Inside the Underbanked Industry insights by Arjan Schutte


Disrupting Auto Finance

Last year, I woke up to the sleeping giant of auto finance. Over the last decade, we’ve witnessed an explosion of startups building software that dramatically cuts inefficiencies in the exchange of information, goods, and services – disrupting industry incumbents in the process. In the last year, Silicon Valley is finally turning its attention to the auto industry, and we see good reason to be excited about the next-gen upstarts that are changing the way we buy, sell, use and pay for cars.

Bigger than an Escalade

Auto sales and finance is a massive industry – with over 51 M units sold in 2013, and total leasing and finance revenues projected to hit nearly $98B in 2014. State laws, like those Tesla is currently battling, have historically prohibited direct sales from manufacturers to consumers, which means that in the age of Amazon efficiency, buyers are still stuck footing the bill for dealer overhead and OPEX. Resources like Truecar, Kelly Blue Book, and have reduced – but hardly eliminated – asymmetry of information between dealers and buyers regarding car value, but can’t alter the fact that fees and mark-ups are essential for dealers to cover their overhead. Thus dealers will continue to push features and pad margins through obscure little line-items like dealer documentation fees – which vary as much as $500 by dealership.

Start-ups like Carvana and Beepi are taking used car sales online - reducing opex and passing on savings to both buyers and sellers. Carvana, which acts as a virtual dealer, leverages online distribution and direct-to-consumer delivery to manage inventory more efficiently and eliminate costs associated with managing a physical lot and salesforce. Beepi facilitates P2P sales via an online marketplace – managing the delivery process and offering sellers a purchase guarantee if no one buys within 30 days. Both companies are able to shave as much as $1,500 –to $2, 000 off the price of a used car, with Beepi further promising sellers a premium over dealer trade-ins (they just raised $60m).

Dumber than a Hummer

Like auto sales, auto finance is ripe with opportunity to reduce costs and improve customer experience. Misclassification of borrowers is a persistent problem within auto, just as in other consumer finance verticals. For example, 66% of generation Y (16-33 year olds) are classified as subprime. Clearly, 66% of this cohort is not conventionally high risk – a large majority simply have little to no credit footprint, or relatively large debt/income ratios due to student loans. Companies like L2C and Neo Finance are looking beyond credit scores and traditional data to segment thin/no-file borrowers from truly high-risk auto loan applicants. And better data is just part of the puzzle. Better models that can parse, contextualize, and learn on complex data sets are also needed. Companies like Cognical and Zest are already pushing the boundaries of underwriting technology in consumer finance – similar innovation can be applied in auto.

Maserati on a Mazda Budget

The complexities of underwriting aside, there is also significant opportunity to increase efficiencies via better distribution of auto finance and insurance – and opportunity to improve customer experience in the process. Consider buy here pay here lots (BHPH) and aggregate auto financiers. These are lenders of last resort - charging 18% -29% APR to high risk borrowers, and offering less flexible terms than banks, credit unions, or the captive lenders (Ford Finance, etc). Yet over one in five BHPH borrowers are prime or near prime. Collectively BHPH and aggregate lenders control 23.12% of the auto loan market (or ~$225B loans outstanding), meaning anywhere from $45B to $55B in capital could be more efficiently deployed in lower cost products.

This is clearly a distribution problem waiting for a marketplace solution. A large segment of borrowers would benefit significantly from increased access to and understanding of the financing options available to them. Likewise, a large segment of lenders (such as credit unions) would benefit from the opportunity to compete for these borrowers. We anticipate auto finance will follow evolution seen in consumer and SME credit – where the rise of online to marketplace and aggregation platforms have enabled borrowers to find and compare a variety of products from numerous lenders in a transparent and efficient way. This evolution is already occurring in auto insurance. Coverhound, (disclaimer, we’re invested), allows customers to browse, compare, and buy plans all online – saving them literally hundreds of dollars on their premiums.

Transparent online and mobile platforms will not only empower borrowers to access the best products available to them in the market, they will also cut out the spreads that dealers currently layer on to finance and insurance (“F&I” in industry parlance) products. Dealers make most of their margin on F&I sales - over $1,200 per vehicle on average for the publicly traded dealers. While F&I is just 3% of dealer revenues it accounts for about 20% of profits. These spreads are added to base rate in order to compensate the dealer for selling the product on behalf of the lender or carrier. In the case of financing, dealers often have discretion over the amount of the spread, and may add on anywhere from 1-2.5% APR. Unfortunately, this incents dealers to land customers in the priciest car (and loan) they can afford (or can’t), to increase the value of that spread. Even worse, recent CFPB analysis found evidence of discrimination in the application of APR mark-ups, with African Americans, Hispanics, and Asians consistently receiving higher discretionary mark-ups than white customers.

