Credit Unions Deploy Small-Dollar Loans as Gen Z Acquisition Strategy Against Fintechs

Credit unions are using small-dollar loans to reach a younger demographic of members and compete with fintechs for Gen Z lending needs.

The numbers speak volumes. The average age of a credit union member is 53. More than 50% of Americans over 50 use credit unions. And less than 20% of Americans under 40 use credit unions, according to Filene Research Institute. 

These younger generations may need the help of a small-dollar loan. Thirty percent of Gen Z and 32% of millennials say they do not feel financially secure. And 56% of Gen Z and 55% of millennials live paycheck to paycheck, according to Deloitte Insights. 

And younger generations aren’t the only ones not feeling secure financially. According to the Federal Reserve, 37% of Americans said they would not be able to afford a $400 emergency expense.

How to Reach Younger Credit Union Members

One way for credit unions to reach a younger audience is by providing products through the digital space such as small-dollar loans or earned wage access products. 

Younger members who are still establishing themselves financially may need the assistance of a small-dollar loan to help them manage an unexpected expense. And they are comfortable finding a lending solution in a credit union’s digital space. 

“And that’s why this digital presence and the ability to provide a real-time experience where the outcome is actually a solution to whatever it is that they need at that point in time is absolutely critical,” Yaacov Martin, Co-Founder and Chief Executive Officer at Jifiti, told us.

“Not only for the survival, but in order for community banks and credit unions to continue to flourish,” he said.

Jifiti is a company that digitizes and automates lending for banks and lenders, community banks, and credit unions. 

Utilizing a Digital Platform

James Chemplavil is founder of Salus, a digital platform working with credit unions to help them make Gen Z members for life. The Salus platform of products include micro loans, earned wage access, and rent reporting. 

“The way that our company started, our first product was offering digital automated micro loans, helping credit unions make those loans to members. And so small-dollar lending is at the crux of what we do because it’s how our company started,” Chemplavil recently told us. 

“Our platform has made over 15,000 microloans on a fully automated basis to borrowers across the country. So this is something that is our core competency.”

Offering Credit to People Without a Prime Credit Score

Small-dollar loans are a way of offering credit to people who may not have a prime credit score.

“Ninety-five percent of microloan borrowers don’t have a prime credit score. So if you look at them through the lens of a traditional credit score, you may not get the approval level that you want,” Chemplavil said.

But according to Salus data, 95% of people who paid microloans back on time didn’t have a prime credit score when they applied. 

“It’s not that these people weren’t creditworthy. It is that they haven’t been given a chance to prove that they’re credit worthy yet,” Chemplavil said.

Building Customer Deposit Relationships

Getting a small-dollar loan at a credit union may lead to bigger deposits with the credit union in just a year’s time. It worked that way for one of Salus’ partner credit unions.  

According to Chemplavil, 65% of microloan borrowers had higher deposits at the credit union a year after they received their small-dollar loan. And these numbers were even higher for Gen Z credit union members. Ninety percent of Gen Z members had higher deposits at the credit union a year after getting a microloan.

“So it’s not just a product for solving that member’s short-term need. It’s also a product for deepening that member relationship with a key demographic for credit unions,” Chemplavil said.

“Microloans are one arrow in the quiver of how you turn a member into a member for life.” — James Chemplavil, Founder of Salus

And this means connecting deeper with younger generations. Salus data reveals that 88% of microloan borrowers are Gen Zs or millennials and are a median age of 29.

Small-Dollar Loans Offer a Middle Ground

Small-dollar loans at credit unions offer a middle ground between Buy Now Pay Later products and more traditional lending products offered by banks and credit unions. How small is a small-dollar loan? About $800 up to $5,000, according to Martin.

“Our goal is to enable and empower both the banks, community banks, and credit unions to offer the right type of financial product to the right customer at the right time,” Martin said.

How Small-Dollar Loans Differ from Earned Wage Access

“EWA is essentially an advance on money you have already earned. It is a liquidity tool for the very short term. Our small-dollar lending program is true credit. It allows a consumer to spread the cost of a significant, unexpected expense over an attractive term at an affordable rate,” Martin said. 

A small dollar loan also helps consumers build a credit history through monthly, on-time payments with the loan. A consumer’s credit won’t be improved through EWA, but it could provide money when a consumer is in a financial pinch.

Credit unions may wish to provide both EWA and small-dollar loans to their members, Chemplavil advises.

Lowering the Costs of Smaller Dollar Loans for Lenders

For a small bank or credit union, a small-dollar loan makes financial sense when the cost of originating the loan is slashed. 

“For a community bank, the manual cost of originating a loan is roughly $250. If you are only lending $1,000, the math simply does not work. We entered this space to fix that ROI,” Martin said.

“By automating and digitizing the onboarding, origination, decisioning, and disbursement, we cut those origination costs by about 80% to the $40 to $60 range.”

With these lower costs, small banks and credit unions are better positioned to compete against fintech companies and their finance offers, Martin said. Those fintech competitors include companies such as SoLo Funds and Upstart.

Appeal of Small-Dollar Loans for Consumers

Small-dollar loans, offered by credit unions, give consumers a choice beyond high-interest rate credit cards and payday loans when a financial emergency such as a car repair strikes. 

“Our program gives them a third better option,” Martin said. “Because it is an installment loan with a clear end date and a transparent, attractive interest rate, it prevents the ‘debt spiral’ often associated with revolving credit. It provides immediate liquidity exactly when it is needed, but within a regulated, safe framework.”

Leading the Way to Future Lending Products

A small-dollar loan can start credit union members on the path to auto loans and even mortgages.

“By giving them a microloan, you’re starting to give them the tools that will help them get to that place where they can now qualify for the auto loan that a credit union would love to give them, the mortgage loan that the credit union would love to give them ,” Chemplavil said.

“Microloans are one arrow in the quiver of how you turn a member into a member for life.” 

The Bottom Line

Credit unions are offering small-dollar loans to their members. These loans are popular with Gen Z and millennials. Credit union members who take out small-dollar amount loans increase their deposits with a credit union in a year’s time. 

These small-dollar loans also help members build a credit history that can help them apply for auto loans and mortgages when their credit improves.