You Suze, you don’t lose: Approval for the Approved Card
Suze Orman today announced her new Approved Card, because in her words (and inflection), "You. Can. Always. Bank. On. Me." The card is the latest in a long line of prepaid cards, a relatively new financial instrument that functions basically like a checkless checking account, needn't be marketed by a bank, offers tremendous value to the un- and underbanked and is often maligned for an abundance and excess of fees.
The Approved Card, like others, offer the advantage of being accepted anywhere Visa orMasterCard are accepted without the ability to spend more than you have, as do both credit cards and debit cards with overdraft protection (and fees). To the 60 million underbanked in the US, prepaid cards offer a powerful alternative to traditional checking accounts and check cashers. In Suze's hands, the instrument could gain popularity also amongst the fully banked, but those (mostly women, I imagine) who need and want additional support of better money management.
Recent history is littered with terrible prepaid cards endorsed by celebrities - notably Lil Wayne, Russell Simmons and the vapid Kardashian sisters. Sadly, it's these celebrity cards that can be counted on to lead the way of high fees and poor disclosures, which represent a minority of cards in the market, but cause a majority of bad press about what is basically an important and positive financial innovation. Suze Orman's card is a pleasant departure from this trend.
For starters, it is a genuinely low fee card. For $3 per month you're in business - compared with $4-10 amongst scale players. ATM fees apply, but are modest. The Fees page is prominent and abundant with FREE things (although it does include some ugly big prices for things like expedited bill pay - $9.95 - which can readily be accessed for half that price). I'd love to see the monthly fees waved for direct depositors, as iBankUp, AccountNow and others offer (disclosure: we have invested in both). Still, it's an admirably low fee product.
Functionality wise, the card is pretty straight forward and basic. The two features of note are an emergency savings fund and credit/identity monitoring. The former is basically a separate place meant to be used to store money, not spend it. It would be awesome if it were interest bearing, like Mango and Netspend's 5% APY savings accounts, and make it hard to withdraw funds (to really help people save). Suze negotiated some favorable pricing with TransUnion for their FACO (or fake FICO) score and identity monitoring. You can use it free with no limits. This is arguably the most unique and coolest feature of the card.
Suze has clearly been dreaming of a digital cash world, one where you can only spend the cash you have, but without being tethered to the obvious limitations of physical cash. This is a powerful vision, really, especially prescient given the current financial crisis. But this digital cash mecca lacks access to one ingredient essential to modern American life: the credit report and credit score. They are not just used for accessing almost any form of credit, but now also used for employment, rental agreements, and insurance.
Even the formidable Suze Orman was not able to cajole TransUnion, Equifax, Experian or FICO into letting her report digital cash (or prepaid) data, let alone have the data be contemplated in a credit score. Instead, we're invited to her Credit Project, in which she will deliver anonymous transaction data from her card users to TransUnion for them to, "help us understand whether including this data in your credit report would impact your access to credit products." I happen to believe that Suze really wants to do the right thing here, although this solution smacks to me of a PR concession made by a credit bureau looking for pre-IPO good press.
As with almost everything in this Approved card, it's a step in the right direction. I approve!
Standards for Great Financial Services? We’re In!
Our venture fund, Core Innovation Capital, is singularly focused on investing in scalable financial technology companies that serve the American emerging market, the unbanked and underbanked. We have promised our investors (like Goldman Sachs) above market returns and we spend significant time analyzing the profit potential of each investment we make. That said, we also intend to invest in companies that will have a short- and long-term positive impact on the financial lives of the people they serve. We believe financial services have a significant role in anyone's upward mobility, and millions of responsible, hard working Americans are stuck in a vicious cycle where their financial tools erode, instead of enhance their net worth and financial capabilities.
CFSI's Compass Principles initiative is a bold and critical effort to set a standard for how financial services can and should function for people. It's critical because financial services are complicated. As we can see in the marketplace and Washington, D.C., the tug and pull of organizational priorities leaves both consumers and industry with unsatisfying results (mostly consumers, if you ask me). Our partners at CFSI established the Compass Principles to set an aspirational quality standard that serves both industry and people (also known as consumers).
