Predatory Lending
to the Underfunded
Wednesday, May 17, 2023
Keith Taylor
Executive Director
DUCA Impact Lab
Narinder Dhami
Executive Lead
New Power Labs
Jonah Chininga
CEO
Woveo
Keith Taylor from DUCA Impact Lab and Jonah Chininga from Woveo joined Narinder Dhami from New Power Labs in a New Power Talks discussion on predatory lending and innovative solutions designed to support communities who are currently not eligible to access mainstream banking to build credit.
According to the State of Fair Banking report, 16 percent of borrowers fell behind on loan payments in the past year.
That is one in six borrowers who cannot meet their loan payments on time.
Newcomers, people of colour, people with low income or low credit scores, amongst others, face various barriers in accessing mainstream banking. This exposes them to predatory lending practices, putting them at a higher risk of getting trapped in a cycle of debt.
Our expert panellists have each scaled innovative solutions to bridge capital access gaps for communities in Canada. In our discussion, four big ideas came up:
1. Banking is like healthcare in that it can profoundly impact our quality of life, and our prosperity as a society. Yet many are not able to access banking.
As a newcomer, Jonah spent six years working to establish his credit history to be able to access banking services in Canada - exposing him to costly and predatory financial services. His story is not unique: 23 percent of Canada’s population are immigrants, and generally need three to five years to establish a solid credit history to access affordable banking services. In the interim, many are forced to lean on unfavourable products during these first few years.
Keith shared stark findings from DUCA Impact Lab’s State of Fair Banking report, which highlights low trust in financial institutions among customers. One in five debtholders access alternative lenders to avoid talking to their primary financial institution. Black and Indigenous people in particular report poorer financial health, with higher amounts of credit card debt, private loans and payday loans than other Canadians.
Bearing out Jonah’s experience, DUCA Impact Lab’s report points to a lack of products and services for those with low or no credit scores. The challenge is that credit is not necessarily an accurate metric to assess how deserving a banking customer may be. DUCA Credit Union is a great example of this. It was founded by a group of newcomers who could not access banking due to their lack of Canadian credit history, and now - 70 years later - DUCA’s growth as a thriving credit union is testament to the fact that the underbanked may in reality be excellent banking customers. The markers banks use to assess credit risk were as imperfect 70 years ago as they are today. Innovation is necessary — and possible.
2. Innovative, effective solutions come from communities themselves.
From community research, DUCA Impact Lab found that newcomers, people of colour, and people with low incomes are more likely to get trapped in a debt cycle due to higher exposure to predatory financial products. In response, DUCA Impact Lab piloted the Escalator Loan. In it, DUCA directly pays down the current debts of a borrower and restructures their repayment plan to be more favourable, helping them move away from debt and towards building wealth. To put things into perspective, the average payday loan’s APR would be around 442 percent, while the escalator loan program interest is prime plus eight percent.
Similarly, Woveo’s rotating savings model is informed by the shared experience of newcomers, based on a model of rotating savings that has been practiced in many cultures for centuries. It’s a way for newcomers in Canada to gain access to capital when they lack access to banking. A group of socially connected individuals (friends or family) pool funds and take turns accessing the pool with zero interest. By partnering with institutions such as VISA and reporting transactions to Equifax, Woveo develops an accessible product that can help newcomers establish their credit history, leveraging the social collateral among communities to encourage healthy financial habits such as saving and making payments on time.
3. Innovative solutions can seem risky, so scaling these solutions requires an ecosystem approach.
Financial institutions are understandably heavily regulated, and are often not the most conducive environments for experimentation. Keith notes a challenge in developing and scaling innovative solutions is this necessary balance with an institution’s risk requirements; that’s why DUCA Impact Lab was established as an independent entity whose purpose is to utilize community-based insights to develop more inclusive models of lending. With this structure, the Impact Lab was able to explore the risks of these new models and find ways to reintroduce them to the credit union.
Jonah also faced challenges in building and scaling Woveo as a newcomer. Building infrastructure in compliance with banking regulations was arduous, but the Alberta fintech regulatory sandbox provided a controlled environment, allowing them to establish strategic partnerships with other fintech services to build Woveo. Finding mission-aligned investors who understand the newcomer experience was another challenge. The New Power Match tool is one way founders can get matched with mission-aligned investors.
4. Despite challenges in developing financial solutions for underserved communities, accessible banking brings positive economic and social impacts.
Access to banking can be transformative in improving quality of life. Targeted products like DUCA’s escalator loan allow participants to save while repaying their debt, giving debtholders a better chance of improving financial health. The financial impact ripples into other aspects of life: participants report lower stress levels, better access to healthcare services not covered by insurance, and improved food and housing security. DUCA’s analysis of the social return on investment shows that for every dollar spent on the program, they’re seeing $12 in returns.
In Woveo’s pilot, positive impacts included improved savings, improved repayment rates, and improved credit scores. The model leverages social collateral within groups of friends or family members to incentivize better financial behaviours that improve saving, debt repayment, and financial security. The pilot has seen more than five million dollars in transactions with zero percent default.
