The past two years Core Innovation Capital has issued a national challenge for who makes the most innovative product or service serving the emerging middle class, aka the un- and underbanked, the cash-preferred, the credit underserved. Sign up here at corevc.com/megachallenge.
This year, we're improving and expanding. It's not just a Challenge; it's a Mega Challenge. Instead of four finalists, we'll pick 10-12. Instead of the last day, we'll feature finalists on the first day of the Underbanked Forum. Instead of one hour, this Mega Challenge will last three hours, in front of the largest group of industry experts ever assembled.
At stake are fun, fame and fortune. A live demo before 800+ executives is pretty exciting for even the most seasoned entrepreneur. National recognition for being the most innovative product for the underbanked in 2013, as determined in real-time by senior leaders in retail, banking, payments, alternative finance, regulation and consumer advocates. And $10,000.
Nominate your company - whether large or small - at www.corevc.com/megachallenge. We've had finalists as large as FIS, or as small as the one-man Juntos Finanzas, who won by a land-slide).
The Challenge has introduced mobile check cashing for the underbanked, payroll-based short-term loans, social media-based underwriting, better sub-prime auto lending, SMS-based financial planning, and micro-investments.
We're eager to see what financial innovation is being cooked up in 2013. We've seen some glimpses and it's pretty exciting!
So if you're working on something great that serves the emerging middle class, whether in payments, in credit, in planning or saving - and if you're able to show a live demo by June, nominate your product or service. It's free, will take 5 minutes and could offer unprecedented exposure: corevc.com/megachallenge.
Goal and resolutions? Too personal. Predictions for this coming year? Too much pressure. Post mortem on last year? Too boring. So, instead, here is my wish list for our industry for the year of the Snake.
An Iconic Brand. Confidence in banking is at historic lows. Perception of alternative financial services are even lower. I would like to see a Great consumer finance brand emerge. And with Great I mean: aspirational to its customers, trusted to manifest the Golden Rule, able to scale. Keep your eye on Progreso Financiero.
Big Bank Backoffice Leadership. With a couple notable large (Chase), medium (Regions), and small (Carver) exceptions, I've long believed most banks shouldn't try too hard to serve the underbanked: oil and water. Instead, I think the best way banks can serve this customer is to serve businesses who serve this customer. Bank great Money Service Businesses. Provide debt to great short-term lenders. Sponsor great remitters. Lobby for non-bank innovators. Partner closer with retailers. I'd love to see a big bank fund and create such a line of business. There's a billion dollar opportunity for someone to go big.
A Short-term Lending Leader. Payday is an ancient game: 1.0. Since around 2010, some new tech players have created the next generation, 2.0, marked by better underwriting, greater transparency, online distribution, and more liberated loan structure (think Zest, BillFloat, LendUp). I'm holding out for 3.0 of short-term unsecured lending, based on my TRUST principles: even better underwriting, risk-based pricing, clear rewards for on-time repayment, lower customer acquisition cost, even lower default rates, the ability to scale big, and solid, mature leadership in this fractious business. It could be one of the above...
Mobile Remote Deposit Capture. Mobile? Talk to the hand! Banks have been rolling out MRDC the past couple years. Last year, it was all the rage to promise it to prepaid card customers. The big deal is that MRDC gets cash onto the phone, which you'd otherwise have to do at a retail location (in which case why use the phone if you can just do everything else at that same retail location?). The big difference is that MRDC for the cash-preferred customer needs to clear immediately, not over 5+ days. The big problem is that comes with a ton of risk. Cool companies, like Chexar, have solutions. I hope this year of all checks "cashed", more than 5% will be "cashed" onto a mobile phone.
Regulatory Clarity. I don't exactly blame your garden variety entrepreneur for starting anything but a financial technology company. It is highly regulated, complexly regulated and unclearly regulated. That Dood Frank? Office of the Comptroller Who? CFP-Why? When and what will they do to me? Fortunately, the CFPB is quite progressive. I hope they will lay out clear principles this year, even before they write the rules, on things like credit reporting, prepaid, short-term lending, and remittances.