This is not about concessions. This is about integrity. Given the apparent lack of clarity on what consumer finance with integrity means, it's high time to (re)establish some norms. CFSI's process for doing this is socratic, collaborative and inclusive. Ultimately, we believe the objective should be to settle on standards that are attainable and aspirational, and that consumer finance companies sign up, make commitments and elevate the industry to world-class best practices.
My partner, Mike Harris, and I are in. We're pre-committing (since there is no formal means by which to commit today). We're doing this not because we expect to agree with every last item, nor because we expect to already "comply" to all standards today, but because we agree with the vision and we trust CFSI and their approach. We're doing this because we exclusively invest in disruptive financial technology companies that we intend to set the new gold standard. Commitment isn't just saying so in a blog post. Starting in 2012, we commit to integrate the Compass Principles into our venture fund as follows:
- To participate in the dialogue to refine the meaning of the Principles
- To use the Principles in our underwriting of new potential investments
- To ask our portfolio companies to commit to the Principles
Our intent is to tighten the specificity of our Compass Principles commitment as the Principles become more specific and as we interact with our fund's stakeholders. And our hope is that our partnership and our portfolio companies will both lead the industry and be challenged to improve.
This was reposted from the Compass Principles blog.
Ninety nine Percent
I'm disappointed in the Occupy Wall Street movement, if you can call it that. I care, because I believe their beef is real. Economic inequality is significant. The poor are getting poorer. Main Street is suffering at the hands of Wall Street. Responsible, hard working people have odds stacked against them. Some irresponsible, hard working people have odds oddly in their favor.
Our fund is in business because we believe these problems are real, and because we believe these problems also present opportunities. Creative entrepreneurs can develop solutions that serve the 99%. Like pawn, for example. Most people harbor negative sentiment towards pawn shops. It's simply a secured loan. But the security can come in the form that anyone has, not just real estate or a yacht or a business. The interest rate on a pawn loan is typically an order of magnitude less than that of a payday loan. The guys at EZ Pawn Corp, pictured above, may look skanky, but they're a fully registered multi-generation business here in New York. Check them out! They serve the 99% quite well (although the post-it note was put up there derisively, no doubt).
Welcome Green Dot Bank
On Freedom Boulevard in Provo, Utah, nestled between the mountains of Uinta National Forest and Lake Utah is a nice little one-branch bank, pictured above. It looks innocent enough. Its CEO, Doug Christensen, invites personal emails from his home page. Ping him quickly, as I assume he's soon out of a job.
The Federal Reserve last week approved Green Dot to purchase the bank, thereby becoming a bank holding company. The bank is tiny, with less than $40m in assets. If the filings from last March are any indication, the purchase price was around $15m with an additional $10m contribution to core deposits. What's the big deal? I'm not sure, honestly.
It's the first pure prepaid program manager to own a bank. It will give Green Dot greater control over its destiny. Instead of asking for approval from a partnering bank for anything new they might want to do, they can instead ask their regulators directly. Presumably this is better. We'll see, since the regulatory environment doesn't look favorably on prepaid or many forms of adventurous consumer finance (mostly not for good reasons, to this observer).
Control to what end? I'll join the speculators who assume some kind of savings product offered through the prepaid account. Presumably some kind of "real" account that's functionally the same as prepaid, but can be marketed differently and avoid the negative stigma associated with the word "prepaid" for many. Perhaps BIN sponsorship to other program managers, much like the Green Dot Money Pack allows cash loads for cards by third parties, like American Express, Plastyc and many others. Perhaps additional transaction products, like bill pay and money transfer, that can take advantage of a national bank charter without needing to register as Money Services Business (MSB) in most states. I'd love to see credit products, but Green Dot's CEO, Steve Streit, has never been a fan. Without credit, it seems like a bank charter is underutilized.
Beyond control, owning a bank will provide some economic efficiency. When Green Dot has transitioned its customers from its current banks in 18 months, it will no longer have to pay a third party a fractional amount of interchange and regular account fees. At scale this is undoubtedly a big number, but it comes with a real cost: not just a public company, but now a bank, Green Dot will have real costs associated with regulatory compliance. I'm sure they've done the math, but given what a commodity BIN sponsorship is these days, the economic advantage isn't overwhelmingly clear to me. The move certainly steers Green Dot clear of Durban-inspired debit card fees, since banks smaller than $10b are exempt.
