It’s been a whirlwind first 6 months for the Causeway Community Finance Fund. When we launched in the fall of 2016, we had no idea that our initiative to support those stuck in the predatory trap of payday lending would gain attention across Ottawa, let alone the country. For those who may not know, we started the Causeway Community Finance Fund as a response to the proliferation of payday lending outlets and other fringe financial services in many of Ottawa’s most vulnerable neighbourhoods.
Many of the individuals we serve at Causeway, in our many programs and social enterprises, have come to rely on these fringe establishments for basic financial services. As a result, many have fallen into the spiraling cycle of high cost debt which is nearly impossible to break free from.
To put the payday lending problem in context:
- In Ontario, there are over 800 payday lending outlets, providing up to$1.5 billion in loans to 400,000 customers
- The average size of a payday loan in Ontario is $435
- Over 70 known payday lenders operate in Ottawa alone. Many of these payday lending outlets operate in lower income areas.
Payday lenders offer short-term loans of up to $1,500 and according to the Canadian Consumer Finance Association (formerly the Payday Lenders’ Association of Canada) the average loan is $435 with a 10-day repayment period.
Since our launch, I’ve met with several dozens of individuals looking for support to break free from the predatory cycle of payday lending. The need is far greater than what we anticipated and can support, but my hope is that the Community Finance Fund can spark change. The challenges associated with payday loans and those that rely on them are not one dimensional. It is not a low-income problem. It’s not financial irresponsibility either. It’s an income security challenge that is far more pervasive than even we could have anticipated.
Shortly after our launch, in January 2017, we received significant attention after an interview with CBC Ottawa. What was designed to be a follow-up to our launch turned into much more. That coverage led to a number of inquiries — from researchers and policy-makers and even other credit unions — across Canada and the US. All of the excitement and interest in our initiative, however, is underscored by the fact so many people recognize the growing problem payday lenders pose in communities across Ottawa and the country.
In our first 6 months of operations we’ve learned lots. We’ve learned that those most in need have found themselves in a debt spiral that is nearly impossible to break free from. We’ve learned that character matters and it can be found in interesting and unsuspecting ways. We’ve also learned that strong partners matter. Reforming the current payday loan landscape is not a problem that Causeway can solve alone. We can, however, contribute by raising profile to the issue and sharing our insights an impacts. My hope is we can all work to create a future where accessible and affordable financial services is an option for those who now find themselves excluded from these services.
Learning 1: The target market is more in crisis than we anticipated
There are a number of factors that contribute to people using payday lenders. It’s nearly impossible to generalize the usage of fringe financial services to merely one factor. I can say that for many, using payday lenders is not a function of irresponsible financial decision-making. The payday loan market is also not a low-income problem — although this segment of payday loan users is most vulnerable. The challenges posed by the growth in payday lenders is not a low-income issue, it’s an income security issue.
Those most in need have multiple payday loan issues
When we first began, we thought we’d serve individuals looking to break-free from 1-payday loan. The average payday loan in Ontario is $435. What became clear very quickly and persistently, however, were that the individuals we served were saddled with multiple payday loans and high-interest installment loans. Many of these installment loans were to consolidate existing payday loans. While providing some form of relief from a payday loan, the interest rates on these installment loans ranged from 27% — 59.9% — far higher than what a credit union might offer. Clearly there’s a need to do better to provide accessible and affordable solutions.
Budgeting revealed the underlying problem is income security
A major feature of our initiative is the support we provide upfront in the form of budgeting. For prospective borrowers, we work through 6-months of their bank statements. There are a number of reasons for doing this, including;
- Meeting our charitable obligation;
- Ensuring every borrower has the capacity to repay their loans without having to return to payday lenders;
- To support everyone develop the capacity to move forward and break free from the predatory trap by creating a relationship with a credit union that can help to accrue assets once their loans are repaid.