Given these misaligned incentives and potentially biased behavior, it’s no wonder that consumers are now spending 11 hours on average researching a car before they set foot on one lot – presumably to arm themselves with information and avoid the car sales guy like Ebola. Disrupting information asymmetry was a natural first step for online auto – but the next wave of energetic start-ups will finish what TrueCar began, by closing the loop between knowledge and action. Very soon, customers will be able to research, browse, finance, and insure their car online – with the vehicle delivered to their door in less time and for less money than ever before.

(Thanks to Colleen Poynton for her thought-leadership on auto finance)


My Comments on Underbanked Opportunity on Bloomberg TV

Bill Gates gave a speech at Sibos today, and for some unexpected reason Bloomberg TV reached out to me to comment on why the unbanked are important.  It turned into a cool 7 minute segment on Core, how our portfolio companies are improving people's lives and how Visionaries, like Amex, are avoiding the traditional missionary and mercenary approaches.  Here it is. (Click here if the video below doesn't work properly)


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Ford Foundation on how markets can create “justice”

The Ford Foundation released this video today, on our venture fund, Core Innovation Capital, and how our portfolio company, Progreso, makes an impact on consumers lives, while delivering market returns.  Very nicely done piece - and we're proud to be featured.  Check it out:

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Respek for Babak Armajani

There are, no doubt, many influences that play out on anyone's career.  No different for me.  One of my most important ones was Babak Armajani.  He died a year ago, today.

Babak had nothing to do with financial services for the emerging middle class, economic development, or financial inclusion.  To make things worse, perhaps, he was a politics geek.  An inside man.  A strategist. A change agent - or some such nebulous description that when applied to many, is meant to cover up a lack of direction, vision, or any real skills.

He co-founded a consulting group about twenty years ago called the Public Strategies Group. Their clients were federal, state and local government organizations.  They shunned standard strategy, organizational development, IT or process improvement type of consulting opportunities - the standard fare.  They were into reinventing government.  Not just talking reinvention.  Actually reinventing: to make government accountable, customer centric and effective and delivering outcomes.  They weren't liberals using reinvention as a ruse for increased spending, nor were they conservatives using reinvention as a ruse for cutting back taxes.  Their team, Babak included, wrote the blueprints for that movement.  They left their fingerprints on many federal agencies, many governors' offices and hundreds to local agencies.  And on me.

I remember clearly when Babak was thrown out of state government (he was the deputy revenue officer for Minnesota, where he lived his whole life) when a new governor brought in his own team.  We were up at a friend's cabin and he and his pals were drumming up this new company.  It was the first startup I saw being created.  Something from scratch.  So exciting.  I have spent my whole career in and around startups.

And this idea of reinventing government, reinterpreted, has informed my every move since they started Public Strategies Group.  I loved that the traditional bi-polar forces that remain at work in our government needn't be the final, or smartest answer.  I loved that some of the key ideas in capitalism could inform - and transform - governance, and not in a Mickey Mouse-let's-privatize-everything kind of way.  My take on this was that capitalism is the most effective problem solving tool humanity has created, and that we should apply it to the world's most intractable problems.  I even helped his company in between things: We built a remarkable accountability tool for then-governor of Iowa, now secretary of agriculture, Tom Vilsack.  Even more amazing is that it's still up and current, after 12 years or so:

Babak ArmajaniBabak - I called him Amu (which means uncle in Farsi, even though technically he was my Dayi - my mother's brother) - nudged me, coached me, invested in me (literally and figuratively), challenged me, bailed me out, believed in me.  And I suppose he still does today, as he is so clearly a part of me.  Here's a picture, in case you were curious, in one of his signature Bill Cosby sweaters from the '80s.  I can't say how much I miss him.

So in my own way, I'm continuing his work; his style of being.  Through our approach at work, how I parent, how I envision my family, and nudge, challenge and cajole - and hopefully support - my colleagues and loved ones.  A year ago today, I was on a plane to Minnesota, instead of to our annual conference.  I'm excited to stay here in LA, our conference around the corner (tomorrow, in Century City).