New Lingo. The language of unbanked and underbanked has run its course. We need something new. The old lingo is limiting - it assumes banking status is the most important determining factor. It's inaccurate - underbanked suggests people should be banked, which for many in this population is not and will never be the case. It's a bummer - people aren't inspired to dig out from under something. Instead, building towers in the sky is the currency of the entrepreneur (and intrepreneur). At Core, we're trying to re-invision this market in entirely new ways and by the end of this year, I hope we'll have the beginnings of a new lingua franca.
What's on your list?
People generally assume serving the underbanked is a noble thing to do. And it is, if you do it right. You can make an incredible difference in the lives of a quarter of the US population by providing them with better tools with which to spend, borrow, plan and save. Check out CFSI's Compass Principles if you're looking for a roadmap on "doing it right."
But I am not noble. I'm a capitalist. And for the third year in a row, I've been tracking the size of the underbanked opportunity. We all know it's a lot of people (but then, many people have brown eyes). We all know their lives aren't easy (so they should help themselves, or charities can help those who can't help themselves). We assume that in aggregate they earn and move lots of money (over $1 trillion, in case you were curious). We hear immigrants send tens of billions abroad and cash billions of checks. But how much do people who rely primarily on alternatives to banks actually spend on fees and interest for basic financial services is the final measure of whether there is a market here. The answer, of course, is yes, big time.
About $78 billion was spent in 2011 by members of the American emerging middle class - also known as the underbanked - on fees and interest on basic consumer products. Together with my partners at CFSI (and thanks to the sponsorship from Morgan Stanley and Herculean efforts of CFSI's Summer Associate Eva Wolkowitz), we updated last years' study entirely. We took out some stuff, added in some stuff, mined all the best research out there, validated it with public data and insider insights. The result is impressive, I think. You can download it here.
Rather than regurgitate what you can read in the Knowledge Brief we've made for your reading enjoyment, I will instead focus on my point of view about all this. $78billion - so what?
First of all, it is a lot. To put it in perspective, this means that a quarter of the US population spends about 7% of their hard-earned paychecks just to conduct their financial lives. Ignoring management fees on securities and such, I would estimate I personally spend about negative 1-2% on my financial life. Right, I earn money to house it somewhere, pay my bills, service my credit and purchase the things I need.
Second, this is just scratching the surface. We left out costs associated with long-term debt like mortgages and education, any kind of insurance, or any costs associated with the small businesses millions of people run to stay afloat.
Third, it's incredibly inefficient. A huge amount of this relates to high losses and high fixed-overhead. The Digitization of Everything has yet to arrive here at scale. Just look at subprime auto-lending here - $26 billion in fees and interest here alone. This is a securitized loan. But imagine the cost to go repossess a car if someone fails to pay. Better, smarter underwriting - like that of innovator Neo Loan - along with a $5 widget that would turn off the car when a payment is missed, would dramatically decrease defaults and program management costs.
What if we could drive efficiencies that offer more people better service and cost them only $39 billion in fees and interest, in a way that yields better gross margin and puts $39 billion back into the economy? This is no Herculean task. Ping Core if you're working on it. You can be noble and capitalist.
The FDIC updated its 2009 figures (based on 2008 Census data) of who uses what kind of basic financial services and released them yesterday. It's not just any four years later, but marks a period that represents significant change in the economy and individual American's lives. What did we learn? Basically, there are more people who underutilize traditional financial institutions (banks and credit unions) and rely more significantly on alternative financial services (check cashers, payday lenders, etc) - but not dramatically more, 2011 vs 2008.
"More than one in four households (28.3 percent) are either unbanked or underbanked, conducting some or all of their financial transactions outside of the mainstream banking system."
We're talking about 68 million people. Honestly, this is smaller than I would have expected, but perhaps doesn't yet fully reflect some of the regulatory changes that were introduced in the wake of the financial crisis. Certainly, bankers like Jamie Dimon, who have been crying foul that they will be forced to let go of their low-end customers as a result of draconian new rules seem overly dramatic. And the growth in prepaid and anger in banks, while real, are not as exaggerated as I had expected. I think this is good news for people who think of this segment as "underserved." Relative to the dramatic times in which we live, even lower income people are maintaining a relative equilibrium in how - and with whom - they manage their day to day finances.