Given that Walmart has a stake in Green Dot, I wonder if the move might bolster a renewed application for a bank purchase by the retail giant. It tried and failed several years ago, thwarted by the small bankers association. Perhaps this transaction offers a precedent.
While it's a big move, and one that sets the stage for an expanded universe of players serving the underbanked with greater scale and efficiency, I lack the insight or imagination to be blown away. I assume I'll be proven wrong.
Not Unbanked: Untapped. Underserved spend $45B on financial services
Most believe the underserved are large in numbers and small in market potential. Of course micro lenders around the world, such as Nobel laureate Grameen Bank, who serve the poor with small, market rate "business" loans have demonstrated it's big business - and largely, good for the world. But here in the US, the unbanked and underbanked have until recently been left to the alternative financial services industry (like check cashers and payday lenders) or the philanthropically funded nonprofit industry (financial literacy programs and credit counseling).
But the underbanked are big business. My fund, with our partners at CFSI, estimate people who don't rely on banks for their financial needs spend $45 billion in fees and interest, alone. This is for services such as check cashing, remittances, rent-to-own, title lending, prepaid cards, walk-in bill payments, even bank overdraft.
Based on thorough secondary research from dozens of sources, including our own analysis, this chart shows dollars spent on fees and interest - not the volume of dollars processed (that's $455 billion) - in 2010.
It is fair to say that most of these products are generally more expensive than what most of "us" pay. APRs higher than 30% (if not 300%); transaction costs of $2+; money transfer costs of $10+; access to payroll check for 2-4%. But lest you think most of this comes from the "predatory" and "shark" players, think again. The biggest categories you'll see are originated or funded mostly by banks: overdraft and mortgages. We have taken only the subset of fees generated here by the part of the population that is underbanked. (And this doesn't include a penny from the debit card charges so popular today).
But even the smallest slivers here are big business. "GPR prepaid" ($1 billion) refers to prepaid program managers, including recent IPOs Green Dot and Netspend. Walk-in bill pay ($1.9 billion) is dominated by Western Union, MoneyGram and Fiserv.
These services are thriving during this recession, by and large. The largest growth came from internet-based payday loans (35% YOY), followed by prepaid (33%) and payroll (25%) accounts. Year over year contraction was led by refund anticipation loans (-18%, which give customers instant access to tax refunds, in return for a hefty fee) and followed by check cashing (-5%) and bank overdraft (-5%).
The moral of this story, in my mind, is that the underbanked are big business. And it's growing. AND it's an industry that should contract significantly. Counterintuitively that contraction should yield greater profits, billions saved by the bottom third of Americans (in terms of income) and a stronger middle class (and therefore a stronger economy, and greater global stability and strength). This will happen through innovators who drive efficiencies through smarter technology and smarter distribution channels. Click here to see the report.
The “Say/Do” Contradiction
A wise COO of a Green Dot pointed out the "say/do" contradiction the other day. It is something that beguiles anyone trying to understand their customer, but especially those who are serving "them."
Let me clarify: we all say we want to lose weight, pay off our debt, run a marathon, save for college, buy only organic, floss. What we actually do is another matter altogether. We do open a bag of chips, instead of going to the gym. We do pay the minimum due on our credit card statement. We do hit the snooze button rather than run 5 miles in the cold. And it's not just the lazy and bad things we do do. We do prefer "tailored shirts" this season, we do buy the tablet instead of the laptop, we do prefer mint over cinnamon. This is the "say/do" contradiction.
Visionaries, like Steve Jobs, aren't listening to what people say they'll do. Instead they guess, anticipate, and take gambles on what people will actually do. We all said we liked the keyboard, so why introduce a mouse? Or a touchscreen?
The "say/do" contradiction is especially vexing when it comes to understanding a customer who is poor, and even more for those who care about their welfare the most. I can't tell you how many times I've regurgitated stats about what the underbanked have stated, in statistically relevant surveys, that they would save if given the chance. They've said they will pay off their debt. They say they don't use payday lenders; that they would use a bank account if this or if that. We cling to these stats and anecdotes because they give us hope. If only we build the better mousetrap or provide access to a better bank the world would be a better place. Like all people, some underbanked will do what they say. So better mousetraps are meaningful and inclusive banks will improve some lives in real ways.
