Payday lenders, who sometimes charge more than 400 percent in annual interest, are a big fat juicy target for a new breed of mission-driven financial institutions.
Short-term payday loans and other “alternative” financial services, such as check-cashing and money transfers, cater to the one-quarter of U.S. households that don’t have bank accounts. The 68 million “unbanked” adults are struggling families, young people, immigrants, the working poor and unemployed people affected by the economic downturn who are deemed too risky for by traditional financial services providers.
Such consumers pay more for substandard services. How much do they pay? An estimated $89 billion a year in fees and interest. What’s more, those transactions aren’t typically reported to credit agencies, so customers don’t build the credit ratings they need for mortgages or auto loans.
“There’s a big business opportunity in a big need area,” says Arjan Schütte, managing director of Core Innovation Capital, one of a growing number of impact funds investing in “financial inclusion” for the underbanked. “Technology can create efficiencies that allow for solutions to serving low and middle income consumers.”
Our improved scoring algorithms have allowed us to increase approval rates and accuracy while serving more consumers and demand for larger loan amounts.Pat Kirscht, Progreso's chief risk officer
Technology, combined with a culture of financial responsibility, has helped Progreso Financierogrow in eight years from a single kiosk in a Super Mercado Mexico store in San Jose, Calif., to 117 retail outlets in California, Texas and Illinois. Progreso has provided more than $1 billion in small loans. Progreso offers small installment loans of between $500 and $4,000, repayable over six months to two years.
CEO Raul Vazquez sees huge growth potential. “We’ve made great progress, but we’re still serving less than two percent of the underserved Hispanic market,” says Vazquez, who came from Walmart where he led global e-commerce.
Schütte was Progreso’s earliest institutional investor, backing its mission of offering low-income Hispanics access to fair financial products and a path to building credit. The company has since attracted more than $300 million in debt and equity financing, including $46.6 million last year in a new round of venture financing. It’s largest shareholder is the Walton family’s venture firm, Madrone Capital. Other VC investors include Greylock Partners and Institutional Venture Partners.
That’s impressive given that Progreso makes unsecured loans and more than half of its customers have no or thin credit files. To determine which applicants should be approved, Progreso devised its own credit-scoring model. The model analyzes thousands of unique borrower attributes to quickly approve or decline loan applications. Decisions are make quickly, a key selling point for customers with urgent financial needs. Nearly half the applicants get approved, as do 80 percent of return customers. Loss rates are in the single digits, the company says.
“The use of big data has helped Progreso significantly expand its credit offerings for consumers with thin or no credit profiles,” said Pat Kirscht, Progreso’s chief risk officer. “Our improved scoring algorithms have allowed us to increase approval rates and accuracy while serving more consumers and demand for larger loan amounts.”
The company’s hands-on customer service approach is intended to build responsibility as well as repayment. New borrowers have their picture taken with their loan officer and receive reminder phone calls from the loan team before payments are due.
Core is among a growing number of impact funds that are targeting financial inclusion. Accion Venture Lab, based in Washington, D.C., typically invests between $100,000 and $500,000 in companies in both the U.S. and developing countries. Village Capital has launched a “fintech” startup accelerator with the top two firms each receiving $50,000 investments.
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Schütte says having a mission-driven investor on board has helped Progreso stay on mission, at the same time providing cover from consumer advocates who have criticized Progreso for its 36 percent interest rates. That’s the limit set by the Federal Deposit Insurance Corporation, and is far lower than its customers’ alternative options.
After some significant bumps, Progreso has recently achieved positive cash flow. The company plans to have more than 130 retail outlets by the end of this year and is investing heavily in mobile and online services.
“Payday lenders are screwed up,” Schütte says. “Here’s a team that can outfox them.”
Progreso Financiero charges 36 percent interest on its small loans, higher than traditional banks, but lower than alternatives such as payday lenders.
Progreso Financiero helps “unbanked” customers establish a credit rating with an innovative credit-scoring methodology. One-quarter of borrowers who have no credit score at all can achieve a VantageScore of 697 after three successful small loans.
One of a series of impact profiles produced in conjunction with the Case Foundation’s new publication, “A Short Guide to Impact Investing.”