What has become clear after looking at dozens of budgets is that once people are in the payday lending trap it is nearly impossible to break free. This is why we have seen people who have come to us with up to 4 active payday loans. With limited capacity to fully repay in a 30-day period with enough leftover to sustain themselves, individuals are left with little choice but to recycle the loans each month. It’s an unsustainable and unnecessary process that is designed to prey on those most vulnerable.
Income security poses real challenges for how individuals meet their daily needs. In my experience, people don’t get into the payday lending trap because they can’t control their spending. For many people, they live on a fixed income or disability. The average income for CCFF borrowers is $1,823. This is far below the Low-Income Cutoff Line in Ottawa. For many, the challenge is managing day-to-day cash flow while living in poverty. People rarely find themselves in this struggle because they can’t control their spending. People who live in poverty face many barriers to financial services, including access to small amounts of credit.
A common theme has emerged, however. Every time I meet with a prospective borrower, I ask: ‘have you asked your current financial institution about a loan?’ In all but one instance the response to that question has been ‘no’. For many, they reply that their credit rating would prevent them from getting a loan. Some don’t feel comfortable going to their bank. Others don’t know how to advocate for their rights as a financial consumer. For all of them, however, the challenge remains that financial services, even at a basic level, remains inaccessible. Many people have found themselves turning to a payday loan because they lack basic services, including overdraft protection and accessing small amounts of credit. Income security is a costly social problem — one that is continuing to grow.
As a result of living in such precarious circumstances, people who are already struggling are forced to make difficult financial decisions, even when they know the consequences of those decisions. People make hard choices once they’re in the payday loan trap. For example, I’ve seen people decide whether they should pay their rent or buy food but one thing they are sure to do is, repay their payday loans. When looking at prospective borrowers’ budgets, our credit union partners have asked many times, ‘what does this person spend on food?’ or ‘how does this person afford to eat?’ unfortunately, for many, they resort to using food banks, or not eating at all. These are the kinds of experiences that shed light on the layers of complexity posed by income insecurity.
Learning 2: Character matters
Watching people struggle to make sense of their payday loan challenges has given me a new appreciation for how I assess character. For those who have no option but to resort to a payday lender to access basic financial services, character isn’t found in what we might typically think is rational. I have come to appreciate that those with the most payday loan debts arrive in such a precarious situation because they want to repay their loans, in full, every month. These individuals don’t want to carry debts; they want to break free from the trap but have no means to do so.
What is seemingly an irrational decision becomes completely rational when you listen to people explain why they’ve resorted to having multiple payday loans. I’ve come to find the rationality behind the seemingly irrational decision to continue to use payday loans despite knowing the fees and costs attached to such loans. People genuinely want to pay their bills and meet their obligations. The systems we perpetuate by allowing payday lenders to proliferate, however, make it easy for many of us to assume that repeat borrowers are simply irresponsible. The average amount of payday loans people come to us is over 2 and totals, on average $1,235. The average payday loan is $435 in Ontario. One borrower had come to us with 4 payday loans for over $4,000. I think — at least in my limited experience — that character is built when people commit and work to meet their obligations. It’s easy to run from such debts — the people we’re serving choose not to.
The time to lead is now
What happens to communities that are overrun with payday lenders? It’s not just the users that suffer. It’s the entire community. These fringe financial service providers invest little to nothing into our communities. If we are going to build financial resilience for the growing number of users of payday lenders in Ottawa, and across Canada, we need to build resilient financial systems designed to support and serve those most vulnerable.We all have a role to play in developing these systems and we’re just scratching the surface of what that could resemble.
One only needs to look to the US and the practice of redlining to find possible solutions to financial disenfranchisement. Redlining was a practice in the 1960s that denied, or made financial services inaccessible to those who lived in low-income and racially segregated areas. In response, the US federal government passed the Community Reinvestment Act, which required (and in many cases incentivized) banks to apply the same lending criteria to all the communities they serve.