We will soon share an update on Core and CFSI's market size for fees and interest charged to the underbanked, to show how the industry is changing at a more granular level.
Download the FDIC report here, if you're interested.
Today's WSJ headlines with a story on how even the mass affluent are struggling with student debt. Our summer associate, Aaron Mercurio, has been working on a private student lending investment thesis for us, and opines the following:
We know student loans are important and we’re often reminded that they’re big business: The student lending market recently exceeded total credit card outstandings by surpassing $1 trillion in debt on the heels of $110 billion in new debt issued in 2011. Meanwhile, tuition increases don’t seem to be slowing down.
If students and parents are voting with their wallets, then federal loans are the preferred means of borrowing both for students and the universities that push them. 93% of new debt in 2011 was issued by the Department of Education under the Federal Direct Student Loan Program. But federal student loans come with a myriad of challenges:
Overview of Terms of a federally student loan issued after July 1, 2012 (simplified for brevity):
|Type of Loan:||Subsidized and Need Based (Stafford, Perkins):||Unsubsidized (Stafford, Direct, PLUS, Parent-PLUS)|
|Loan Amt. Limit||$3,500 - $6,500 / year||Based on school tuition + expenses|
|Interest Rate||3.4% - 5% Fixed||6.8% Fixed|
|Origination Fee||0% - 1%||Up to 4% (w/ 1.5% rebate)|
|Collections||Cannot be discharged in bankruptcy, wage garnishment allowed|
Source: Department of Education, Direct.ed.gov website
The average student has $25,700 in debt, including graduate school debt, according to the Department of Education. While subsidized Stafford/Perkins loans are attractive – students need to qualify and it may only cover a small amount of tuition.
Key issues with Federal Student Debt today:
- Not all loans are created equal: Fixed, flat rate loans are inefficient; don’t account for risk, macro-environment, or student/university performance
- Lack of price competition: Up to 4% origination fees and fixed-rate loans in a market where prime has remained flat at 3.25% since Jan, 2009
- Extreme collection practices: Defaulters are almost never able to discharge loans in bankruptcy and co-signers credit is impacted
- Inconsistent borrowing caps: Like the rates, desire for simplicity creates inefficiency in terms of meeting students’ individual borrowing needs
The silver lining? Major problems drive major opportunities, and this market is ripe for innovation. With start-ups like Fynanz creating a platform for credit unions to aggregate lending power to compete, SoFi connecting alumni with current students to create lower cost opportunities, and Tuition.io providing sophisticated software for managing student debt and repayment, I’m excited to see if these and other companies can drive the PSL market and compete head-on with federal loans.
I try to avoid eating food that "may or may not" contain some ingredient, especially if it's not even clear what that ingredient is (milk product?). Barclay's new Ring credit card, I'm afraid, looks tremendously tasty and innovative, but while poking through their Terms of Service over lunch just now, proved themselves no better than a Twinkie. In fact, far worse, because Twinkies don't pretend to be healthy.
Barclay's pitches the Ring credit card as "crowdsourced" and "community powered." They're keeping it "simple" and touting unprecedented candor: "For the first time ever, we're going to give you a look at our profit and loss statement, which shows you how we make money from Barclaycard Ring. And with Giveback™, you'll even get to keep some of the profits for yourself." This is cool stuff! If they would actually share their (card's) P&L statement, it would be a historic first. I love the idea of being a customer and an owner, and if they do it right, I might actually choose features or economics that aren't strictly in my myopic self-interest.
They keep their promise with low, flat rates, a clear fee schedule, even beyond the basic Schumer box requirements. The Terms of Service is easily accessible, plain English, short and to the point. But reading past the fee schedules and basic disclosures, comes my tremendous disappointment:
This profit sharing feature is not based on the actual profits of the program. Instead, the Giveback™ program contains a transparent calculation that is used to determine what will be shared with the community members and which may or may not approximate actual profits. The Giveback™ program and the profit sharing features are offered at our sole discretion. We may discontinue the program at anytime.
