Encouraging uptake of a payday alternative

Background

Payday loans provide relief for an immediate need, but this relief comes at the cost of triple-digit interest rates and exorbitant fees. According to research from the Pew Charitable Trusts, about 12 million people in the United States take out payday loans. Furthermore, borrowers who cannot afford to repay loans within two weeks are often forced to take out more loans to cover existing ones. Borrowers incur even more fees and get trapped in a downward cycle of debt.

To explore how we might move away from payday loans to lower-cost alternatives, we again partnered with Credit Human Federal Credit Union. Credit Human saw that their members and even some employees were using payday lenders for short-term cash needs. As a response, Credit Human developed QMoney – a lower fee, lower interest payday loan alternative. Like a payday loan, QMoney also offers member money “on the spot” – members can go online and request a loan for up to $500 at any time without a credit check. We worked together to develop a pilot of the QMoney program and to explore how we might present QMoney to members in a way that motivated them to switch from payday loans to QMoney.

Key Insights

QMoney was designed to help members improve their financial health. By encouraging members who use payday loans to switch to QMoney, people would be less likely to get caught in the predatory cycle of borrowing payday loans. Although QMoney loans are a better alternative, there are several reasons why people may not switch:

• Members might not consider going to their financial institution as an alternative to a payday lender. People categorize financial products and services to match their financial needs. Once people organize their financial lives, breaking through the status quo can be difficult.

• Members do not accurately assess the cost of payday loans. When people take out payday loans, they are focused on solving short-term problems. This makes it harder to accurately weigh the future costs associated with repaying.

Experiment

We hypothesized that providing visuals of the dollar amount savings that explicitly compared QMoney and payday loans would lead members to be more likely to see QMoney as a viable alternative to payday loans. We developed marketing materials (postcards) and follow up emails, which we piloted with 450 Credit Human members who we identified as having previously taken out a payday loan. These members were randomly assigned to receive one of two different messaging conditions around QMoney loans:

Results

During the two-month long pilot, about 16% of members who were identified as having previously used a payday lender took out a QMoney loan. We found that more people who were presented the lump sum amount may have started and submitted a QMoney loan application, although these findings are not statistically significant with the small number of people in the pilot.

Interestingly, we did see an interaction with email opening such that participants presented with the lump who opened up the follow-up email were significantly more likely to submit a QMoney loan application. We also found that between late July and late October, 27% of members in our sample took out a payday loan. Although not statistically different, members in the lump sum condition were slightly less likely to take out a payday loan and borrowed slightly less money after the intervention.

Across the board, the lump sum condition may have performed better than the daily sum condition. The results from the pilot study were encouraging enough to roll out the program at a larger scale. We are in the process of re-launching a second iteration of this test to 2,500 people where we will be better able to pick up differences between groups.