Microbilt-CL Verify Merge
Microbilt has been around a while, providing credit servicing solutions to small and medium businesses. Guitar stores, furniture centers, auto dealers - that kind of thing. They started is the DOS terminal days and have grown to become a risk management clearinghouse targeting the un- and underbanked, through a number of interesting partnerships in the past several years.
First, PRBC. The aspirational alternative credit bureau (in which I led a small investment at CFSI, for disclosure), better known for its pro-consumer advocacy than its ability to scale, was nabbed by Microbilt, and PRBC remains the brand for the alternative database.
Then the FICO Expansion Score. Credit score pioneer and leader, FairIsaac developed a version of its score based on data not available in the Big Three credit bureaus, the Expansion Score. Despite best efforts (and no doubt partially thanks to this Great Recession), FICO couldn't make the Expansion Score a big business. Recently, Microbilt negotiated an exclusive marketing arrangement with FICO and now offers a FICO-branded score as its own.
Today, Microbilt announced a merger with CL Verify, one of the top payday lending fraud bureaus. I would guess both are medium businesses themselves, probably doing about $10-20 million in revenues and hovering around profitability. Unlike the previous transactions, I think this merger represents more than mostly a brand name. CL Verify has a lot of data in a thriving payday industry.
In the current credit crisis, the profile of payday borrowers is moving up the ladder - as the profile of "prime" borrowers is moving down. It seems pretty clear that the new Microbilt's (as the joint venture will be called) data assets will not just be unique, but uniquely relevant to an emerging "credit troubled" class.
I think Microbilt is becoming a juggernaut in the underbanked space, one that if they play their cards right, should be of interest to the Big Three and the institutions that frequent them. Their new CEO could be just the ticket: Are you the guy, Wink Price?
Green Dot IPO: Seminal Day for New Underbanked Industry
Today is not just a pleasant summer weekday. It is the day that the first pure-play underbanked financial technology company went public. And not with a whimper: at $43 dollars per share, higher than expected, and 27 times earnings, higher than Visa. Sequoia Capital, the blue-chip venture fund, and Total Technology Ventures paid up to $3.70 per share and can delight their LPs with a healthy ten-bagger. You can find the company on the New York Stock Exchange as GDOT.
This is not just a boon for Green Dot's shareholders. It's a seminal day for a new generation of the underbanked industry. The new generation is not about AFS vs banks, which both point fingers at the others' poor products, pricing and customer value. The new generation about earning trust, creating short- and long-term value, leveraging high tech and high touch, giving access to a better future and generating profits as a result. It's about better AFS and better banks, about retailers, phones, internet, community and scale.
I believe that unless companies can do this at scale and profitably, it will remain a niche enterprise for activists (sorry to say). So, today is a big day. Congratulations Steve Streit, Mark Troughton, and the team! Now don't mess it up!
Credit Scores
The Washington Post ran an interesting story on some trends in consumer credit scores. Basically, there are more people with low scores and more with high scores. Those with 800+ FICO scores are presumed to have gotten their debt into shape. Those with 599 and below now represent 43 million Americans - up from 26 million. The latter could be due to negligence (not paying bills, overspending) or misfortune (unemployment, tough times).
For now, most lenders will simply focus on the best risk, as they limit their exposure. However, this also represents the advent for the subprime burueas. Historically, these companies - like Teletrack, CL Verify, and DataX - have only served payday lenders. While payday lenders find their customer demographic moving upstream, more adventurous banks will quickly need to move downstream (on the FICO spectrum, that is). I believe they will increasingly need to rely on these alternative data sources to do so. As the article points out, a FICO score of 580 could be for any number of reasons - some more predictive of someone's stability, ability and willingness to pay, than others. Additional data will be important to determine if Person A with 580 is actually a 620 and Person B actually 550. Alternative analytics, like L2C, ID Analytics, and LexisNexis' RiskView, will also become more important.
