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)


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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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!


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?


Susu Sudio: Shared Savings

Finding new ways to spend money you do and don't have makes up the two largest segments in consumer finance: payments and credit, respectively.  Finding new ways to save money - for a large purchase, a rainy day - is a barren landscape.  Of course, saving is like flossing your teeth: you know you should, but ignoring it won't kill you.

Ironically, it can and will, as we see non-savers on the cusp of financial ruin with frequency; more likely to file for bankruptcy; more likely to default on a mortgage.  And the macro-economic consequences are big, too: Chinese savers own trillions of US debt; excess credit reliance causes things like recessions.  American's savings rate are amongst the lowest of all developed countries.

So, oddly the most innovative and active import of ideas on how to save are both ancient and originate from the developing world.  And a pool of companies are introducing their spin on the idea of pooled savings as a way to effectively change behavior and provide immediate benefits of stuffing a little dough away.

The idea is that if you band with a group of people you know and trust and each agrees to contribute a fixed amount every week for a number of weeks equal to the size of the group, every person can have their turn to take the collective pool.  Let's say 5 people agree to contribute $100 per week for 5 weeks.  The first week I could get access to $500 - to buy that iPad I wanted.  The next week, the next person gets $500, etc.

At least six companies are all building out this basic idea: Yattos,, ClearStreet, eMoneyPool, OurSusu, and PeoplePoweredSavings.  Some fairly straight forward - and stalling.  Some with cool bells and whistles, like offering a premium to group members to take their bout towards the end (and charging those who want early access - but still less than interest on a prime credit card).  Some integrate into social networks, like Facebook, partially or completely.

Using the internet and bank connectivity to leverage and old, and sound, idea makes perfect sense - on paper.  Using modern social media to extend the ancient power of guilt and pride is very cool - in theory.  Our nanny, from Trinidad, religiously participates in a "susu" - as they are called in the Caribbean.  Would she do it online? Nope.  Should "westerners" learn and benefit from this idea - absolutely.  But will we? I doubt it.

If any of these sites will make it to any scale, they will need to be great marketers.  They'll need to start with net-savvy, but older immigrants, for whom this model was native, but who aren't rebelling against the "old world ways."  They'll need to appeal to introduce a complex idea to well intended, but disinterested group of Westerners to make it big enough to matter.  I sure hope someone does: I need it personally, as does this country.  If I were to bet on one of these, it would be, despite the fact that I set up a group, invited people and failed to get any interest, including people close to the company.  So I'm left to save on my own, the old-fashioned way, and pine for Susu's not just being a silly lyric in a Phil Collins song.

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The Underbanked Mega Challenge is here!

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

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  We've had finalists as large as FIS, or as small as the one-man Juntos Finanzas, who won by a land-slide).

urlThe 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:



Underbanked Wish List

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?


Let’s Halve the $78b Spent by the Underbanked on Fees and Split the Difference

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.


I’ve seen the future, and it’s Prepaid

About a year ago, a friend set up a call for me with Suze Orman, while she was still planning her Approved Card.  She was somewhat weirdly obsessed with the vision of a digital cash economy.  No paper. No credit.  Also, not realistic.

General purpose prepaid has basically gotten a bum rap.  The press still thinks it's all Kardashian cards, while a big majority offer simple, clear pricing and would cost significantly less than either checking or check-cashing, assuming normal use cases.  Suze was no exception.

Then Green Dot didn't do its industry any favors by scaring its investors to drop the company's value 60%.  Netspend is doing better, but is hardly a Wall-Street darling.  So the category appears out of favor.

I'm super bullish on prepaid and believe it's going to become much bigger than most people seem to think.  Here's why:

Checking and check cashing substitute.  As reiterated in the Journal today, "Free" checking is only for those who can keep a substantial balance.  I believe prepaid accounts will remain an attractive alternative to those who are fed up with banks and those seeking better alternatives to check-cashing.  Despite all the above, prepaid continues to grow at breakneck speeds in the "underbanked" demographic (and includes many fully banked customers).

Third party banking.  There are many big companies who enjoy substantial payments relationships with consumers.  Just like Wal-Mart was really seeking a banking license to decrease their interchange fee losses, many others can and will own their payments relationship with their customers, and leverage their trusted brand.  A AAA account or Apple account or New York Life account are not far away, I believe - and prepaid makes this possible.  My friends at Rev launched an innovative boarding pass/debit card for Air New Zealand.  We see prepaid companies looking to white label a program for third parties, and I think that makes a lot of sense.

Mobile. This awesome mobile wallet you've been reading about? Chances are it will be based on prepaid.  There may or may not be a card involved, but prepaid is not a physical card as much as it is a technical and regulatory variation on how traditional bank accounts are managed.  Note the Google Wallet team recently bought prepaid processor TxVia to juice up its efforts.

Real-time fund transfer. Ever wondered why in 2012 we still have to wait 3-5 days for checks to clear? Or worse, to pay a bill electronically? Or even worse, transfer funds to and from yourself between banks electronically?  The culprit, among other things, is a creature called ACH!  How do we make payments real-time? Prepaid.

 The underbanked just scratch the surface of prepaid potential.