And last but not least in our industry maps of companies serving the Emerging Middle Class, is the Savings and Financial Capability Map (preceded by the Payments Map and the Credit Map). This is the smallest in terms of generating revenues - only $8.9billion in fees - and contains the fewest number of companies and highest number of early stage companies. But that spells opportunity. Clearly savings and investing is important. And clearly Mint was not the panacea to effective financial management (even though it set the standard in personal financial management, which is now a large category).
This map features such interesting players as BestBuy, Jackson Hewitt, Level, PayOff, Strands, Citi, Emerge, Revolution Credit, SavvyMoney, CreditKarma, LoanHero, ReadyforZero, the viral phenom Coin, Wallaby, TrustEgg, Puddle, SaveUp, FeeX, and Betterment.
Thanks to Victoria Cheng for helping make this and the other two maps, and Jason Chow for giving them polish.
Following the Payments Map of companies serving the Emerging Middle Class, here's The Credit Map. A handy dandy guide for seeing how all the pieces fit together and a decent sample of who are the movers and shakers. These companies were key in generating $71 billion in consumer revenues in 2012 by issuing approximately $300 billion in various shapes and forms of credit, from auto titles to secured credit cards to pawn and the more out there "future earning lenders" and "employer lenders." I hope it's useful.
Who's here? LexisNexis, Exeter, Tricolor, Westlake, Wells Fargo, Clarity, L2C, FactorTrust, Zest Finance, Regions Bank, BillFloat, LendKey, Neo Finance, Contigo, FairLoan, Aarons, Clear Creek, NetCredit, Progreso Financiero, EZ Pawn, LendingClub, Pave, La Curacao, LendUp, Think Finance, Cash America and EZ Corp, to name a few (and bump my SEO).
Last week, CFSI and Core published the 2012 market sizing report for companies serving the Emerging Middle Class. $89B across five categories of products during 2012. In an effort to make the landscape more concrete, our venture associate, Victoria Cheng, helped create several industry maps. Here's the first one: The Payment Map. This is an incomplete list of the principal and up-and-coming movers and shakers in payments for the underbanked, or the Emerging Middle Class.
Who's on it? First Data, FIS, Rev, Cirrus, Green Dot, Western Union, Experian, PayPerks, Google, Square, Achieve, BankingUp, Card.com, RushCard, Wipit, Bancomer, iSend, Quippi, Remitly, Ripple Labs, MoneyGram, Unidos, PreCash, TIO Networks, 7 Eleven, Fuze Network, PayNearMe, Ace Cash Express, Certegy, InGo, Mitek, Chase, MetaBank and many others.
Four years ago I tried to size the underbanked market. We knew it was lots of people, but weren't sure if they are "underbanked" because they're unbankable. Do they make bank? (Answer: hell yes). We have since partnered with CFSI, and now with Morgan Stanley, to formalize and serialize this research.
So, the numbers are in for 2012 (it's about time) and here's the upshot (and here's the report): The underbanked, or "financially underserved" as this paper calls them, spent approximately $89 billion on fees and interest payments last year. A lion share on cars (and subprime auto loans are the fastest growing credit product, to boot: projected to grow 23% during 2013). Prepaid cards (both general purpose and payroll) are projected to grow over 20% this year (it was closer to 30% YOY growth last year!). We expect refund anticipation loans to drop in 2013 after topping the growth chart of "very short term credit products" (<30 day credit products), 10% vs 25%, respectively. Short term credit products, as a group, yielded more fees/interest payments than all other products combined (almost $50b).
Some surprises of note: Check cashing shrunk during 2012 and we expect it will grow in 2013, despite the fact that federal benefits went mostly electronic this year. I think it's because an improvement in the economy and higher fees associated with personal checks (or hand-written business checks). We further anticipate a significant growth reduction in internet payday products, largely resulting from recent DOJ and state AG crack-downs. Finally, checking accounts are going to grow 4x of last year's growth due to the disappearance of free checking - in turn due to the reduction of overdraft.
Download the report. Next week, I'll share some industry maps which highlight the who's who in payments, credit and savings and financial capability.
One of the biggest financial service disruptions in recent memory has been the transformation of the payday lending industry - originally published on Citizen Tekk.