They will "transparently" disclose what amounts to a deceitful claim. They will not share their P&L. They may give something back, but it may or may not approximate actual profits. It could be a lot less than your garden variety non-social, non-transparent credit card. They may, in fact, give nothing back, at their discretion. But the fact they promote this as the vanguard of transparency, the epitome of modern, youth oriented social media savvy strikes me as incredibly cynical.
Why not actually disclose the P&L, even if just for a particular product? Why not actually share a portion of the profits that could amount to more than the perfunctory "2% cash back"? Why not actually open source functionality? Why not actually use our social media networks to strengthen our financial agreements? Why fake it, Barclays?
My partner in crime, Jennifer Tescher, who runs the Center for Financial Services Innovation, is leading a bold movement to increase quality in consumer finance. High time! Here's what she has to say:
Given the high level of consumer confusion and distrust, the Center for Financial Services Innovation (CFSI) set out in 2011 to create a higher bar for the financial services industry. With feedback from providers, consumer advocates, policy makers, regulators, and other experts in the financial services marketplace, we created the Compass Principles – a set of guidelines outlining the qualities and features financial institutions should consider, as they create and sell basic financial tools. The Principles are a force for change. They define how the industry can work toward a vision for the future in which financial services are safe and actively contribute to improving people’s lives.
The Principles are comprised of four main guidelines:
- Embrace inclusion by responsibly expanding access;
- Build trust by developing mutually-beneficial products that deliver clear and consistent value;
- Promote success by driving positive consumer behavior through smart design and communication; and
- Create opportunity by providing options for upward mobility.
The Principles aim to inspire a race to the top by encouraging financial services providers to take a proactive role and think creatively about how their products can better serve both their customers and their institutions. The Compass Principles help providers think about how to serve customers in ways that are fair and inclusive. As financial services providers make a “Compass Commitment”—a pledge to proactively and fairly serve their customers and the industry—we will see real examples of products and services that exemplify the Compass Principles. This framework will foster a healthy competition among organizations across the entire landscape to provide safer and more innovative products for their consumers—and we’re looking for those organizations right now. To learn more about the Compass Principles visit www.compassprinciples.com.
We received many nominations for the best innovation serving the underbanked in America. Mostly startups, but also some big companies, including banks. Mostly payments, but also credit, savings and financial capability solutions. Mostly true innovations, but also quite a few doozies. Our judges looked for true innovation, demo-ability, and also product mix (so that not all finalists would be PFM's for, example). The four finalists - Helping Loans, Juntos Finanzas, Sociogramics and TIO Networks - will present on the center stage at CFSI and the American Bankers' Underbanked Financial Services Forum in San Francisco on June 15th in front of the largest group of industry experts ever assembled in one place. This audience - of bankers, alternative financial services companies, payments executives, card networks, advocates, hedge funds, regulators, community development leaders, consultants and investors - will vote for the winner in real time to choose the 2012 most innovative product for the underbanked in America.
Why these finalists? Here are some of my reasons:
Consumers, press and regulators have been beating up on short-term lenders for being predatory, while no one is filling the gap with smart alternatives. We were shocked to see a big foreign bank - Santander - introduce a low-cost, well structured short term loan in the form of an all-online auto equity loan, HelpingLoans. It offers longer terms, multiple payment, no balloons, great transparency on terms and a clean, modern user interface.
We have all marveled at, and then maligned Mint.com and the litany of Personal Financial Management tools that followed in its wake. Juntos Finanzas is incredibly low-tech (SMS manual input and paper), but was designed to actually help unbanked, low-income working Hispanic Americans understand and manage their cash-flows. Call us luddites, but we love what actually works vs what's simply wiz-bang.
With Facebook's IPO looming, the world is obsessed with "social media." Why has no one figured out a way not just to do leadgen with social (my mom can do that!), but to actually use our online social media lives to bring back what the community banker of yore did: really understand his customers? Sociogramics, led by the god-father of online dating, Match.com founder Gary Kremen, does just that.
Walk-in billpay purveyors, TIO Networks, have joined the mobile frenzy with yet another m-wallet. But pay attention to this: the TIO wallet offers something most don't: the hook and the ability to pay almost any bill from your phone. We think other wallets lack a necessity-based use case. Further, the TIO wallet allows payment by cash, prepaid, credit card and bank.
