Inside the Underbanked Industry insights by Arjan Schutte


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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The Credit Map

Following the Payments Map of companies serving the Emerging Middle Class, here's The Credit Map.  A handy dandy guide for seeing how all the pieces fit together and a decent sample of who are the movers and shakers.  These companies were key in generating $71 billion in consumer revenues in 2012 by issuing approximately $300 billion in various shapes and forms of credit, from auto titles to secured credit cards to pawn and the more out there "future earning lenders" and "employer lenders."  I hope it's useful.

Core's Map of Credit

Who's here? LexisNexis, Exeter, Tricolor, Westlake, Wells Fargo, Clarity, L2C, FactorTrust, Zest Finance, Regions Bank, BillFloat, LendKey, Neo Finance, Contigo, FairLoan, Aarons, Clear Creek, NetCredit, Progreso Financiero, EZ Pawn, LendingClub, Pave, La Curacao, LendUp, Think Finance, Cash America and EZ Corp, to name a few (and bump my SEO).



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The Payment Map

Last week, CFSI and Core published the 2012 market sizing report for companies serving the Emerging Middle Class.  $89B across five categories of products during 2012.  In an effort to make the landscape more concrete, our venture associate, Victoria Cheng, helped create several industry maps.  Here's the first one: The Payment Map.  This is an incomplete list of the principal and up-and-coming movers and shakers in payments for the underbanked, or the Emerging Middle Class.

Core's Map of Payments

Who's on it? First Data, FIS, Rev, Cirrus, Green Dot, Western Union, Experian, PayPerks, Google, Square, Achieve, BankingUp,, RushCard, Wipit, Bancomer, iSend, Quippi, Remitly, Ripple Labs, MoneyGram, Unidos, PreCash, TIO Networks, 7 Eleven, Fuze Network, PayNearMe, Ace Cash Express, Certegy, InGo, Mitek, Chase, MetaBank and many others.

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Underbanked Hot? How’s a cool $89billion?

Four years ago I tried to size the underbanked market.  We knew it was lots of people, but weren't sure if they are "underbanked" because they're unbankable. Do they make bank? (Answer: hell yes).  We have since partnered with CFSI, and now with Morgan Stanley, to formalize and serialize this research.

So, the numbers are in for 2012 (it's about time) and here's the upshot (and here's the report):  The underbanked, or "financially underserved" as this paper calls them, spent approximately $89 billion on fees and interest payments last year.  A lion share on cars (and subprime auto loans are the fastest growing credit product, to boot: projected to grow 23% during 2013).  Prepaid cards (both general purpose and payroll) are projected to grow over 20% this year (it was closer to 30% YOY growth last year!).  We expect refund anticipation loans to drop in 2013 after topping the growth chart of "very short term credit products" (<30 day credit products), 10% vs 25%, respectively.  Short term credit products, as a group, yielded more fees/interest payments than all other products combined (almost $50b).

2012 market size

Some surprises of note: Check cashing shrunk during 2012 and we expect it will grow in 2013, despite the fact that federal benefits went mostly electronic this year.  I think it's because an improvement in the economy and higher fees associated with personal checks (or hand-written business checks).  We further anticipate a significant growth reduction in internet payday products, largely resulting from recent DOJ and state AG crack-downs.  Finally, checking accounts are going to grow 4x of last year's growth due to the disappearance of free checking - in turn due to the reduction of overdraft.

Download the report.  Next week, I'll share some industry maps which highlight the who's who in payments, credit and savings and financial capability.

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Five Subprime Auto Finance Predictions for 2018

This is the third installment on why I think subprime auto lending is about to transform radically.  I just returned from an enlightening trip to the Auto Finance Summit in Las Vegas.

Over the past five years, payday lending has evolved from a marketplace dominated by old-school lenders into one that is pioneering lower cost credit from a new breed of technology and data-driven lenders. Just as payday lending evolved to better meet the needs of the underbanked, so will auto lending change to meet the needs of non-prime customers.  New technology, new business models and new regulation represent an enormous opportunity for current auto lenders and entrepreneurial thinkers to create a more efficient and more transparent marketplace. Here's how I place my bets:  In five years...

  1. New risk scoring technologies will cut the cost of the highest subprime loan rates by 50%.  The impacts of big data, neural networks and machine learning are about to change the rules in auto finance.  Just consider what Yodlee could do for lenders (which it is starting to, perhaps unwittingly, in consumer finance), or how easy access to payroll data, through companies like FairLoan, could impact the economics for both lender and borrower.
  2. Wal-Mart will be the nation’s biggest auto financier.  Almost all loans are made through auto dealers.  New types of dealers are going to pop up, as we have seen in so many other financial services.  Companies like Wal-Mart, with Costco and Sears close on its heels, are poised to challenge the traditional distribution models for auto, and bring the scale and mandate to do so at "everyday low prices."  Did you know Wal-Mart is the nation's largest check-casher?
  3. Improved loan servicing will reduce repos by 80%.  Customer engagement through social media will be the least of it, but important.  Cars will become like utilities that can be shut off if payments are too late, and without remediation plan.  Ongoing cash-flow analysis and employment data will give lenders real-time information on job loss, and the ability to develop a new payment plan before it's too late.
  4. Collaborative consumption will influence loan terms for 10% of loans. We don't need to wait for the automomous Google car for the impacts the "shared economy" to reach auto finance.  Uber, Lyft, Side-Car and others already provide us better means to share this major purchase which spends 90% of its life dormant, parked.  We're only a deal away from lenders tying themselves into the payments platforms of Braintree and the like that give customers greater convenience and transparency and decrease lender risk.
  5. Mobile phones will inform a majority of auto purchasing behavior.  Consider we consult our mobile phone on 80% of purchases today, and that over 10% of BHPH customers are prime and super-prime.  Like in almost all other purchases, the smartphone will mitigate against information asymmetries in this sector as well.  TrueCar gives real-world visibility to new-car prices. Dealers have access to Black Book (the insiders version of Kelly Blue Book) for used-car pricing - why wouldn't consumers?