Underbanked Distribution Channels
It amazes me how many business plans we get that basically ignore a distribution strategy. It's probably more amazing what obvious omissions most business plans suffer in general, but in our space - underbanked financial services - distribution is quite common. It is not ok to merely make reference to distribution in the way that it might be to, say, the exit strategy. To be sure, those who can articulate a clear exit strategy are more impressive to those who resort to, "IPO or strategic acquisition." But many plans we see will simply say, "the Latino market," "the African American market," or the "unbanked consumer market." So, I'm feeling compelled to identify the most important distribution channels and discuss some potential ones that still seem sketchy, but that come up often.
In bricks and mortar, the primary channels are alternative financial services (AFS), retail and banks. AFS are the check cashers, payday lenders, and currency exchanges. These come in many flavors, shapes and forms. Some mono-line, some feature rich, some skanky and some professional. A dozen or so big players are national or super-regional. There are many, many chains ranging from 1-30 stores. What's great about this channel is that they target the underbanked, they are under tremendous regulatory and financial pressure and therefore generally open and eager to innovate. What's bad is that they are publicly maligned as bad for people and on the wrong side of current regulatory reform.
Retail is probably the most exciting and fast growing distribution channel in underbanked financial services. Wal-Mart leads with a fairly broad suite of low-cost products, from check cashing to bill pay to money orders and remittances. Sears, Kroger, BestBuy and others are joining. A sub-set of retail are convenience stores (or C-stores as the insiders call them). Folks like 7-Eleven, Circle-K, ExxonMobile and many many others are quite active in this field. For all these retailers, financial services represents not just fee-based revenue (without additional overhead), but more importantly increased spend in the store. What's great about this channel is that it's still mostly a green field with many who don't want Wal-Mart to eat their lunch...again. What's bad is that financial services are not central to their business, which often serves to limit their long term commitment, their appetite for risk, the sophistication of their tellers and their interest in taking on additional regulatory burdens, typically as Money Services Businesses (MSBs).
Banks would make the most sense - hence the term underbanked - but do the least, to date. With the exception of do-good community banks and credit unions (often specially designated as Community Development Financial Institutions), most banks are not motivated to move down-market, yet. Banks' Community Reinvestment Act obligations aren't of much help either, as they are focused on safe commercial and tax-credit lending. I'm cautiously optimistic that recent overdraft reform - said to wash away about $40B in overdraft fees - will push banks to find smarter, better consumer products that will generate fees. This channel is great because the licensing and infrastructure exist, cost of capital is low and the upper and mass-markets are pretty saturated. It's bad because banks are slow, culturally negative to the underbanked and not incented to take risks serving this market.
Then there is the internet. Payday is moving here in droves, like $8B in volume last year. General purpose reloadable prepaid is active online - for folks who don't trust or were turned away from banks. And this is not just the mass-affluent-but-in-debt-to-their-ears. But saying the "internet" is your distribution channel isn't enough, obviously. Direct customer acquisition is super expensive. Most distribution partnerships don't work. Most affiliate deals don't generate the volume intended. The net is great because it eliminates all the cap-ex of physical locations. It's bad because it's incredibly noisy.
In the category of un-proven but common, I'd put mobile and the workplace. Everyone wants to deliver services through the phone, but consider how it REALLY is a better mousetrap, not just another iPhone app. For example, how will money get on the phone and how will it get off? At what cost? To whom? This simple equation often erodes the savings originally proposed.
We have seen half a dozen lending programs to be delivered through employers. Makes perfect sense in terms of following the money. No one I have seen has cracked the code of, a) why the employer will care enough to bother, and b) if they do, how said employer will compel or intrigue their employees to sign-up. We see lots of partial answers on this channel, but no slam dunks.
It is essential you consider your distribution channel and that your solution solves a high-level problem not just for the consumer end-user, but also for the distribution partner. Not easy, but totally essential.
