Where is Apple?

Where is Apple?

Fast Company’s cover this month provokes a story about, “the Apple of [name your industry].”  Like any dutiful reader, I’ve been asking the question about my industry: what company delights its customers in the consumer finance industry?  Who is the Apple for the un- and underbanked?  I divide the industry into three big buckets: retail banks, alternative financial services (AFS), and nonprofits-CDFIs (Community Development Financial Institutions, a special federal designation for do-gooder financial institutions).  This video, by Rafi Kam and Dallas Penn, is pretty funny, generally compelling and relatively balanced for what is basically a rant.

I think each of these segments (banks, AFS, nonprofits) face real challenges to being the Apple of the consumer finance world:

Retail banks have scale, but don’t care.  The basic business model of retail banks – earning a spread from making loans with core deposits – pushes them upstream, to compete in the already-saturated waters of big deposit accounts.  Other than overdraft fees, supposedly gone since July 1, banks claim ignorance on how to serve the underbanked.

AFS also have scale, do care, but are inefficient and focused on short-term products.  These are the check cashers, payday lenders, retailers and bodegas of the world.  They actively serve the underbanked customer, reach 100,000s locations, but charge high fees for transactions like remittances and check cashing fees, or short-term credit, like payday and title loans.  Their inefficiencies and legacy costs basically prohibit better rates.  Their customers who wish to take a long term perspective, building credit, saving, and investing, have no real choice.

Nonprofits care, offer low cost and long-term products, but don’t scale.  Then there are the “mission” folks: organizations who are in business to serve the underserved.  These nonprofits, credit unions and community banks – many which enjoy a special protected designation by the US Treasury, CDFI – specifically target low-income communities with a broad range of well-priced products, from checking accounts to business loans and mortgages.  The only trouble is that they don’t scale – at all!  Most only serve 100s of customers; the largest serve 10,000s.  But when 60 million people in the US are un- or underbanked, it will take about 10,000-100,000 CDFIs to serve the need.  There are only 800.

As much as they each decry one another, these segments actually need each other.  The “Apple for consumer finance” will need leadership that can create great financial products which serve both short- and long-term needs, are high-tech and high, and distributed through banks, check cashers, nonprofits and new channels.  Given that the underbanked in the US spend $25 billion in fees and interest, it can be done without subsidy and with enough profit to attract great talent and capital.