Face to Face Lending
Nearly 40% of Americans are either totally excluded from mainstream banks or rely on a fringe financial institution for some financial service: cashing checks, short term credit, etc. They currently pay exorbitant prices for these services, compared with the mainstream. I believe there is a profitable way to a) provide access to short term credit, and b) build credit history, while c) developing the financial literacy and habits necessary for successful participation in the world of mainstream banks and credit.
I want to build a small-dollar unsecured lending company on the direct sales distribution model. “Avon” for credit. The business would build on the relationships and communities that already tie people together. It would also create incentives for to build credit worthiness and leverage the efficiency of mobile payment systems. The dramatic shift in the banking landscape has resulted in fringe lenders across the country. That industry can only be met by a business model that is compelling enough to be replicated. My hope is to develop a social enterprise lending model that can compete with fringe lenders and build its borrowers toward inclusion in mainstream financial markets.
This business would recruit and train credit promoters from the communities most marginalized by traditional financial institutions: urban areas, communities of color, rural communities, and poor communities in general. These are all communities currently besieged by payday lenders, title lenders, and pawn shops. Credit promoters will be the point person to provide credit and financial skill training for their social networks. Credit promoters will slowly build their ability to lend greater amounts of money through successfully identifying borrowers that are able to repay their loans. Borrowers will slowly build their ability to borrower greater amounts at better terms by paying back previous amounts on time. The business model should provide the ability for a hard working and efficient credit promoter to earn the equivalent of a full-time living wage.
In the financial mainstream, borrowers don’t wait for an emergency before seeking out credit. They carry cards in their pocket that guarantee access credit in an instant. Credit promoters will be trained in small-scale credit underwriting so as to write a "line of credit" for individuals in their social networks. Credit promoters are in the best position to identify non traditional indicators of creditworthiness and assess a person's ability to repay. Underwriting credit before an emergency will let borrowers access cash quickly when the need eventually comes up.
Small-Dollar Loan Cycles and Credit Agency reporting
Credit promoters will teach borrowers how to build credit and access better credit terms through repeat small-dollar lending. A borrower that borrows and then repays $10, then $30, then $50, then $100 will not only be more likely to eventually repay greater amounts, but also see the connection between their repayment history and accessing better credit terms. Early loan cycles will carry relatively high APR interest, with the goal of completing enough cycles that the borrower can access credit on terms similar to that available in the mainstream. Reporting these small-dollar loan cycles to the national reporting agencies will serve to build the mainstream credit profiles of the borrowers. Reporting the borrowing and repayment activity will be key to eventual access to mainstream financial markets. Default by borrowers, especially early in the loan cycling, will also be reported to the credit agencies and preclude a borrower from accessing credit for some time period.
The business will use mobile payment systems to quickly make loans, receive payments, and verify payment histories. A platform similar to Venmo or others that link to bank accounts could work. Borrowers without bank accounts could be issued rechargeable cash cards such as GreenDot cards. A mobile app could also help borrowers track spending, budget, and give prompts that encourage sound decision making. A credit promoter app could help manage the credit underwriting and lending portfolio. A robust technology infrastructure is not critical to testing the business, but will be essential to its ability to eventually scale.
The ability to recruit and train credit promoters who can then find good borrowers will be critical to the business. Everything else is built on the foundation of credit promoters. This business could pilot with a few thousand dollars and a handful of credit promoters. Over the course of 6 months the business should be able to see credit underwritten for potential borrowers, several loan cycles with borrowers, gradual increase in loan size for borrowers and loan portfolio size for promoters, and a consistent repayment history. The business would operate at a loss during the pilot in order to adequately incentivize promoters to recruit and lend. This time would also be critical to tailor the loan products and terms to the target borrower’s needs while ensuring the business can eventually be profitable.
Crystal is a single mother of 2 elementary aged kids. She grew up in Athens, completed a couple of years at the local community college but never finished her degree. She plans to go back and finish once she can find the time and money, but for now she works 30 hours per week at a local store making minimum wage. She has taken a title loan out against her car in the past to pay for repairs - if she can't drive then she can't make it to work. She has never had a bank account. Crystal is sharp and outspoken, lives in the same community where she grows up.