The Omnibanked Dilemna
I finished reading Michael Pollan's the Omnivore's Dilemna recently. Given that it's all about food, it was surprisingly thought provoking on its implications on serving the un- and underbanked. Even without a mention of prepaid cards, payday loans or second-chance checking accounts. It's about the challenges - and importance - of scaling idealism.
Pollan argues that because humans can eat just about anything, it forced the development of our brain so that we could differentiate the poison oak from the butter lettuce (whereas the bamboo-only diet has left the panda with a tiny noggin).
With perverse delight, Pollan paints the many ways in which the food industrial complex has driven America to obesity, our cows to forgo grass, and our land to erode as monoculture. Still, corn feeds billions. In my parallel universe, these are the mainstream financial institutions. Driven by greed, they have driven America to debt, our children to forgo savings, and ratings agencies to corrupt. Still, banks are the backbone to the global economy.
He then describes how the '60s idealists in Berkeley formed the basis of the American organic food movement. It has borne hundreds of sustainable farms, organic food stores and local-food restaurants across the US. Pollan chronicles this movement with deserved love and respect. I liken it to the community development movement, also born in the idealistic '60s, also proliferated into hundreds of incredible organizations, such as ShoreBank and Self-Help Credit Union, which provide financial services to poor people and underserved communities. However, neither movement serves 1% of America! While good and important, both are niche at best.
Enter Whole Foods: The organic food chain that sold its soul to the devil, yet brought the organic food movement to scale, if I may simplify Pollan's drift. On one hand, Whole Foods and especially its CEO, John Mackay, has become a lightning rod for the purists. They don't source locally, they ship strawberries from Chile, they put independents out of business. And worse, Mackay hates unions and opposed the Obama health care reform. Whole Foods, I agree, has compromised a lot of values we attribute to the organic food movement. However, without Whole Foods neither Wal-Mart nor Costco would be selling organic. Without Whole Foods millions of acres would not be harvested without chemicals or pesticides.
Who is to the community development movement what Whole Foods is to the organic movement? Who can take ShoreBank to a meaningful scale? How can tens of millions of people reap the benefit of their vision, their practices and their values? Us economic development-types are at risk of putting too much stock into too few results. I believe it is NOT ok to only serve a couple hundred or a couple thousand people, as many who care about the welfare of the un- and underbanked are willing to do. Not if we want to address a national issue that impacts 60 million people.
The luxury of small makes it very easy to be critical of the large: "banks this," and "payday that." I want to see leaders like John Mackay in financial services. True, profit-hungry capitalists who are also deeply driven to realize a larger vision for a better world. Pragmatic idealists, where are you? Send me your favorites at arjan@corevc.com.
More pleasure, better business
Financial services are a drag. Paying bills sucks. Sorting through the best products is no fun, given how many there are and their considerable complexity. A mortgage? Forget it. Why is it that people can't figure out how to make financial services interactions more fun? Doing so needn't be a loss leader, as lottery companies know well.
On my way to Atlanta a couple weeks ago, I was reminded of the power of lottery, right in the airport. People are willing to face irrationally low odds for the chance to win a life-changing amount of money. And it's not just a couple people: on average $500 per household per year in America. Considering that I know many people and zero of those households play the lottery ever, it means there are quite a few which play with $1000 or more in lottery (let's ignore the multi-billion dollar gambling industry for the moment). I bet most earn less than I do.
Behavioral economics is en vogue, with a legion of professors riding a titlewave of sexy ideas: University of Chicago's Richard Thaler and his paternalistic libertarianism, Yale's Dean Karlan has studied the cost of not making your goals, Harvard's Peter Tufano started a nonprofit, D2D, that's built a personal finance game. All this work is based on the recognition that human behavior, not economic models or financial products, drive markets. Unless we study human behavior, we're modeling econs and building products for markets, not humans.
In any case, I think we need a spoonful of sugar to make the medicine go down. Suze Orman does this nicely with her show's "Can I afford this?" section, as a counterpoint to her entirely debt-averse mantra. The prospect of paying off debt and reducing spending to the bare essentials for years on end is as dreary as it is unlikely - unless we can add some fun, offer some reward, or be a little playful. People doing this are seeing results.
