For a lot of Americans, mainstream financial services represent a menu full of goods that aren’t desirable, aren’t affordable or just aren’t applicable. And this isn’t through any fault of their own — the marketplace has changed. Consumers who used to work 9-5 jobs are now gig economy workers; consumers who used to get credit cards in college are now graduating without ever having used mainstream credit.
The traditional consumer, who banking systems are built for, is no longer the average consumer in many regards, according to LendUp CEO and Co-Founder Sasha Orloff.
“This is a customer group we call the emerging middle class — over 50 percent of the population reports volatile income. This is a new customer segment that we used to think of as working class, but it’s now creeping up the socio-economic ladder. This is a consumer who works and lives on their phone, and many have moved from drawing salaries from a career to an economy where they are paid for doing tasks.”
The problem, he told Karen Webster in a recent interview, at its simplest level, is that the traditional banking system just isn’t working as well as it could for a very large swath of the population.
So building an innovative solution — one that could work with traditional banks or on its own — became LendUp’s goal. And it appears to be gaining traction. The firm has underwritten over $1 billion in loans and more than 3.3 million loans.
“We created a social impact team so we can measure what our impact is on our customers’ financial health. We’ve saved $55 million for our consumers in fees and interest. We’ve also been able to improve credit scores more for our consumers than our competitors — and also more than [if they were] just not borrowing at all,” Orloff explained.
It’s been a long and challenging road to build something usable enough for an emerging class of consumers to appreciate, Orloff told Webster, in an environment that is not always friendly to his vision. “There is a stigma around underbanked product and unbanked consumers — and an idea that the mainstream banking system is the only legit solution.”
That’s created regulatory pressures that have acted against businesses like LendUp — not to mention pressure on innovators to steer clear of the space.
But the space needs innovation — even simple tweaks — to make it work for the ever-growing slice of the populace that needs it.
Where Innovators Can Raise Their Game
LendUp’s first product was an emergency loan product that addressed a core value proposition: immediacy.
“It seemed pretty obvious to us that when someone has a financial emergency, they need money now. We wanted to offer a solution that could match our instant underwriting with instant processing so that we could put that money in a customer’s bank account in three to five minutes.”
But the business isn’t only about loaning money, Orloff noted — it is about helping customers build their financial health. Part of that means “graduating” their customers through their products — from a $250 emergency loan to a $1,000 installment loan to a low-cap ($300-$500) credit card that can see its spending cap raised along with positive consumer behavior over time.
“Our mission as a company is provide anyone a path to better financial health. And we’re meeting the needs of borrowers who’ve been traditionally shut out. The problem is that the banking system is limited in making products for a wide range of customers who really need them. Because of our house-built technology, we have a variety of factors that determine credit worthiness, beyond credit scores. We also have the ability to promote education right in the experience because our technology allows us to build the product and the education experience contiguously. For example, when a customer has a card with us, their credit limit doubles after six on-time payments — but they also have to take our credit management class.”
And, Orloff noted, banks aren’t the enemy or even really the competition, since as a group, mainstream financial institutions are largely taking a pass on these consumers — mostly because they don’t have the technology capabilities, or they’ve determined they can’t do so in a profitable way that doesn’t run the risk of angering regulators.
Which is why LendUp works with banks — and aspires to do so more in the future.
“We would love to say we can help everyone as a venture-backed firm, but there is a path to graduate people into the banking system, often because we are partnering with the banking system. For banks to be able to work with this customer, it is really about using new product design, different analytics and data sets. We can offer a lot of insight and help there.”
Helping underserved consumers is a challenge, Orloff noted, because it is easy to get the wrong idea about those who are not part of the mainstream banking system. People view consumers with subprime credit scores, for example, as not being very smart or sophisticated because some of them get in over their head with lenders that are leveraging some very bad practices.
Notably, no one holds middle-class consumers to a similar standard.
“Our borrowers are very savvy and know an awful lot of about money. It’s impressive. But there are bad practices and actors out there who take advantage of them, for sure.” Similarly, he noted, regulatory proposals that seem centered on just banning small-dollar, short-term lending are misguided. The intention is doubtlessly good, he noted, but the consequences have a way of being unpredictable.
“I would say don’t rush it. We are creating federal law for an industry that doesn’t have them now, and it is hard to undo something once it is done. Dodd-Frank has had the opposite effect than was intended in a lot of ways — many community banks are struggling, and big banks are bigger than ever. A bank closes every day in the U.S., according to the FDIC, and those banks are mostly closing in the suburbs and rural areas — in other words, in areas where people need access to financial services that are safe, fast and reasonably priced.”
The rules for regulators, Orloff said, should be the same as the rules for everyone else in the industry: Talk to the customer and find what they want, need and are likely to use.
Because customers, even those underserved today, can be put on a path of financial health if given the right tools. But if no one has the toolbox to offer them, it probably won’t work.
LendUp is about building and expanding that toolbox — and 2016 was a good year for enhancements. But according to its CEO, 2017 is looking even better. We look forward to what’s next.