But when you add "us/them" to "say/do" the disparity gap widens geometrically. Most do gooders, like me, are not "them." We barely know "them." We really do care, but with startling frequency we really don't know. I'm shocked how few people in the "community development" or "financial inclusion" world have ever walked into a check casher. Or how many consumer advocates, who earn their modest living expressing legitimate grievances to the Western Unions and Cash Americas of the world, have literally no clue who exactly uses those services or why. Wanting better for "them" gives us a moral high-ground. And all too often removes us more from why "they" do prefer cash; or do choose the payday lender; or do avoid banks. This makes it harder for us to help "them." And we see this surface in the numerous unintended consequences of consumer protections put into place. The moral high ground certainly trumps boring old reality, especially with a long suit in data and statistics. Us/them + say/do = poor/results.
So what we need is to realize "they" are "us." To learn how they are like us: actively, slowly, and humbly. I think this is called empathy. Then we need visionaries who can bridge a vision for a better world with the guts to guess, anticipate, and take gambles on what people will actually do. These visionaries will be hidden in sheep's, wolves' and plain clothing. We at Core seek and fund these visionaries.
If you're a do gooder, please keep doing what you're doing, and push the incumbents to do better - we need to do way better - but get to know your customer, for crying out loud. If you're an operator, simply addressing demand can be a cynical and zero-sum game. Creating long term value - and upward mobility - is not just a challenge worthy of your talent, but a means to greater enterprise value.
Is Financial Innovation an Oxymoron?
Since I started writing at Forbes, I'm unclear what to do with my "own" blog. So, for today, I'm reposting. If you have a better idea, let me know.
The week before last I attended a show-and-tell event for adults in the crevice of the financial industry that calls itself “fintech,” for financial technology. Naturally, the event is called Finovate, and the attendees are assumed to be finovators. Common knowledge suggests that financial innovation is generally bad news. While much of what I saw wasn’t particularly innovative, there were some exciting exceptions: ideas both innovative and to my eye not likely to cause a global financial crisis – perhaps even able to help us avoid the next one.
Of the 60-odd companies who presented their wares, the following struck me as big ideas that could change society for the better:
Kabbage provides much needed business finance to online merchants. They base their credit decision on instantly available business data and can complete approval and funding within minutes, not days or weeks. As our – and the world’s – economy continues to lag, any and all business financing is essential to reversing that trend. Kabbage is available to merchants who sell on eBay and Amazon only, but they’re giving credit in ways that are quick, convient and fair. If that’s not innovative in itself, they now include Facebook and Twitter activity in their underwriting on the theory that your online social engagement is predictive of your character (one of the three pillars of loan underwriting, along with capital and capacity). They call it “Social Klimbing.”
While everyone else pipe dreams about Near Field Communication and mobile based payments, Dynamics is leveraging the existing infrastructure of the magnetic strip: the millions of devices that read our credit and debit cards when we swipe them. They showed a solution that dynamically encodes the mag-stripe on a card only after you type in a code on the card. Another lets the user press a tiny button on the card that let’s you pay normally or from your accumulated rewards (see picture). These devices look exactly like credit cards, but bring intelligence, convenience and security to a ubiquitous payments network.
Finally, Plastyc, a company which provides a prepaid account to the un- and underbanked (full disclosure: in which my firm has invested) demonstrated their new savings features. While not the sexiest demo, the reasons this is innovative are many. First, people who are underbanked have few options for savings other than their mattress. Second, this savings account provides effectively a 6% annual yield! (My money market account pays just 30 basis points) Finally, the product encourages savings behavior by making it automatic and discouraging frivolous withdrawals. In a society with negative savings rates, getting some help changing our behavior is a very big deal.
Many other finovators – like Demyst.data, Google Advisor, Tandem Money, BillGuard, Betterment and Lighter Capital – deserve mention. While clearly much of the financial industry should not be allowed to play with matches, it is a mistake to rule out financial innovation that can be lasting, positive and scalable. In fact, it’s highly necessary.
Interest in Principles?