A new breed of technology companies has begun to displace traditional and expensive lenders by using data and technology to build scalable, profitable businesses that deliver meaningful change for borrowers. As a financial technology investor that believes social impact can be an economic multiplier, I am particularly excited about this same model migrating to other industries. I believe that the subprime auto market is that next great opportunity for entrepreneurs.
As a whole, auto lending is a massive and highly fragmented market composed of banks, “captive” lenders, finance companies and Buy Here Pay Here (BHPH) lenders in which many consumers are unable to identify the best financing options available to them. For all but the best customers, the result is often a less-than exceptional buying experience made worse by high interest rates, unnecessary fees, and poor loan terms.
On top of this, a not-so-subtle market shift is underway towards servicing the growing subprime auto market. Lenders are drawn to this market because many buyers that sat out the recession are now shopping for cars in substantial numbers, and subprime loans offer attractive margins. Historically, this population is even more vulnerable because of a lack of compelling loan choices and misaligned financial products. However, much like the payday loan industry of five years ago, the prevalence of mobile phones and big data has the potential to dramatically reshape this trend and the larger auto industry by putting control back in the hands of the borrower.
Just as payday lending evolved to better meet the needs of the underbanked, so will auto lending change to meet the needs of subprime customers. Today’s subprime customers can pay as much as 10 times more to get a car loan, with BHPH lenders charging rates as high as 30% with no un st as payday lending evolved to better meet the needs of the underbanked, so will auto lending change to meet the needs of subprime customers. Today’s subprime customers can pay as much as 10 times more to get a car loan, with BHPH lenders charging rates as high as 30% with no underwriting. But the combination of new technologies and increasing government regulatory attention means that buyers can expect dramatically lower costs and much more efficient ways of buying a car in the very near future. At the same time, this change presents an enormous opportunity for current auto lenders and entrepreneurial thinkers as buyers search for the best deal in a newly transparent marketplace.
Over the next five years, I expect to see five new trends help completely transform this market in a way that significantly improves the borrower experience and delivers them a better deal.
First, new alternative risk scoring technologies and mobile underwriting tools will cut the cost of the highest subprime loan rates by 50%. The payday loan industry provides the clearest precedent here with companies like L2C and Zest Finance using Big Data and alternative scoring methods to significantly drop the price of borrowing. Some people (rightly so) may take issue with the structure of these loans, but no one can argue the impact on interest rate. I expect to see a similar impact when you consider the current, inflated auto lending rates and the high number of BHPH loan originations. Technologies such as big data, neural networks, and machine learning will put the tools in the hands of consumers to seriously undercut this legacy network.
Second, Internet sales and new retail channels will transform auto finance distribution, and Wal-Mart will be the nation’s biggest auto financier by 2018…with Costco and Sears close on its heels. We have only to look at cell phones, electronics, gas, or hundreds of other products to find examples of how this will upend the market dynamics in favor of consumers. Cellphones in particular have moved from a manufacturer-controlled network to a far-flung distributed sales channel that includes prepaid cellphones at corner stores. With Wal-Mart already successfully dipping its toe in the bank branch model, and as the largest check casher in US, auto finance is a natural extension. The end result will be more and lower cost loan choices for car buyers.
Third, improved loan servicing will reduce repossessions by 80%. One of the most disturbing elements of the payday industry isn’t always the front-end loan pricing, but rather the resulting debt treadmill that occurs with multiple renewals and fees. Similarly, in the auto industry, late payments and repossessions can become the larger and unexpected financial impact. New technologies that allow car owners to avoid repossessions through POS payments are already making a difference and additional education will help borrowers understand the long-term implications of non-payment. Eventually, cars will become like utilities that can be shut off for late payments. The net-net will be cheaper upfront borrowing costs because of reduced back-end risk for loan holders.
Fourth, collaborative consumption will influence loan terms for 10% of loans. The rise of transportation alternatives like ZipCar and Uber have some worried about the future of auto purchases. I believe that new, alternative lenders will see the silver lining here and leverage those opportunities to turn your car into a source of income by structuring lower cost loans tied to collaborative consumption trends. The greater ridership for your vehicle, the more reasonable your loan terms. It might sound counterintuitive to some, but it will encourage people to purchase vehicles as an economic opportunity.
Finally, the ubiquity of smartphones will inform a majority of auto purchasing behaviors and will change the point of interaction between customers, dealers, and lenders. By this, I mean that you will have better access to insider pricing information and will no longer be constrained by your physical location when securing an auto loan. Instead of having to divorce your purchase from your loan, or tie the two together by securing on-site financing – borrowers can close over their smartphone in a dealership, or even use their phone to find the best financing deals nearest them. Instead of information asymmetries where more than 10% of BHPH customers are prime and super-prime, we will find a better-aligned marketplace.