Where is Apple?
Fast Company's cover this month provokes a story about, "the Apple of [name your industry]." Like any dutiful reader, I've been asking the question about my industry: what company delights its customers in the consumer finance industry? Who is the Apple for the un- and underbanked? I divide the industry into three big buckets: retail banks, alternative financial services (AFS), and nonprofits-CDFIs (Community Development Financial Institutions, a special federal designation for do-gooder financial institutions). This video, by Rafi Kam and Dallas Penn, is pretty funny, generally compelling and relatively balanced for what is basically a rant.
I think each of these segments (banks, AFS, nonprofits) face real challenges to being the Apple of the consumer finance world:
Retail banks have scale, but don't care. The basic business model of retail banks - earning a spread from making loans with core deposits - pushes them upstream, to compete in the already-saturated waters of big deposit accounts. Other than overdraft fees, supposedly gone since July 1, banks claim ignorance on how to serve the underbanked.
AFS also have scale, do care, but are inefficient and focused on short-term products. These are the check cashers, payday lenders, retailers and bodegas of the world. They actively serve the underbanked customer, reach 100,000s locations, but charge high fees for transactions like remittances and check cashing fees, or short-term credit, like payday and title loans. Their inefficiencies and legacy costs basically prohibit better rates. Their customers who wish to take a long term perspective, building credit, saving, and investing, have no real choice.
Nonprofits care, offer low cost and long-term products, but don't scale. Then there are the "mission" folks: organizations who are in business to serve the underserved. These nonprofits, credit unions and community banks - many which enjoy a special protected designation by the US Treasury, CDFI - specifically target low-income communities with a broad range of well-priced products, from checking accounts to business loans and mortgages. The only trouble is that they don't scale - at all! Most only serve 100s of customers; the largest serve 10,000s. But when 60 million people in the US are un- or underbanked, it will take about 10,000-100,000 CDFIs to serve the need. There are only 800.
As much as they each decry one another, these segments actually need each other. The "Apple for consumer finance" will need leadership that can create great financial products which serve both short- and long-term needs, are high-tech and high, and distributed through banks, check cashers, nonprofits and new channels. Given that the underbanked in the US spend $25 billion in fees and interest, it can be done without subsidy and with enough profit to attract great talent and capital.
Wabi Sabi, Wesabe
One of the Personal Financial Management (PFM) favorites, Wesabe, is shutting its doors. CEO Marc Hedlund wrote a doleful note to his users today. Understandably in denial of shuttering his business, he euphemistically referred to the "discontinuing the Account Tab," instead. After five years and $4.7 million, all raised in 2007, revenue generating must have proven impossible. Even top NY VC Union Square Partners and technology uber-publisher, Tim O'Reilly, on board let the company come to its knees.
I think this means that vanilla PFM isn't going to cut it, unless you're lucky enough to get picked up by Intuit. Still the pioneers of this space have done more than create an acronym most people seem to know. They have created a category of financial products: online, interactive tools to help us understand our money. Last I attended Finnovate, apparently half of the presenters were PFMers of one kind or another. Clearly, there is consumer demand to improve our financial interfaces. Clearly, there remains demand for the nine-lives Yodlee account aggregator. Clearly, no one is spending money trading their existing relationships for new ones recommended by the likes of Wesabe and Mint.
So if PFM addresses a need, what's missing? I think it's behavior change. We don't just want to understand our finances. We want to understand our finances in order to... manage our expenses ... reduce debt ... save more ... find errors ... spend better. I'm guessing vanilla PFMs will give way to specialty PFMs that focus on some kind of specific behavior change. Like LendingTree's Thrive - to find a better rate; or DebtGoal - to reduce your debt; or CreditKarma - to improve your credit score. These guys are all very targeted, not generic. This focus allows them to target lead gen sponsors or garner subscription fees.
