Michigan credit union helps members borrow from friends and family

Lending money to a friend or family member can be a touchy subject, especially when it comes time for one to repay the other. But Michigan State University Federal Credit Union in East Lansing is working with the relationship-based lending app Zirtue to help its members better negotiate such agreements at the start.

"When my family members and friends would borrow money from me over the years, I struggled to get that money back from them and it created awkward situations that strained my relationships," said Dennis Cail, co-founder and chief executive of Zirtue. "It got to the point where I had to essentially forgive the loans just to keep the relationships intact, and that's not always the best thing."

Across the U.S., money struggles plaguing consumers of all ages are having long-term implications. A February survey of 750 HR leaders and 750 full-time employees conducted by SoFi at Work found that 86% of employees are worried about their finances, with 45% concerned about contributing enough toward retirement.

The $7.7 billion-asset MSUFCU launched its pilot with the Dallas-based Zirtue in January to test how the tool would help students pay for minor expenses with backing from family members and colleagues. Using the Zirtue app, members are prompted to first complete a series of verification questions and input basic information like name, mailing address and their MSUFCU account number in order to create a profile on the app.

The next step is building the loan request. Once members input the contact details of the person they wish to borrow from and the total amount to be borrowed, borrowers set the terms of the automatic repayment plan on a monthly basis or one-time transaction. A second identity verification is then conducted using an integration with Plaid's know-your-consumer tool Cognito.

The final requirement before the digital "IOU" request can be formally sent is to link a payment method for reimbursing the lender. Members can manually enter their bank account information or connect instantly by signing into their account through a second integration with Plaid.

For students taking out loans as "one of the biggest debts they'll have in their lifetimes," the added cost of school supplies, rent and other expenses can "overextend them and have a huge impact on their credit scores if they miss a payment or default," Cail said. Zirtue currently does not report missed payments to the credit bureaus.

The platform also allows users to enlist outside help in paying bills by linking the statements to the Zirtue app, which then sends the borrowed funds to the invoicer instead of directly to the user. In the event that a borrower loses their job or is unable to fulfill their obligation, agreements can be forgiven by the lender or honored through deal insurance provided by TruStage's Payment Guard product at no added cost.

The market for "shared finance" tools has grown considerably over the last few years. Some firms like Greenlight Financial Technology focus on the family dynamic to help parents teach their children basic banking concepts and showcase simple debit products, while others such as Tandem, Zeta and Zirtue cater to the financial arrangements between friends and loved ones.

For Ben Maxim, chief digital strategy and innovation officer at MSUFCU, the partnership with Zirtue is a way to deepen the credit union's relationship with its student segment of members and offer an alternative network of funding when compared to payday lenders.

"Instead of going to a payday lender or launching a GoFundMe where they take money out and different things like that for their fees, here's an opportunity to just reach out to your immediate close network," Maxim said.

Firms like Zirtue and many others "are changing the nature of peer-to-peer lending, which already happens with Venmo or P2P in general, by giving it a structure to encourage the repayment in a positive way," Maxim said.

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Legal experts with the Brooklyn, New York-based law firm Consumer Attorneys say that when compared to formal relationships such as those between employers and employees, money exchanged in informal relationships between friends and family members can bring terms that range from "strict adherence to agreed-upon terms all the way to a basic recognition that repayment may be more hypothetical than actual," said David Chami, managing partner at the firm.

"The families who fall somewhere in the middle of these two extremes are the ones who may end up regretting their decision to loan money to a family member because soft, not well-defined expectations can leave too much space for tension to build within the dynamic," Chami said.

Financial institutions seeking to tap into this growing market are turning to fintech firms specializing in personal finance management tools, as consumer values for the most desirable features in a mobile banking platform continue to shift.

Daniel R. Kahan, partner at King & Spalding, said partnerships such as these have become increasingly popular over the last few years not just to avoid high development costs for new offerings, but to leverage outside compliance expertise in a potentially unfamiliar area.

"For banks looking to expand their product offerings, partnering with a fintech that's already found some traction and is a domain expert in a particular area can be much faster than trying to build a new product internally," Kahan said.

MSUFCU will continue to gauge member engagement as it rolls out marketing campaigns around the partnership and explores future use cases for Zirtue's platform.