Overall, I think we are heading towards a golden age of subprime auto lending that will trickle up into the larger auto loan industry and bring us all compelling choices and benefits. While there will certainly be resistance by some of the entrenched players, we have already seen a willingness by more traditional finance institutions and newer alternative lenders to push the envelope. The result will be a changing and evolving industry – much like payday – that is better suited to the financial conditions of the consumer.
This is the third installment on why I think subprime auto lending is about to transform radically. I just returned from an enlightening trip to the Auto Finance Summit in Las Vegas.
Over the past five years, payday lending has evolved from a marketplace dominated by old-school lenders into one that is pioneering lower cost credit from a new breed of technology and data-driven lenders. Just as payday lending evolved to better meet the needs of the underbanked, so will auto lending change to meet the needs of non-prime customers. New technology, new business models and new regulation represent an enormous opportunity for current auto lenders and entrepreneurial thinkers to create a more efficient and more transparent marketplace. Here's how I place my bets: In five years...
- New risk scoring technologies will cut the cost of the highest subprime loan rates by 50%. The impacts of big data, neural networks and machine learning are about to change the rules in auto finance. Just consider what Yodlee could do for lenders (which it is starting to, perhaps unwittingly, in consumer finance), or how easy access to payroll data, through companies like FairLoan, could impact the economics for both lender and borrower.
- Wal-Mart will be the nation’s biggest auto financier. Almost all loans are made through auto dealers. New types of dealers are going to pop up, as we have seen in so many other financial services. Companies like Wal-Mart, with Costco and Sears close on its heels, are poised to challenge the traditional distribution models for auto, and bring the scale and mandate to do so at "everyday low prices." Did you know Wal-Mart is the nation's largest check-casher?
- Improved loan servicing will reduce repos by 80%. Customer engagement through social media will be the least of it, but important. Cars will become like utilities that can be shut off if payments are too late, and without remediation plan. Ongoing cash-flow analysis and employment data will give lenders real-time information on job loss, and the ability to develop a new payment plan before it's too late.
- Collaborative consumption will influence loan terms for 10% of loans. We don't need to wait for the automomous Google car for the impacts the "shared economy" to reach auto finance. Uber, Lyft, Side-Car and others already provide us better means to share this major purchase which spends 90% of its life dormant, parked. We're only a deal away from lenders tying themselves into the payments platforms of Braintree and the like that give customers greater convenience and transparency and decrease lender risk.
- Mobile phones will inform a majority of auto purchasing behavior. Consider we consult our mobile phone on 80% of purchases today, and that over 10% of BHPH customers are prime and super-prime. Like in almost all other purchases, the smartphone will mitigate against information asymmetries in this sector as well. TrueCar gives real-world visibility to new-car prices. Dealers have access to Black Book (the insiders version of Kelly Blue Book) for used-car pricing - why wouldn't consumers?
In my last post, I made the case that the financial product no one talks about - auto finance - is actually the single largest spend category in financial services for the un- and underbanked. (Read it)
Today’s subprime customers can pay as much as 10 times more to get a car loan, with Buy Here Pay Here lenders charging rates as high as 30% with no underwriting. This industry is not just large and growing, but it's also ripe for disruption. In fact, I believe that the next five years will transform auto finance in much the same way that the last five years have transformed payday lending.
Over the last half-decade, payday lending has evolved from a marketplace dominated by legacy, largely brick and mortar payday shops into one that is pioneering lower cost and better structured credit from a new breed of technology and data-driven alternative lenders.
Five years ago, payday was largely the same as it was 20 years ago. Online payday options at the time looked a lot like their traditional counterparts, neon lights and all. The high fixed costs from physical locations were simply replaced by high variable cost from lead generation. And high loss rates both on- and off-line kept costs high. From a consumer perspective, a combination of bad habits, financial desperation and information asymmetry kept people coming back to payday.
While in many ways that consumer premise remains true today, payday itself has evolved to offer many alternatives, new players and significant advances. Five years ago, there was no LendUp, or ZestFinance, or BillFloat. Players like Progreso Financiero and Think were still in relative nascency. While many can (and do) take issue with these players and others, it is undeniable that they represent a vanguard of new and improved solutions.