Unfortunately, in Canada payday lenders are not considered a financial institution because they do not take deposits. So as the big banks continue earn record profits — and layoff and close branches in low-income areas, people are left with little choice but to resort to fringe financial services. We need to find a ‘Made in Canada’ solution to our growing financial security problems. We most certainly have the infrastructure to do so. What has made it difficult to effectively regulate payday lenders is they occupy a space between provincial and federal legislation and regulations. We need to work to reconcile the regulatory imbalances and the uneven financial services sector that has resulted. We can do better and I’m optimistic we will.
Learning 3: Strong partners matter
We’re incredibly fortunate to have our credit union partners involved and helping us. What makes our initiative unique is that we have three local partners — Alterna Savings, Frontline Credit Union and Your Credit Union — helping bridge the financial accessibility gap. In our early planning stages we didn’t want to simply become a cheaper source of capital for those in need. We knew the challenge for many was access to mainstream financial services. In order to overcome those challenges it was imperative for us to partner with credit unions, who have in their DNA, the needs of their communities in mind.
We have a great opportunity to help those in need create a relationship with a financial institution that can help them meet their needs long-term. Some key stats about our initiative that highlight the need for our credit union partners, include:
- The average term of our borrowers is 18 months — far higher than we anticipated
- The average loan is $1,531 — again far higher than we anticipated
- The total number of loans we’ve assisted to facilitate is $18,250 — yet the demand has been much, much greater
We have helped save thousands of dollars in payday loan fees for our borrowers. The total cost of interest and fees attached to a CCFF one-year loan is a fraction of what a 30-day payday loan would charge. My hope is that borrowers will, once their loans are paid off, start accruing assets of their own. Perhaps they will open up savings accounts or even become homeowners. One thing is clear, however, they will not be able to do so if they pay thousands of dollars in payday loan fees every month. We’re helping those most in need keep more of their money.
Our credit union partners help not only with the administration of the loan once we make a referral, but they also monitor repayment and provide reports to us. I hope that as we continue to work together they will also learn more about the complexities of payday lending and develop solutions of their own to help overcome the problem. This will, of course, take time and require the support of governments, the financial services sector and civil society. But I think real change is possible if we pursue this with pragmatic and relentless incrementalism.
What’s next for us?
Although we’re only finishing up the first 6-months of our pilot, we’re already thinking ahead. So what’s next for us? We are going to continue to push ahead and serve individuals most in need. We will continue to work with our credit union partners to tweak our financial model. We know already that our assumptions about the size and length of loans were higher and longer than anticipated. That means we need to be mindful that we can’t burn through our capital too quickly. We need to both balance our budgets and still find a way to serve those with the greatest need.
We are now working with community leaders and partners to explore a storefront location in the Vanier neighborhood. This is an area littered with payday lenders and, not surprisingly, where many low-income residents live. Taking on such an initiative will need to be incremental, which is why we’ll start with a ‘pop-up’ shop and use that to learn where the most pressing needs are. Having a storefront location will by no means guarantee success for us. It will allow us to continue to raise profile to the significant issue that payday lenders cause for our most vulnerable residents and communities. A storefront location allows us to be present and confront these issues head on.
Given the trajectory of our work, we need to continue to raise loan capital. We will have to find innovative and new ways to raise such capital, knowing that we’re investing in people with no security and limited to no assets. The segment of people we’re working with has rarely been invested in — but they’re worth the risk. We’ll have to find compelling ways to make it happen.
Thank you again to all of you who have supported us and our work.
For more information:
To learn more about the Causeway Community Finance Fund, contact us at the information below:
Doug Pawson, Director of Social Business & Social Finance
613–725–3494 ext 105 | email@example.com
Rachel McKeen, Communications
613–72503494 ext 621 | firstname.lastname@example.org
Causeway Work Centre transforms lives and fuels community economic development in the Ottawa region through an integrated network of innovative training and employment programs, one-on-one support, cross-sector partnerships and by creating socially minded businesses.
To learn more visit our website.