Building A Better Payday Lending Product

Short-term lending has something of a bad rap in the United States — consumer advocacy groups have long accused them of being predatory debt traps, and both state and federal regulators have spent the last decade writing and rewriting regulations aimed at curtailing what they characterize as the short-term lending industry’s excesses.

OppLoans CEO Jared Kaplan told Lend Academy that it is a reputation that the industry has done a lot of work to bring upon itself by taking advantage of desperate people living in desperate times. He also doesn’t buy the explanations offered by the short-term industry to justify their fees — sure it’s risky business, but Kaplan said that it’s also a convenient foil to justify practices as necessary but aren’t.

Underwriting in the sub-prime segment is more expensive for a business, Kaplan noted. The consumer set one is dealing with in that segment has major red flag issues that likely keep them away from lower-cost, more mainstream credit alternatives. Only seeing three-digit annual percentage rates, or APR, he noted, isn’t sufficient to conclude a firm is being predatory; in fact, Kaplan said that his firm offers subprime installment loans that carry an APR around 140 percent.

What is predatory, he noted, and what the small-dollar, short-term lending industry has become famous for doing: is misleading customers about costs, hiding fees and on the whole constructing the system to generate its profits around a customer’s failure to pay. What makes OppLoans different, he said, is that his team takes time to explain the product to the consumer upfront in great and highly transparent detail. It also doesn’t add in fees and — most importantly — build its business around repeat customers always looking to re-up their loans.

“The product is designed to rehab you and to ultimately graduate you out — if you’re in the product for more than 18 months we failed you,” Kaplan noted.

An Honest Appraisal

According to OppLoans data from earlier this year, 75 percent of U.S. workers live paycheck to paycheck with no cash savings safety net underneath them. What that means in practical terms, Kaplan said, is that a sudden overwhelming financial emergency can happen to just about anyone. It was something he didn’t initially appreciate when he started first entered the company as CEO — but something that rapidly became apparent as he started sitting in on customer calls with the firm’s agents.

The majority of their customers, he noted, weren’t low income or living on the margins of financial life.  They were middle income; they were fully employed; they had bank accounts; and in many regards, they were not a customer who “should be in the market of last resort.”

The challenge for OppLoans, he noted, is designing a product that can profitably help those clients, instead of one bent on extracting maximum value from them.

This meant, first and foremost, taking a different data-driven and discriminating approach to qualifying a customer. Some of what OppLoans offers is familiar to anyone who has been following the digital lending space over the last five years. Using proprietary credit qualifying algorithms, OppLoans offers consumers 12-18 months personal loans for ranging from $500-$5,000. Those funds are expensive relative to credit cards or near-prime digital lenders like LendingClub or Prosper but run at about half the APR associated with payday, title and pawn lenders.

Like most responsible lenders, and what is currently up for debate now as part of the Consumer Financial Protection Bureau’s (CFPB) look into these products, OppLoans screens its customers for the ability to repay — and does sometimes turn potential borrowers away. It also screens customers at the upper end of their applicant pool and advises them when they might be better suited to seeking less expensive funding elsewhere.

“The first thing we do is when someone finds us online, we actually do the diligence search on their behalf so to the extent [if] there’s a better, cheaper product out there, we will show the customer that product and we will say, ‘hey, we’re not the best option for you.’ It’s very akin to the Progressive insurance model,” Kaplan said.

That doesn’t often happen, maybe about 10 percent of the time they end up referring a potential customer to a more appropriate lender. That’s a loss of revenue, but the reality is, Kaplan said, it is business they don’t need or want. Pushing someone to take a more expensive loan than they need to because OppLoans happened to be the first site they landed on is predatory and is the type of practice that has trained people to distrust and dislike short-term lending.

Building Better Solutions

The way to solve those problems, he noted, isn’t to ban bad lenders, however. That might clear the worst practices out — but also comes at harm to consumers with an emergency — and no access to credit. The way to solve those problems is to build better products that create virtuous cycles for consumers instead of vicious ones.

“More than half the country lives paycheck to paycheck, has very few options and certainly very few options that look to rehab and graduate customers out of this product. I actually think there is a robust place for other lenders that don’t look like us. I think you’re seeing lots of interesting things in the online lending space whether that’s through point-of-sale, whether that’s through some of these salary linked models, where you’re able to offer much lower costs of credit.”

There doesn’t need to be one single solution for every consumer but better solutions competing for consumers by building products better customized to their needs. OppLoans, he noted, doesn’t want for customers — the economic realities in the lives of working Americans mean they have more applicants than they can serve, and they don’t see that reality changing soon.

The immediate questions, he noted, is always about how to serve the customer best. Among other things, Kaplan said, that means mixing their artificial intelligence-based systems and product pairing with human-based customer service interactions. This type of model works best, he said, when they use technology to enable human customer service, not to try to replace human customer service.

However, the longer-term question for OppLoans — and what they believe every short-term lender should be asking themselves when they design their products — is how do they send their clients on.