What's behind these improvements? Better disclosures have led to better informed buying decisions; use of big-data and better risk scores have resulted in lower losses and better terms; new channels like merchants and mobile phones have both forced and allowed for better economics; and great design has created long term brand loyalty.
Soon, we will see similar technology, data and mobile advancements drive a parallel evolution in the subprime auto industry. While there are very few startups in Silicon Valley today focused on non-prime auto finance (NeoLoan is an exception), we do see compelling startups in the broader auto space (for example: TrueCAR, CoverHound, Tesla, Uber, Lyft and Side-car) and prime-targeting financial institutions like Chase are beginning to explore new finance methods. This, together with the size and growth of subprime auto finance, paves the way for innovation moving down-market.
For my next post, I've got some smok'n auto finance predictions that we'll put our money on. Wait for it!
No one who reads my blog will be surprised to learn that 1 in 4 Americans are underbanked. But I do see quite a few raised digital eyebrows when I point out that these 80 million consumers spend almost $80 billion on fees and interest for the most basic of financial services every year. While most would assume that these enormous fees are generated primarily by check cashers and payday lenders, the actual amount is quite small at $1.7B and $4.8B, respectively. In fact, the lion's share of these fees derive from subprime auto lending.
Emerging Middle Class Americans paid $27 billion in interest and finance charges for their cars in 2011. $27 billion! That's over one-third of all financial services expenses incurred by those with imperfect credit or those that rely on alternative financial services. Back of the napkin math works out to just over $300 per person per year. As a point of reference, I pay only one-fifth of that amount.
Is this population, as a whole, really five times more risky than me? While some individuals may be, I would argue that most are not. And I believe this will have dire repercussions for many of today's subprime auto lenders.
Over the course of this week, I'm going to write a three-part series on this hidden but giant industry within consumer finance. This first post makes the obvious point that it's large and growing. In the next, I'll argue that subprime auto lending is the new payday lending - in a good way. And finally, I will make some predictions about how the industry will change in the next five years.
But first, chew on this: auto finance, in its entirety, represents a $55 billion spend category (Experian, 2012). Sub-prime is about half of that and it's growing fast. The industry is quite profitable: 32% net margins overall, and as high as 40% for "buy here pay here" lenders. After a dip in the recession, consumer demand is up. Big players like JP Morgan are showing renewed interest in the category. And the secondary market is interested.
All of this – a large, growing but highly fragmented market with a poorly designed consumer product – leads me to believe that the technology transformation evidenced in the payday industry over the past five years will likewise transform the subprime auto market, which today operates basically as it did 20 years ago. I'll make the case why in my next post.But it's curious to note that this giant industry is made up only of small players. No one company commands greater than 6% of the total industry (Wells Fargo leads, Ally - formerly GMAC - is close second). Credit unions, who have long staked their raison d'etre on their great auto finance terms, are 21% of the market. But that's across 7,000 credit unions. Not even the largest credit union has more than 1% of the total market. Can you say super fragmented?
All of this – a large, growing but highly fragmented market with a poorly designed consumer product – leads me to believe that the technology transformation evidenced in the payday industry over the past five years will likewise transform the subprime auto market, which today operates basically as it did 20 years ago. I'll make the case why in my next post.
What can a zero emission, entirely crowd-navigated road trip teach us about the future of financial services?
Friday, I went on a limb and took a road trip of exactly equal length to my electric car's battery capacity - 200 miles - to meet with one of our investors. I enjoyed zipping by traffic in the carpool lanes (an EV perk) and when everyone came to a stand-still, my new iPhone app, Waze, helped me utilize the power of the crowd to take faster side streets in the foreign hinterworld between LA and San Diego.
Beyond the opportunity to brag about my next gen transportation prowess (which I do with some humility, as I sat sipping a milkshake at Carls Jr while my car sips power outside - just 20 miles from home), I am struck how this trip is fundamentally different from others, even if it looks the same to anyone I share the streets with - and that there are parallels to next gen consumer finance. So what's different and what are those parallels?
