A Vermont cookie dough manufacturer’s attempt to shield its employees from predatory payday lenders nearly two decades ago has blossomed into a lending program gaining traction across the country, offering a potential novel customer acquisition channel for banks and credit unions while also addressing financial inclusion concerns.
Rhino Foods, based in Burlington, Vermont, partnered with North Country Federal Credit Union in 2006 after noticing employees were seeking advances on their paychecks. The company sought a more sustainable solution than repeated cash advances, leading to the creation of employer-sponsored small-dollar lending (ESSDL). “Our CEO literally wrote on the back of a napkin, and said, ‘Let’s do this,’ and that was the foundation for this program that we’ve been a part of for 18 years,” Jeff Smith, Senior Vice President of Lending at North Country, told American Banker.
ESSDL provides employees access to same- or next-day cash, typically ranging from $1,500 to $2,000, without credit checks. Instead, employers vouch for their employees, paying a setup fee and additional fees based on loan utilization and performance. Loans are repaid in six to 12 installments of $50 to $60 through payroll deductions, with annual percentage rates capped at 20%. A key feature of the program is that, upon repayment, continued payroll deductions automatically build an emergency savings account for the borrower, unless they opt out.
The program is designed to be a bridge for unexpected expenses, and is being positioned as an alternative to the increasingly popular earned wage access (EWA) products. Sara Wasserteil, program director at the Corporate Coalition of Chicago, explained the distinction: “Earned wage access is really good when you need a spot… ‘I need money that I can afford, I just need it a little bit earlier.’ Employer sponsored small-dollar loans are better when you have either a larger emergency or larger expense.”
North Country Federal Credit Union has originated 12,000 small-dollar loans totaling approximately $15 million to employees of more than 50 companies within its field of membership, according to Smith. While the loans have a slightly higher average delinquency rate – around 4% – compared to the credit union’s overall portfolio, Smith downplayed the risk, stating that the total outstanding balance of these loans represents less than 1% of North Country’s $83 million loan portfolio.
The growing interest in ESSDL comes as financial institutions seek new avenues for customer acquisition and, for banks, potential Community Reinvestment Act (CRA) credit. The Community Reinvestment Act, enacted in 1977, encourages depository institutions to meet the credit needs of the communities they serve, including low- and moderate-income neighborhoods, according to the Federal Reserve Board.
“If we do our job right, what we’re then doing is we’re bringing in a new member, and at that point, we have the ability to talk to members about other products and services, and we can then make them a full fledged member,” Smith said, adding that the same applies to commercial clients. “The commercial relationships are where the dollars are and where they can have the most bang for their buck.”
The program also boasts high customer retention rates. Christina Blunt, executive director of the Rhino Foods Foundation, noted that borrowers are “really sticky,” consistently paying off their loans and maintaining their accounts. Employers also benefit from increased employee retention and attraction, as financially stable employees are less likely to seek employment elsewhere.
The program’s expansion is being driven by community and consumer advocacy groups. The Rhino Foods Foundation is actively working with lenders and businesses to establish ESSDL programs nationwide, with a growing presence in New England, New York, and Chicago. In Southern California, soap company Dr. Bronner’s is championing the program, while the Woodstock Institute and the Corporate Coalition of Chicago are promoting it in the Chicago area.
Some credit unions, however, are expressing concern about the potential impact of earned wage access on their ability to offer small-dollar loans. Dan Apfel, CEO of Rochester, New York-based Genesee Coop Federal Credit Union, told American Banker that his credit union is launching its own ESSDL program while also backing a New York State bill to regulate EWA products, classifying them as credit and subjecting them to the state’s 16% usury law. Apfel argued that unregulated EWA products can trap borrowers in cycles of debt.
North Country and Rhino Foods are focused on refining the program design to encourage wider adoption among lenders. Blunt emphasized the importance of designing programs that are not merely charitable endeavors, but rather strategic opportunities for client acquisition and financial growth. “We don’t want our lending partners to design this to be a charitable endeavor, as then it will surely be a loss leader. What we want is for them to be really deliberate about this as being a way to steward new clients or new members and to grow their financial capacity along with that right client relationship,” she said.
Smith added that the program’s ultimate goal is to provide affordable access to credit for those who need it most. “When people are struggling more now than ever, having affordable access to small-dollar credit is vital,” he said.