Ooh! Nothing like waking up to a disagreeable American Banker story ["
Thought both critics and fans of short-term payday lending might like to see "da' facts" on SECU's Salary Advance Loan (SALO) program. We state unequivocally that "the SALO program is the most profitable loan" that SECU makes, even though we charge only 12% APR! Here are the three critical components of the SECU payday lending program you should evaluate: underwriting, cost/profitability, and community wealth building.
SECU's underwriting criteria are pretty basic. The borrower must have an SECU checking account, be breathing, and not be under bankruptcy. Don't get panicky — wait 'til you see the results!
The SALO program is a maximum $500 loan repayable in a lump sum at the end of the month. Works much like a line of credit with repayment and future loans fully automated through funds transfer, voice response, our call center, or over the Internet. Low cost of origination, low maintenance and servicing costs!
As comparison, regular payday lenders usually charge borrowers $15 per hundred of the loan amount. So if you borrow $500 for one month from a payday lender, the cost is $75. If you borrow $500 from SECU at 12% APR, the monthly interest cost is $5; a savings to the consumer in financing costs of $70 per month! Remember that figure. You'll see it again!
Let's take a look at the cost/benefit analysis. (Hope heaven, at this point, will protect me from the "glass half-empty" cost accountants!) Lots of ways to spin the numbers depending on whether or not you want to promote or kill a program. We all know that, but using a direct, simplified average cost allocation model helps clarify the substantial profit potential of a payday loan for your institution. (Why do you think that payday lenders are the fastest-growing segment of the financial business? Lack of demand? Lack of profitability?)
Here's an actual return on assets analysis for the SECU SALO product:
Most financial institutions are very pleased to achieve a 1% to 2% ROA in today's world. An "all in costs" return of 5.75% is why SALO is the most profitable loan we make. All the above figures are easily and independently verifiable from our regulatory call reports.
But let's be realistic. Take the above analysis and "plug in" your own institution's "numbers"; let's charge 18% for the loan; and let's plug in a credit card-like portfolio loss ratio of around 5% for the sake of argument. The average cost of funds for most banking institutions is around 4%, and the average operating expense to asset ratio is around 3% (but plug in your own numbers if you don't like these)!
Still looks pretty good, doesn't it? How would it look if you charged 24%? Or 36%? A lot better than the 400% the consumer pays today under any scenario! At least you now understand why payday lenders don't want you "to make a mistake" and launch a payday program!
But don't overlook community wealth building (CRA, if you must). Let's go back to that $70 per month the consumer is saving using the SECU SALO program. SECU has 50,000 members who use the SALO program each and every month! Know how much money they save in interest costs per month (50,000 x $70)? How about the interest savings per year (50,000 x $70 x 12 months)? Hard to believe that you could create a simple program that would leave $42 million per year in the pockets of your customers, your neighbors, your co-workers, and your family, isn't it! Just think if your institution would pledge "to re-invest" $42 million in a local community of 50,000 folks over the next 12 months. … Well, you'd probably have pigeons on your statue in the town square next year!
These are the real numbers on the SECU salary advance program. Why aren't you making this type of loan in your community? You already have the computer systems, the staff, the lending and collections procedures in place. We'll be happy to share with you any additional information you may need, friend or foe alike!
Remember, you read it right here in the American Banker! And, by the way, did I mention that this is the most profitable loan we make?
Jim Blaine
President
State Employees Credit Union
Raleigh