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Next PayDay: Govern Google

I began to explore new solutions for payday lending in this op-ed in the American Banker. The response (at least based on my Twitter feed) has been outspoken, with many perspectives for and against. I thought I'd use the opportunity to go into further depth on my blog.

Google Self-Governance on Ad Words for Payday Lenders

In theory, online payday loans, bereft of brick-and-mortar costs such as rent, labor, and more limited risk management tools should be less expensive than traditional corner-store payday loan providers. Not so.  The cost of getting customers online, primarily through online ads, is huge, in part because there are so many "lead generation" agents and unregulated off-shore or tribal lenders bidding for the same ad words. Ultimately, this makes online loans typically more expensive.

For example, the Pew Trust estimates storefront payday loan costs at $10 per $100 (261% APR) to $20 per $100 (521% APR), depending on state regulations, for a typical 14-day loan. Online payday loans cost significantly more - an average of $25 per $100 online (652% APR). Online loans cost so much because ad words like "payday loan" are extremely expensive, with prices bid up by a mix of lenders and lead generator.

In the big picture, online distribution for good, services, and loans is supposed to bring costs down for consumers through "dis-intermediation." But what we see in some markets (like payday) is a new class of opportunistic "intermediators" getting in the way of customers who are trying to connect directly with lenders. Unfortunately, payday is a commodity market, where there aren't strong brand signals that help customers to determine which offerings are the best. This opens the door for lead generation agents to needlessly make a quick buck "referring" customers, or unregulated lenders to drive up already high costs for everyone.

An anatomy of who is buying adwords for "payday loan" on Google. A year ago it was half non-regulated lenders. Today it's better - 3 out of 8.

An anatomy of who is buying adwords for "payday loan" on Google. A year ago it was half non-regulated lenders. Today it's better - 3 out of 8.

The average cost per click (CPC) for "payday" on Google AdWords is $6.52. That adds up fast when you realize that only a small percentage of the people who click on your ad probably end up buying it.  If one in ten apply, you start $65 in the hole.  If it's one in 20, it's $130.

So what can be done to bring down online payday loan costs? The fastest way would be for Google to regulate its own ad word sales: by weeding out unregulated lenders and non-lenders, such as lead-generators, and only selling ad words to fully compliant lenders. Although it would mean fewer ad dollars for Google, prices for low-income Americans trying to access payday loans could come down substantially.

And there's precedent.  In 2010, Google agreed to limit pharma adwords to entities vetted by the National Association Boards of Pharmacy “VIPPS” program, along with a set of digital tools to watch for rogue Viagra ads and the like.

What do you say, Google?  What was that about doing no harm?

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2014 Core Challenge Finalists

From almost 50 applicants we have selected the four most innovative ideas for serving the Emerging Middle Class to present to the largest expert audience on June 6th at CFSI and Sourcemedia's EMERGE Forum in Core's new home of Los Angeles.

This year includes many firsts:  our first bitcoin finalist.  Our first small business finalist.  Our first international finalist.

Blossom is a faster, better bitcoin wallet for mobile that's making cryptocurrency accessible and reliable to more than wild-eyed libertarian cowboys. Blossom is moving quickly to get non-technical users onto the blockchain bandwagon.

Dealstruck is Prosper for small businesses: an online small business lender that's scaling rapidly to provide cheaper, faster credit for America's job creators. This is a huge market and we're excited to see a great team get it right... so far!

Entrepreneurial Finance Lab (EFL) provides a psychometric test that yields actionable credit risk information for lenders in emerging markets, for customers that don't have credit scores. EFL's test could allow millions of entrepreneurs around the world to become credit-worthy.

Moneyworks offers a holistic debt management package, allowing users to control their spending through a prepaid card and tightly integrated mobile app. The "holistic" part is what's exciting: we see tons of PFMs that don't work because they don't try hard enough to influence users' behavior.

Congratulations to these finalists.  On June 6th, they'll duke it out and ~800 attendees of our EMERGE Forum will decide in real-time who wins the big prize and takes home the honor.  Thanks to all those who threw their hat in the ring.  I should make a special shout-out to Rezzcard's Alex Cooper, who has participated four years in a row and whose walk-in rent payment systems are quite innovative, indeed!