After hundreds of billions of bailout dollars and a litany of ensuing debacles, our banks are not the pride of the nation. Bankers are more maligned than used-car salesmen, it seems. Bank regulators have been completely overhauled and the aftermath of the Consumer Financial Protection Bureau won't be written for quite a while. Trust in banks is low. Only one banker has ever received the President's highest honor, the Medal of Freedom. What's wrong with this picture?
Of all sectors, you'd think the conservative, risk-averse pillars of our economy - banks - would be models of trust, examples of citizenship, and pantheons of our communities.
But that's not all: Banks don't have a monopoly on managing consumers' money. Alternative Financial Services providers, including finance companies, check cashers, payday lenders and payments companies also serve most Americans in one form or another. They, too, are not often listed among our heros (zero Medals of Freedom here).
We all rightfully complain about consumers' short sightedness, addiction to instant gratification and demand for excessive credit. The financial services industry is up in arms about the CARD Act, Dodd-Frank, Durbin, CFPB and other federal initiatives to limit the industry's opportunism.
A small nonprofit in Chicago is trying to change this: The Center for Financial Services Innovation (CFSI, with whom I am affiliated) is trying to set a standard of excellence in collaboration with financial services providers. It's no small feat, but they are working with some of the largest financial services companies in the country, along with some of the most innovative startups.
This isn't about corporate social responsibility, or philanthropy, or the Community Reinvestment Act (the rules that force banks to contribute to the underserved in their footprint). These standards are about self-interest. If the industry doesn't change course, it will further lose consumer trust and risk additional regulation. Neither helps profits.
CFSI is calling this effort the Compass Principles (www.compassprinciples.com). It's pretty straightforward, with just four leading principles:
- Embrace Inclusion
- Build Trust
- Promote Success
- Create Opportunity
Each has specific examples, and the idea is to set a high bar that is aspirational to the industry, but not out of reach. The principles are broad, but have precise ways you can succeed or fail to do so. They're great for consumers, but free-market based and great for business, too.
Our consumer finance industry has plenty to be careful and shy about. But I hope they will chose to be bold about aspiring to something better. It's good for business, America and Americans.
In the Black, underbanked report from New Zealand
In proper American form, I arrived in New Zealand clueless it is hosting the Rugby World Cup in two weeks - a massive event boosting a level of national excitement akin to the FIFA or the Olympics - and excited to check out how it handles its unbanked and underbanked, only to realize it has none. Google "New Zealand Un(der)banked" and you will find a disappointing nary.
Like most of the rest of the world, prepaid cards in New Zealand are more common and not primarily for the underserved. The latest innovation in prepaid is here, in honor of the Rugby World Cup, natch. Low fees and very high load limits - max daily load is NZ$20,000 - sounds like a patriotic invitation for fraudulent use to this observer, but perhaps I'm just jaded.
I have found not one check casher or payday lender or even finance company in Auckland's urban or lower income neighborhoods. Just friendly KiwiBank ATMs. Guess I'll cheer for The Back, the hometown team, and that the country's underbanked are in the black.
“Um, excuse me!” My Comment to the OCC on small-dollar loans
Re: OCC Guidance on Deposit-Related Consumer Credit Products (Docket ID OCC-2011-0012)
Dear OCC Representative:
Core Innovation Capital is submitting this letter in response to the request for comments by the Office of the Comptroller of the Currency (OCC) on June 8, 2011. We appreciate the opportunity to respond to the OCC’s proposed guidance on safe and sound banking practices for overdraft and deposit advance programs. We commend the OCC for addressing the matter of deposit-related consumer credit.
We are a venture capital fund that invests in the most innovative companies serving underbanked consumers in America. Our definition of the underbanked comprises of people that have little or no access to mainstream financial services, such as banks, and so rely upon alternative financial services, such as check cashers, payday lenders and pawnbroker solutions. According to a nationwide study, it was uncovered that there are over 60 million individuals that fall into this category and a large portion of these consumers are both homeowners, family oriented, but with limited access to credit.
Core Innovation Capital diligently researches and invests in early growth-stage for-profit companies in the financial services industry. Our team has made “double bottom line” investments serving the underbanked since 2005. Our vision is to fund scalable, technology-driven solutions in customer-facing products and services, as well as business-to-business solutions, that meaningfully improve the lives of low- to moderate income people and strengthen the American middle class.