A fundamentally new engine. Even though my car as four wheels and four doors and headlights and bumpers, its engine is a total departure from the 150 year old internal combustion engine that powers 99.99% of other cars on the road. In consumer finance, I continue to be shocked at the antiquity of basic banking. Why can't checks clear in real-time? Why are core banking costs so high? Why is the basic functionality so profoundly limited? At risk of lacking greater imagination, I continue to believe that prepaid - done well - offers a panacea to these and other ails. Of course, a completely new engine would go farther than Simple and others who are just building on top of the old. More lenders are starting from scratch, including LendUp, BillFloat and Progreso. CBW Bank, some-Weir in Kansas, is working on this as well.
Zero emissions. Even though the energy electronic vehicles consume almost always do create pollution, the environmental impact is de minimis compared to "normal" cars. So, the externalities to just getting around are net-positive given today's broader global warming crisis. In other words, a better, faster motor can actually be good for the environment. The financial services parallel, plays to our fund's philosophy on impact alignment. We believe that companies that make financial products that will help improve consumers' lives will make better returns in the long-run. It can't just be consumer friendly, as there are clearly infinite ways to lose money doing that, but smarter products that create upward mobility and save costs will be the ones that pass regulatory scrutiny and will sell and trade for more when they're acquired or go public. Square is a good example.
People powered. Paper maps are all but gone and Google Maps is being upstaged by Waze, a mashup of GPS data, public traffic data, digital maps and the real-time contributions of millions of people (in fact, Google just bought Waze last week for a cool billion). People can contribute passively while driving with the Waze app open, or actively by pointing out everything from a stalled car to a cop. Bundle and Mint started doing this in consumer finance: people like you spent $X on gasoline and $Y on restaurants. CreditKarma lets users rate offers, giving it a more democratic vibe. Barclaycard's Ring card hyper-engages with their users. But where is the power of people in financial planning, product selection, vouching for my responsibility, sharing risk and avoiding the most common pitfalls of too much debt and too little saving? P2P lending, nowadays, is neither P, nor P. Social media may be used to underwrite and market, but doesn't help me (although Lenddo is trying to buck that). I wrote about social savings recently. Lots of potential here.
Finding new ways to spend money you do and don't have makes up the two largest segments in consumer finance: payments and credit, respectively. Finding new ways to save money - for a large purchase, a rainy day - is a barren landscape. Of course, saving is like flossing your teeth: you know you should, but ignoring it won't kill you.
Ironically, it can and will, as we see non-savers on the cusp of financial ruin with frequency; more likely to file for bankruptcy; more likely to default on a mortgage. And the macro-economic consequences are big, too: Chinese savers own trillions of US debt; excess credit reliance causes things like recessions. American's savings rate are amongst the lowest of all developed countries.
So, oddly the most innovative and active import of ideas on how to save are both ancient and originate from the developing world. And a pool of companies are introducing their spin on the idea of pooled savings as a way to effectively change behavior and provide immediate benefits of stuffing a little dough away.
The idea is that if you band with a group of people you know and trust and each agrees to contribute a fixed amount every week for a number of weeks equal to the size of the group, every person can have their turn to take the collective pool. Let's say 5 people agree to contribute $100 per week for 5 weeks. The first week I could get access to $500 - to buy that iPad I wanted. The next week, the next person gets $500, etc.
At least six companies are all building out this basic idea: Yattos, puddle.io, ClearStreet, eMoneyPool, OurSusu, and PeoplePoweredSavings. Some fairly straight forward - and stalling. Some with cool bells and whistles, like offering a premium to group members to take their bout towards the end (and charging those who want early access - but still less than interest on a prime credit card). Some integrate into social networks, like Facebook, partially or completely.
Using the internet and bank connectivity to leverage and old, and sound, idea makes perfect sense - on paper. Using modern social media to extend the ancient power of guilt and pride is very cool - in theory. Our nanny, from Trinidad, religiously participates in a "susu" - as they are called in the Caribbean. Would she do it online? Nope. Should "westerners" learn and benefit from this idea - absolutely. But will we? I doubt it.
If any of these sites will make it to any scale, they will need to be great marketers. They'll need to start with net-savvy, but older immigrants, for whom this model was native, but who aren't rebelling against the "old world ways." They'll need to appeal to introduce a complex idea to well intended, but disinterested group of Westerners to make it big enough to matter. I sure hope someone does: I need it personally, as does this country. If I were to bet on one of these, it would be Yattos.com, despite the fact that I set up a group, invited people and failed to get any interest, including people close to the company. So I'm left to save on my own, the old-fashioned way, and pine for Susu's not just being a silly lyric in a Phil Collins song.