Don't miss the session at CFSI's Underbanked Financial Services Forum in San Francisco. You will have the opportunity to see live demonstrations of these innovators, ask questions via Twitter and vote for the winner via SMS in real time, to decide who deserves to be the most innovative product serving the underbanked in 2012.
We want to shine a spotlight on the most innovative teams serving the underbanked. You could be an app developer in a dorm-room in Beloit, WI or work for one of the largest financial technology companies on earth. If you have built a product or service that works (or will work by June 15th) and addresses the unbanked or underbanked - that is, the American emerging market - submit it to the Core Innovators Challenge at challenge.corevc.com.
At stake is $10,000 but mostly, it's notoriety. Four finalists will be selected to present in prime-time at the only national conference focused on the underbanked, the CFSI Underbanked Financial Services Forum. An audience of 600-700 industry executives (read partners, clients, funders, regulators, and press) will vote for the winner via SMS in real-time. We'll issue press releases, make a fuss, make introductions, and sing your praises.
Last year GoalMine took the big prize. With the other finalists they ran the gamut: from tiny (Flexwage) to huge (FIS), from payments innovators (PayNearMe) to savings (GoalMine), from mobile (FIS) to the interface between cash and digital money (PayNearMe).
Check it out! challenge.corevc.com. No purchase necessary!
Suze Orman, Credit Karma and others are breathing new life into the important effort of helping people see, track and improve their credit score.
My friends at CFSI and at PERC have long been active in trying to expand the dataset used to build ones credit report. The idea was, and remains, that 50-odd-million people in the US have thin files or no files which renders them unscorable, and therefore denies them access to credit or only provides access to the worse priced and structured credit available. Worse, since credit reports may also be used for hiring, insurance underwriting, and rental applications. Then there are another 100-odd-million who have full files, but not a great score. For many this is an accurate reflection of not being a great risk, but for many more the credit bureau data simply don't tell the whole (or the right) story. Our objective is to increase access while keeping risk constant, NOT to increase access at any cost.
In 2010 Experian purchased RentBureau, giving that credit bureau access to millions of rental payers. Months later they made the unprecedented move to include RentBureau into its main credit report, thereby giving people with untraditional trade lines the ability to build good credit. The only problem is that while many lenders use Experian's credit report, very few use their credit score. For practical purposes, until FICO uses a data type in its ubiquitous FICO Score, that data type is not helping you actually "build" credit en masse. Of course there are tons of exceptions where lenders, themselves, use non-traditional data.
I think "credit building" should mean contributing data that is used broadly by large and small lenders for underwriting purposes.
Suze Orman is well aware of this problem - and the opportunity. Despite the mountains of bad press her pretty progressive prepaid card has endured, two of the most interesting aspects relate to credit building (although she is careful not to mention that). The first is a free credit monitoring service, offered by TransUnion and presumably subsidized by Suze. It's equivalent to what you'd pay FreeCreditReport.com $15 per month for. Not a bad deal for $3/mo plus what amounts to a checkless checking account.
Free credit score pioneer, Credit Karma recently announced a free credit monitoring service, as well; also powered by TransUnion. See a trend?
So, now we can track our score for free. But what if it's not great or it's non-existent? How can we build it? Lenders have been reluctant to expand beyond traditional trade lines, largely for wont of homogeneity (magazine subscription data are quite different from your mortgage payment), scale (most alternative data resides with many parties each with smaller data-sets), efficacy (who cares if it exists if it isn't predictive?) and cost (buying a waterfall of data to underwrite a post-pay mobile plan can seriously erode a customer's long term value). Regulators aren't helping, yet. The CFPB announced last week it will start tracking the credit bureaus. I hope this will accrue to incentives for people to apply new forms of data and greater controls on what data are used and an expansion of what data may be used for credit underwriting purposes (currently largely covered under the Fair Credit Reporting Act).
I believe lenders are leaving billions of dollars on the table, and way too many consumers - who are stable, able and willing to repay many forms of debt - are denied access or are effectively subsidizing too many peers who default and therefore paying a lot.