Crystal became a Credit Promotor because she knows lots of people who have trouble accessing credit in emergencies and likes the idea that she can help people and make some extra money in the process. After training, Crystal has a pool of $500 from Face to Face Lending to make in loans. Her first loan is to a friend she has known since childhood, Tina, who is in a life situation similar to Crystal's. Tina has a low credit score, but works a minimum wage job and is part of a solid working class family. Given what Crystal knows of Tina and her family, and based on training, Crystal extends a $150 line of credit to Tina, so whenever she needs money Tina can immediately get $150 from Crystal. Even though she has no pressing needs, Tina takes $20 from Crystal and pays it back within a week. Then takes $40 and pays it back. Each of these transactions are recorded and reported to credit agencies.
Crystal helps Tina keep an eye on her credit score and they see it begin to slowly increase. Tina's line of credit grows from $150 to $300 and then $500 - each extension of the credit limit comes with better terms because Tina is building a repayment history. Tina also knows that eventually she may qualify for several thousand dollars in credit that is free for the first month, and then available at an interest rate comparable to mainstream credit cards. She has learned that being in debt is costly and intends to stay out, but appreciates the security of having the credit available should she need it. Crystal has also helped Tina make and stick to a budget and start a small savings account.
Tina is one in Crystal's lending portfolio. Her portfolio limit started at $500, but over the past 6 months she has found solid members of her community for whom she has underwritten lines of credit, and completed several successful loan cycles. Her portfolio limit has gradually increased to $2000. In her spare time she continues to organize "Money Parties" for friends and people she knows her community where she teaches about credit, credit scores, budgeting and saving. She also begins the process of underwriting lines of credit for those people she knows. She is compensated for the work she does and so far is making a few hundred dollars a month. She sees that eventually she may be able to have a portfolio limit of $20,000 or even more and then may be able to make more money from lending than from her other job. She likes being someone that people trust with their money problems and likes being a source of stability for her community.
Questions that need some thought to move forward:
- What are the "tasks" that we need to train Credit Promotors to do? Which tasks have compensation tied to them? What kind of compensation?
- Underwrite lines of credit - flat fee
- Financial education, budgets etc - no compensation
- Issuing credit - variable compensation based on interest paid
- Should we start with some subset of potential borrowers to ?
- Borrowers with jobs or wage earners in the home?
- I think the answer is yes, maybe only start with borrowers with a steady source of income. This would ease some of the bumps in initial launch as long as we maintain the vision to eventually provide credit more broadly. Also if we can't provide credit effectively to this class of borrower then we surely can't do it for those with less steady income.
- Borrowers with significant assets, i.e. car or home?
- Borrowers with jobs or wage earners in the home?
- What training should the first Credit Promotors have?
- Identify creditworthiness
- Who has a job?
- Would they lend to this person
- What other outstanding formal and informal obligations does this borrower have
- What is the borrowers current credit score if any
- What is an amount they can take and pay back with relative ease?
- Identify creditworthiness
UPDATED June 3
I am still in search of an initial credit promotor partner to bring in to the project from my local Athens community. I have talked the idea through with several people and the consensus seems to be:
1 - Start with a subset of borrowers, i.e. only folks with jobs.
2 - Don't assume we know how to train credit promotors on how to find/underwrite borrowers.
A. All we would be doing is some replication of "established" underwriting and the whole point is that these borrowers are not "acceptable" by established underwriting.
B. We trust the promotors to develop their own means of 'underwriting'. Maybe we establish a basic boundaries and then let the promotors do their job of just finding good borrowers.
3 - Perhaps the best (only?) way to do this is just take $5000 and entrust $1000 to each of 5 promotors. Let them lend it out (with rough framework) to no fewer than 5 people. Follow along as they discuss, lend, and follow up with borrowers. Regroup periodically and capture the lessons.