Alternative lending - as has been well covered - offers a sort of dual-edged benefit/risk to its potential customer base, especially when those potential customers are subprime borrowers.
The upside is access to funds, and the need for that access is almost completely inarguable. A recent study by Pew Charitable Trusts indicates that the majority of subprime borrowers who seek short-term loans are doing so to cover mandatory expenses.
The downside, from the borrower perspective, is cost. There are a variety of alternative financial services solutions with a variety of funding models and products that put money into borrowers' hands, but, as a general rule, those loans don’t come cheap. Interest rates vary — as do loan terms (which can limit APR’s usefulness as a rate evaluation, too) — but as a rule borrowers tapping diverse lending channels are often facing annual interest rates that can range from 30 percent to the triple-digit rates often ascribed to payday lenders.
And while predators exist, not all of those high costs can be written off to price gougers.
“Every day we see people who are innovating in lending,” Nathan Groff, chief government relations officer for Florida-based Veritec Solutions LLC, told MPD CEO Karen Webster in a conversation earlier this year. “They say, ‘we’re going to Facebook to use their data points, we’re going to fine-tune our risk metrics.’ And that’s great – but at some point, when you strip everything away, the fees have to get somewhat close to the risk the lenders are taking.”
Subprime borrowers pose risk, and that risk has to be accounted for with additional cost — as the financial meltdown and worldwide (and in some places ongoing) economic disaster stands a testament to the reality that one can not simply lend to everyone and hope for the best. The worst can be expected to follow, as it has done in the very recent past.
And while the team at Ascend Consumer Finance accepts that risky borrowers come with increased costs, they reject the idea that “risky borrower” is or should be a long-term designation.
“That is the real differentiator for us at Ascend. All lenders today take a snapshot in time of a borrower's credit profile and then they put them in a product,” Ascend CEO Steve Carlson told PYMNTS in a recent interview. "In our case it is a three-year loan. Regardless of how the borrower’s credit profile changes throughout time, and it does, the rate never changes.”
Ascend’s basic concept is that borrowers' financial behaviors can improve over time - and that their platform can encourage that behavior by rewarding it with interest rate reduction.
“Our first product is based on the premise that we should recognize and reward positive financial behaviors. These are behaviors that improve [the borrower’s] overall financial health and lower the risks to us as a lender, which we like,” Carlson explained.
So a potential customer — a subprime borrower with credit in the 580-660 range — can take out a loan for up to $10,000. Borrowers can opt for a higher fee — 25 percent to 35 percent interest — loan product over three years, or they can opt for a slightly higher ceiling and a chance to halve their rate over time.
“With Ascend what we ask is that the borrower provide us real-time insights into their actual financial behaviors. And that way we can assess and reassess their credit profiles and adjust their interest expenses as appropriate,” Carlson noted. “If you look at auto insurance, you can take a chip, put it in your car and have up to 30 percent reduction on [an] auto insurance rate because the insurance company has a very good reason to be rewarding good driving behavior.
“There is no reason that lending shouldn’t be the same when we can do real-time underwriting evaluation of risk and reward borrowers for positive financial behavior.”
To track “good behavior,” Ascend’s team looks at the following areas:
· Via access to the credit reporting bureaus it monitors if a consumer is reducing their monthly debt obligations and controlling credit card spending.
· Via a read-only access to a customer’s savings account through the Yodlee service Ascend monitors if a customer is adding $50 to emergency savings.
· If a customer has a car, and if they will secure the loan with the car’s title.
“The car can be of any value — it is a signal of serious intent to pledge a high value and high utility object,” Carlson explained.
Ascend made its public debut earlier this year with the announcement of $1.5 million in seed funding of its rate reduction program. The firm got another boost earlier this month with the announcement that online lending marketplace LendingTree has added Ascend Consumer Finance to its network of lenders.
“We're continuing to see innovation in lending that has the potential to massively impact financial services," said Doug Lebda, founder and CEO of LendingTree, in a statement. "We want to arm borrowers with the best options available. We're excited to welcome Ascend to the network and hope to grow our network with even more lenders who leverage data and technology to provide a better customer experience."
Ascend is new to a market that Carlson noted is already crowded - but Carlson thinks his background in both finance and HSBC, as well as tech and Intuit, places Ascend in an ideal position within that market.
“We want to help consumers improve their credit profile, because that is a sound business play for us. But no one ever improved their credit or their financial management skills by simply never borrowing money — that is not realistic. What is realistic now is that we can reward people at the speed they are improving. And that is our goal.”