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The flexible credit initiative smartpitch
- 1. The Flexible Credit Initiative AN AFFORDABLE ALTERNATIVE FINANCIAL SERVICE DEEPA DUBEY GENERAL TRACK
- 2. The Problem • Lack of access to short term credit is very costly. • Ex. Low income earners can spend up to $214 more a year on transportation because they cannot afford to buy a monthly MetroCard and have to rely on weekly MetroCards. • Alternative financial services that provide short term credit are expensive and designed to keep people trapped in a cycle of debt. • Pew Charitable Trust estimates 3% of New Yorkers use payday loans despite the fact they are illegal in New York State. • “Well, Friday came, you gave them your pay, what you owed them, which cleared of that loan, but now you have nothing, so you have to re-borrower to survive the week or two weeks.” - A former payday borrower from Manchester, NH
- 3. The Flexible Credit Initiative • FlexCred (for short) is a not-for-profit company that will partner with: • community banks to offer affordable and flexible loans • Loan size: $200 – $2,000 • Terms: 1 – 2 years • Simple interest rate: 15% • community organizations to offer financial literacy workshops for borrowers and their families • Workshops aimed at adults, young adults, teenagers and children
- 4. Customers • Primary customers are unbanked/underbanked New Yorkers • Predominantly Black or Latino adults with a medium household income of $30,005 • Use alternative financial services such as payday loans, auto title loans, and pawn shops to manage cash flow • Secondary: Freelancers in the ‘New 1099 Economy’ and consumers looking to consolidate existing debt Borough # of Adults # of Households % of Households Bronx 269,213 134,293 29% Brooklyn 288,432 137,625 16% Manhattan 166,414 95,306 13% Queens 108,413 47,926 6% Staten Island 6,305 2,989 2% New York City Total 827,334 405,573 13%
- 5. Competitive Advantage Payday Loans Auto Title Loans FlexCred Loan Size $100 – $1,000 $500 – $25,000 $200 – $2,000 Interest Rate 36% – 40% (compound) 25% – 360% (compound) 15% (simple) Payment Terms 2 weeks 30 days 1 – 2 years Renewable Yes Yes Yes With FlexCred, no matter what the loan size all monthly payments will be kept below $100, which will greatly help reduce the risk of default.
- 6. Why Partner with FlexCred? The benefits for Banks/Credit Unions include: • Potential to attract and gain new customers • Potential to improve standing within the community The benefits for Community Organizations include: • Greater involvement within the community • Ability to expand offerings and services
- 7. Phase One – Pilot Program • A 2-3 year pilot program targeting the greatest concentration of unbanked households: • Mott Haven/Melrose (Bronx) • 56% of households are unbanked • Potential partners include: St. Ann’s Episcopal Church, St. Jerome's Church and Municipal Credit Union • Morris Heights/University Heights (Bronx) • 53% of households are unbanked • Potential partners include: BronxWorks, South Bronx Overall Economic Development Corporation, Ponce De Leon Federal Bank, and Municipal Credit Union
- 8. Startup Funds and Costs for Phase One Funding Sources: • Individual Donors • Crowdfunding • Corporate Underwriters • Insurance companies • Financial Institutions • Foundations • Citi Foundation • Ford Foundation • Robin Hood Foundation Loan pool $250,000 Employees $200,000 Reserve pool $50,000 Office Space $40,000 Supplies $15,000 Marketing $10,000 Contingency $10,000 Total: $575,000
Editor's Notes
- Hello. I’m Deepa and I am here to talk to you about the Flexible Credit Initiative.
- The MetroCard is a lot like Costco: you can save a lot of money, but you have to buy in bulk. What happens if you are Leon Wentt, a dishwasher making $275 a week, and can’t afford to part with $116.50 all at once to buy a monthly MetroCard? You buy a weekly MetroCard for $31 instead. Short term, you are managing your cash flow and ensuring you have enough money until your next payday. Long term, you are spending $214 more a year on transportation. For those of us in this room, we can turn to credit cards to front us the money needed and then pay the bill next month. We have flexibility with our finances. For those that are not part of the mainstream financial world, there are very few options. You can turn to alternative financial services – but those are rather expensive. Your only other options are to either part with roughly a 3rd of your weekly pay and hope you can make it until your next payday, or you continue to pay $31 and remain stuck in the short term.
- This is where the Flexible Credit Initiative – or FlexCred – comes in. FlexCred is an affordable alternative financial service. Our mission is to help New York City borrowers break the cycle of continuous debt by offers loans with a low, simple interest rate and longer payment terms. FlexCred will offer loans ranging from $200 to $2,000 at a simple interest rate of 15% for 1 to 2 year terms. If the loan is less than $1,000, the term is 1 year. If the loan is greater than $1000, then the term is 2 years. FlexCred will also offer financial literacy workshops for the borrowers and their families at no cost.
- Our primary customers are unbanked and underbanked New Yorkers that make up over 13% of all households. Those that use alternative financial services such as payday loans, auto title loans, and pawn shops for quick cash. Secondary customers will include freelancers that make up the new 1099 economy thanks to companies like Uber and TaskRabit. FlexCred will also be available for anyone looking to consolidate credit card debt or other existing debt.
- Why FlexCred? We’ve created a product that will help consumers rather than profit off of them. With FlexCred, no matter what the size of the loan is, the monthly payment will always be less than $100, which the FDIC has found to greatly lower the risk of default. The average payday or auto title borrower ends up extending their loans multiple times. Payday borrowers usually extend their loans up to 8 times and pay well over $520 in interest. If you miss a payment on your auto title loan, then you could lose your cab and your ability to get to work. FlexCred loans can be extended as well – but will still cost the consumer less than the alternatives.
- Why FlexCred? We’ve created a product that will help consumers rather than profit off of them. With FlexCred, no matter what the size of the loan is, the monthly payment will always be less than $100, which the FDIC has found to greatly lower the risk of default. The average payday or auto title borrower ends up extending their loans multiple times. Payday borrowers usually extend their loans up to 8 times and pay well over $520 in interest. If you miss a payment on your auto title loan, then you could lose your cab and your ability to get to work. FlexCred loans can be extended as well – but will still cost the consumer less than the alternatives.
- Phase One of FlexCred will create a pilot program targeting the two areas in NYC with the great concentration of unbanked households. We will reach out to potential community organizations and banks/credits unions to create the partnerships needed. This phase will last 2 – 3 years, which will give us time to gather data and feedback on what works and what needs work.
- Potential sources for startup funds include individual donors, crowdsourcing, corporate underwriters and foundations. Without having the partnerships in place, we anticipate having to raise at least $575,000 for the pilot phase. Issues $250,000 in loans will generate $37,500 in interest which will be used to cover overhead expenses and reinvested into the loan pool.