Our vision, and we hope you share it, is to see a strong, robust, and competitive financial services marketplace, where the diversity of consumer transaction, savings, and credit needs are met with a range of providers offering clear and transparent products and services at reasonable prices.
The recommendations and insights in this comment letter are based on deep industry knowledge and our consumer observations of market practices. We offer the following suggestions for the OCC to study and encourage through your guidance.
We believe APR capping regulatory practices stifle innovation, are irrelevant to the consumer, and are a poor proxy for whether a loan is “good” for the borrower.
End arbitrary APR ceilings for short-term loans.
We believe that Annual Percentage Rate (APR) is an effective metric for calculating and comparing interest costs across mortgages, credit cards and other long-term forms of credit. However, APR is counterproductive when it comes to small-dollar and short-term credit products, particularly in relationship to lower income consumers. This directly matters to your constituents: working Americans took out $40 billion in payday loans last year, which does not account for other short-term credit solutions such as overdraft, title lending, and pawn shops to name a few. When regulators cap APR for short-term loans at an arbitrary number like 36%, lower income working class people get badly hurt because access disappears and less regulated, inferior products appear in their place, which leaves more people without emergency liquidity paying even more for off-shore, under the table or “non-loan” loans.
As an example of why APR is not useful to most consumers when it comes to small-dollar loans, in a focus group we attended every participant believed that a $10 fee for $100 borrowed for two weeks was a better than 20% APR. An annual metric for a short-term product is confusing: Would you check into a hotel that charged $70,000 (annual rate)? Or a cab that charged $200,000 (cross country rate)? Do you include the initiation fees (many credit unions with "low APRs" don't)? We believe that cash-on-cash ($7 for every $100 borrowed) schedules are much clearer and actionable, but not enough.
Encourage innovative business solutions
We see a tremendous amount of socially oriented entrepreneurs who wish to provide better alternatives to payday and other expensive forms of credit. Rate caps and regulatory ambiguity actively discourage the very energy and creativity needed to create more responsible and consumer-oriented credit instruments for working Americans. We hope the OCC will act within its ability to encourage innovation in small-dollar lending with a quality standard that is based on the structure of the products instead of the APR.
Implement a loan structure such as “TRUST”
As our central suggestion, formed from extensive research and meetings with consumer advocates and industry representatives; in lieu of APR, we propose a model such as “TRUST” as a new quality standard for short-term credit. By addressing the core structure of a short-term loan consumers are empowered and much needed innovation can be unlocked. Our suggested model consist of five tenets:
- Term flexibility - suit the loan to fit various users' needs
- Repaid fully - design the loan to be payable without rollover
- Understandable - make the terms and fees clear and transparent
- Selective - good loans should be priced according to risk
- Transitional - offer a graduation path for good performance
An example of how this would translate to in practice could include the following:
1.) A consumer goes online and finds a TRUST certified small-dollar lender.
2.) She is asked how much money she needs and how long she needs to pay it back (Term Flexibility). She can adjust these variables.
3.) Once she settles on an amount borrowed and length of time, she is able to plainly see the price and payment ramifications (Understandable) (e.g. 6 payments of $100).
4.) She clicks on “Apply for loan” and the system considers what kind risk class she belongs to (Selective) and whether she is likely able to repay the loan based on her income and other resources (Repaid Fully).
5.) To aid the consumer, once payments are met, the system either reports to the “Big Three” credit bureaus or begins to build an internal credit score for the individual, which could provide better terms on her next loan. Alternately, the system could require a small amount of savings collateral to both securitize the loan as well as establish a savings behavior (Transitional).
By design, there are many ways to manifest the TRUST structure for short-term, small-dollar loans. We hope the TRUST concept can provide a framework to end the partisan conflicts between consumer lenders, consumer advocates, regulators and innovators who will never move forward while APR stands between them, to the ultimate disadvantage of the lower-income people they are trying to serve and protect. We strongly urge the OCC to avoid an APR-based regulatory approach and adopt, by any name, the principals described in TRUST.
We appreciate the OCC’s request for comment and hope our suggestions are useful in illustrating best practices for ensuring that these products are accessible, responsibly designed, and safely used by all consumers.
Sincerely,
Arjan Schütte
Managing Partner, Core Innovation Capital