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Auto Lending is the New Payday Lending – and That’s a Good Thing

In my last post, I made the case that the financial product no one talks about - auto finance - is actually the single largest spend category in financial services for the un- and underbanked. (Read it)

Today’s subprime customers can pay as much as 10 times more to get a car loan, with Buy Here Pay Here lenders charging rates as high as 30% with no underwriting. This industry is not just large and growing, but it's also ripe for disruption.  In fact, I believe that the next five years will transform auto finance in much the same way that the last five years have transformed payday lending.

Over the last half-decade, payday lending has evolved from a marketplace dominated by legacy, largely brick and mortar payday shops into one that is pioneering lower cost and better structured credit from a new breed of technology and data-driven alternative lenders.

Five years ago, payday was largely the same as it was 20 years ago.  Online payday options at the time looked a lot like their traditional counterparts, neon lights and all.  The high fixed costs from physical locations were simply replaced by high variable cost from lead generation.  And high loss rates both on- and off-line kept costs high. From a consumer perspective, a combination of bad habits, financial desperation and information asymmetry kept people coming back to payday.

While in many ways that consumer premise remains true today, payday itself has evolved to offer many alternatives, new players and significant advances.  Five years ago, there was no LendUp, or ZestFinance, or BillFloat.  Players like Progreso Financiero and Think were still in relative nascency.  While many can (and do) take issue with these players and others, it is undeniable that they represent a vanguard of new and improved solutions.

What's behind these improvements? Better disclosures have led to better informed buying decisions; use of big-data and better risk scores have resulted in lower losses and better terms; new channels like merchants and mobile phones have both forced and allowed for better economics; and great design has created long term brand loyalty.

Soon, we will see similar technology, data and mobile advancements drive a parallel evolution in the subprime auto industry. While there are very few startups in Silicon Valley today focused on non-prime auto finance (NeoLoan is an exception), we do see compelling startups in the broader auto space (for example: TrueCAR, CoverHound, Tesla, Uber, Lyft and Side-car) and prime-targeting financial institutions like Chase are beginning to explore new finance methods.  This, together with the size and growth of subprime auto finance, paves the way for innovation moving down-market.

For my next post, I've got some smok'n auto finance predictions that we'll put our money on.  Wait for it!


Subprime Auto Finance: Hidden Giant

No one who reads my blog will be surprised to learn that 1 in 4 Americans are underbanked.  But I do see quite a few raised digital eyebrows when I point out that these 80 million consumers spend almost $80 billion on fees and interest for the most basic of financial services every year.  While most would assume that these enormous fees are generated primarily by check cashers and payday lenders, the actual amount is quite small at $1.7B and $4.8B, respectively. In fact, the lion's share of these fees derive from subprime auto lending.

Emerging Middle Class Americans paid $27 billion in interest and finance charges for their cars in 2011.  $27 billion!  That's over one-third of all financial services expenses incurred by those with imperfect credit or those that rely on alternative financial services. Back of the napkin math works out to just over $300 per person per year. As a point of reference, I pay only one-fifth of that amount.

Is this population, as a whole, really five times more risky than me? While some individuals may be, I would argue that most are not. And I believe this will have dire repercussions for many of today's subprime auto lenders.

Over the course of this week, I'm going to write a three-part series on this hidden but giant industry within consumer finance. This first post makes the obvious point that it's large and growing. In the next, I'll argue that subprime auto lending is the new payday lending - in a good way.  And finally, I will make some predictions about how the industry will change in the next five years.

Screen Shot 2013-09-26 at 4.47.12 PMBut first, chew on this: auto finance, in its entirety, represents a $55 billion spend category (Experian, 2012).  Sub-prime is about half of that and it's growing fast. The industry is quite profitable: 32% net margins overall, and as high as 40% for "buy here pay here" lenders. After a dip in the recession, consumer demand is up. Big players like JP Morgan are showing renewed interest in the category. And the secondary market is interested.
Screen Shot 2013-09-26 at 4.52.56 PMAll of this – a large, growing but highly fragmented market with a poorly designed consumer product – leads me to believe that the technology transformation evidenced in the payday industry over the past five years will likewise transform the subprime auto market, which today operates basically as it did 20 years ago.  I'll make the case why in my next post.But it's curious to note that this giant industry is made up only of small players.  No one company commands greater than 6% of the total industry (Wells Fargo leads, Ally - formerly GMAC - is close second).  Credit unions, who have long staked their raison d'etre on their great auto finance terms, are 21% of the market. But that's across 7,000 credit unions.  Not even the largest credit union has more than 1% of the total market.  Can you say super fragmented?

All of this – a large, growing but highly fragmented market with a poorly designed consumer product – leads me to believe that the technology transformation evidenced in the payday industry over the past five years will likewise transform the subprime auto market, which today operates basically as it did 20 years ago.  I'll make the case why in my next post.