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Diverse Perspectives

I go to more conferences than are good for me.  And if you're like me, you don't attend many sessions, and you meet with the same cast of characters.  I have two suggestions on breaking those rules.  If you read this blog, I'd argue there are two must-do conferences on your calendar: Money2020 (in October) and Emerge (in June, and save $200 with this code: CORE).  The former goes broad and the latter goes deep.

The American Banker and our partner CFSI are the brains behind Emerge, which this year rebranded from its previous title, the Underbanked Financial Services Forum. Here are five reasons you MUST attend:

First, some of my favorite new voices are speaking: Dan Shulman from Amex is always ready to think massive.  I'm currently reading behavioral economist Eldar Shafir's latest book, Scarcity, and it's eye-opening.  And Lisa Servon, from the New School, has shaken up our community with her eloquent writing on the value of much-maligned check cashers and the realities of their customers (WSJNew Yorker, Atlantic).

Second, a truly diverse crowd.  No, just not bankers. Not just card folks.  Not just advocates.  Not just regulators.  Not just investors.  Not just entrepreneurs. Not just the big processors.  Not just analysts.  Not just payday lenders.  All of them.  A big, messy melting pot.  And if you know anything about our industry, while you may not like it, IT TAKES ALL OF US.

Third, this year MasterCard is sponsoring the best-ever Core Innovators Challenge, where the best and brightest will be subjected to the largest expert panel in the industry to determine the most innovative solution for the underserved.  The nominations are in, and we'll shortly announce the four finalists who will present.  At stake: fame, fun and fortune (well, $10k).

Fourth, if my friends at CFSI are good at anything it's great content.  Panels aren't thrown together willy nilly from sponsoring companies.  They are hand-picked, deep tissue massaged and dress rehearsed to deliver new insight, genuine debate and wisdom from experience.  So you will not just be attending sessions, you'll be annoyed you have to choose between concurrent sessions.  Won't that be a nice change from the norm?

Fifth, real experiences in Los Angeles.  Leave the Hyatt and join CFSI on its popular (usually invite-only) offering to experience financial services for the underbanked.  Sponsored by Amex, the session is called FinX, and it's an eye-opener for even the most grizzled vet in our space.  Plus, LA is the largest US market for AFS and money transfer, so check us out.

If you're an entrepreneur - let me know you're coming.  Everyone else, register here.  Early bird deadline is April 25 (and the price only goes up from here).  Use CORE as a special code for reading my blog and you'll get $200.  You're welcome!


Who is the most innovative of them all?

For the fourth year running, our fund will sponsor the Core Innovators Challenge in June at CFSI and the American Banker's renamed Emerge Forum (formerly the Underbanked Financial Services Forum).  Hurry, before April 14!

Once again we are seeking nominations from companies small and large for who offers the best, most creative, most consumer friendly and commercially attractive product serving the Emerging Middle Class.

Nominate your company at

Hundreds of companies have participated in the last years.  Finalists have included Fortune 500 companies and startups with nary an employee.  Like previous years, the judges at Core will select the finalists.  They will present live in front of the largest expert panel in the US, about 800 senior executives in the underbanked space.  This giant expert panel will vote to determine who is the most innovative of them all.

Yes, the winner wins $10k, but much more important is the opportunity to get center stage, prime time at the leading national conference on consumer finance innovation.  Nomination is free, takes 5 minutes, and could change your life.

Did I mention the deadline is April 14?!

Below are the winners of 2011, 2012 and 2013, respectively.  GoalMine, Juntos Finanzas, and PayPerks.




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Spent – Amex and Participant take on financial inclusion

Amex' visionary Dan Schulman is marshaling that giant to embrace financial inclusion in very real ways, not just a philanthropic or PR side show.  On the PR side, though, they have partnered with the guys behind Inconvenient Truth and Waiting for Superman (Jeff Skoll's Participant Media), to create a short documentary on the Emerging Middle Class, or the underbanked.  Here's a trailer that was released at SXSW last week.  Sadly for them, I'm in it.  If these two minutes are a preview of the full piece, it will cast a new narrative on our industry - not just about the need, but also about the groundswell of new solutions that are both profitable businesses and which provide short- and long-term value to customers who currently suffer from a vicious cycle of money. What do you think?


The Savings and FinCap Map

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).

Core's Map of Savings

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.

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