, you’re not going to make money. So taking out the cost was one piece of it. We effectively reduced our staff over the next five years by about 50% and increased our volume of loans by about 200%.
The other thing was adding Q-Cash Plus. Today, that product is more profitable than Q-Cash even though we've only offered it for about 17 months.
Our hope is as we automate more and perhaps drive more volume because of the mobile, we’ll be able to reduce the pricing to make it more affordable to members.