I began to explore new solutions for payday lending in this op-ed in the American Banker. The response (at least based on my Twitter feed) has been outspoken, with many perspectives for and against. I thought I'd use the opportunity to go into further depth on my blog.
Google Self-Governance on Ad Words for Payday Lenders
In theory, online payday loans, bereft of brick-and-mortar costs such as rent, labor, and more limited risk management tools should be less expensive than traditional corner-store payday loan providers. Not so. The cost of getting customers online, primarily through online ads, is huge, in part because there are so many "lead generation" agents and unregulated off-shore or tribal lenders bidding for the same ad words. Ultimately, this makes online loans typically more expensive.
For example, the Pew Trust estimates storefront payday loan costs at $10 per $100 (261% APR) to $20 per $100 (521% APR), depending on state regulations, for a typical 14-day loan. Online payday loans cost significantly more - an average of $25 per $100 online (652% APR). Online loans cost so much because ad words like "payday loan" are extremely expensive, with prices bid up by a mix of lenders and lead generator.
In the big picture, online distribution for good, services, and loans is supposed to bring costs down for consumers through "dis-intermediation." But what we see in some markets (like payday) is a new class of opportunistic "intermediators" getting in the way of customers who are trying to connect directly with lenders. Unfortunately, payday is a commodity market, where there aren't strong brand signals that help customers to determine which offerings are the best. This opens the door for lead generation agents to needlessly make a quick buck "referring" customers, or unregulated lenders to drive up already high costs for everyone.
The average cost per click (CPC) for "payday" on Google AdWords is $6.52. That adds up fast when you realize that only a small percentage of the people who click on your ad probably end up buying it. If one in ten apply, you start $65 in the hole. If it's one in 20, it's $130.
So what can be done to bring down online payday loan costs? The fastest way would be for Google to regulate its own ad word sales: by weeding out unregulated lenders and non-lenders, such as lead-generators, and only selling ad words to fully compliant lenders. Although it would mean fewer ad dollars for Google, prices for low-income Americans trying to access payday loans could come down substantially.
And there's precedent. In 2010, Google agreed to limit pharma adwords to entities vetted by the National Association Boards of Pharmacy “VIPPS” program, along with a set of digital tools to watch for rogue Viagra ads and the like.
What do you say, Google? What was that about doing no harm?
From almost 50 applicants we have selected the four most innovative ideas for serving the Emerging Middle Class to present to the largest expert audience on June 6th at CFSI and Sourcemedia's EMERGE Forum in Core's new home of Los Angeles.
This year includes many firsts: our first bitcoin finalist. Our first small business finalist. Our first international finalist.
Blossom is a faster, better bitcoin wallet for mobile that's making cryptocurrency accessible and reliable to more than wild-eyed libertarian cowboys. Blossom is moving quickly to get non-technical users onto the blockchain bandwagon.
Dealstruck is Prosper for small businesses: an online small business lender that's scaling rapidly to provide cheaper, faster credit for America's job creators. This is a huge market and we're excited to see a great team get it right... so far!
Entrepreneurial Finance Lab (EFL) provides a psychometric test that yields actionable credit risk information for lenders in emerging markets, for customers that don't have credit scores. EFL's test could allow millions of entrepreneurs around the world to become credit-worthy.
Moneyworks offers a holistic debt management package, allowing users to control their spending through a prepaid card and tightly integrated mobile app. The "holistic" part is what's exciting: we see tons of PFMs that don't work because they don't try hard enough to influence users' behavior.
Congratulations to these finalists. On June 6th, they'll duke it out and ~800 attendees of our EMERGE Forum will decide in real-time who wins the big prize and takes home the honor. Thanks to all those who threw their hat in the ring. I should make a special shout-out to Rezzcard's Alex Cooper, who has participated four years in a row and whose walk-in rent payment systems are quite innovative, indeed!
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 (WSJ, New 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!
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 www.corevc.com/challenge.
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.
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?
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).
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.
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.
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).
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.
Who's on it? First Data, FIS, Rev, Cirrus, Green Dot, Western Union, Experian, PayPerks, Google, Square, Achieve, BankingUp, Card.com, 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.
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).
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.
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...
- 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.
- 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?
- 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.
- 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.
- 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?