Wabi Sabi is one of my favorite Japanese ideas: beauty in imperfection (in butchered translation): From Wesabe's imperfections an important industry emerges. Not much comfort to that team, but true.
In the Future…Delivering Wow!
This is part of a series of posts inspired by CFSI's Underbanked Financial Services Forum. At the conference, attendees were asked to complete the sentence, "in the future, the underbanked marketplace will..." on a square button.
By special guest, Ailian Gan
If you heard the oohs and ahhs from the crowd surrounding Jack Dorsey at the Underbanked Forum, you’d think he was a magician. There were no sleights of hand, but he performed magic of a different kind. He had just swiped $5 from the credit card of a man who wanted to make a donation with a little payment gadget called Square. Square allows individuals to accept credit card payments. The app interface was intuitive, the man could sign with his finger on the screen of the iPhone, and a receipt was emailed on the spot. Everyone was amazed by how quick and elegant the whole process was. Usually people get annoyed when you take their money, but Square delivered wow.
To begin with, any tool that can make people enjoy paying you is pretty powerful. That got me thinking about how different consumer finance could be, if financial institutions made it a point to really impress their customers. There has been a lot of innovation around simple banking lately (like Betterment, BankSimple, Ally Bank and ING Direct). I'd like to see wow banking. I'd like to look forward to dealing with my finances and be thrilled to visit my bank.
Going back to Square, beyond its slick interface, the vision for Square has other elements of wow. While it is easy to think of Square as a tiny card reader, Dorsey spoke of Square as a platform that will eventually support a larger ecosystem, the way his earlier invention, Twitter, has become a platform for a much larger ecosystem. For this to work, platform builders need to open up their firehose of data. Users and innovators must be encouraged to define the many uses of the product. Whether it happens through Square or another product, I’d like to see finance open up in the same way - more information sharing, more piggybacking of great ideas, and hopefully a rush of innovation.
Bank Off, Bank On!
My CFSI colleague, Karen Andres, sent an email this morning about her local Detroit radio show, Drew and Mike in the Morning, on WRIF. "This is no NPR - beyond bawdy humor, uncomfortably hilarious interviews with innocent people, and hard rock. Controversial - this ain't your mama's radio station," Karen writes. Useful validation from real people about stats and perceptions "we" think "they" have:
"Drew and Mike were talking about some article that had been published in either the Free Press or the Detroit News about a possible Bank On Detroit effort. And this got listeners to start calling in to talk about all the reasons why they don't use banks. Given that we trade in a lot of summary statistics about these motivations, It was refreshing and beyond interesting to hear real people talking about the real reasons why. It was invigorating on a Monday morning as I get up to do my very small part in helping create better products and services for them.
"Here are the reasons they cited, as best as I could capture them:
1) "My grandparents taught me this from the Depression. They could only take out $5 once per week from their bank accounts, so since then we have only relied on cash and money orders. And I think this is something that gets passed down, especially in multi-family housing units, where everybody is in the same boat - to not trust banks and use cash."
2) "I have to pay child support and I just don't want there to be any record of any extra cash in an account somewhere, or it will get taken."
3) "I know people with government benefits, single mothers on welfare, who don't want the government to see that they have $500 extra in their account, so they keep getting their benefits."
4) "I work in the city of Detroit doing tax prep, and I had this elderly woman as a client. She has never had a bank account - she just uses money orders for everything. She uses $3 money orders to pay for her $5 prescription drug co-pays. She tells me that's just the cost of doing business. I'm really trying to get her into a bank account."
5) "For years, I have gotten my check on Friday, and I go to the liquor store to cash my check and pick up some booze and cigarettes. I also pay off the debt I've racked up at the liquor store during the week. It's just my lifestyle."
6) "I know a guy who has been paying his energy bills in cash for a long time. But he didn't make a couple of payments, and they didn't have in their system that he had a history of paying his bills, so they just shut off his energy."
(Thanks Karen!)