A collection of reactions from Day Two of CFSI's Emerge Conference at the Grand Hyatt in Beverly Hills:
a) People seem to believe that products for the underbanked are poised to take a sudden leap in the right direction in the very
near future. Most of that seems to turn on the assumption that the benefits of technology will couple with opportunities created by big data to create more consumer-friendly services. Dan Schulman is one of the people championing the idea that the future is going to be better because of data. He commented that his company's Serve product is "not rooted in plastic, it is rooted in software."
I agree with the idea that big data is going to change things in all kinds of ways. What I don't see is evidence of why it can be said that this is the time, as opposed to two or three years from now. I also think this belies the fact that change has been pretty constant and has been taking place at a very rapid pace for some time now. I feel as if there have been "new, new things" for a long time. Social was new not too long ago.
Moreover, parts of the undebanked strata are becoming downright mature. Witness the prepaid card: prices have gone down, functionality has gone up, and most of the consumer protection issues are settled.
b) Big data is already making a significant impact in the underwriting of sub-prime auto loans. Because car loans are a large purchase and because they are paid back over a number of years, car lenders are very willing to pay for external sources of data to inform their underwriting. They have to look to less well-known data providers because traditional FICO scores are less predictive at the bottom end of the credit scale.
They also work from their own insights. One lender says he likes to see the monthly income and spend of his customers. "If they shop at McDonald's instead of going to the grocery store," said a lender, "then that is not a good sign to us."
Even with all of that extra data, the average BHPH loan still bears interest of 22 percent on a three-year term. Will big data benefit consumers and businesses equally? If lenders can underwrite in a way that reduces risk, will the coincident reduction in loss rates mean that the customers who do qualify see lower rates? I hope that the benefits are shared by both transactors.
c) Small-dollar credit has fallen out of the spotlight. While there was a small-dollar credit session, the conversation is focused more on regulatory issues. This isn't a place where alternative lenders are standing up to show off new ways to make loans. One place that can be seen is with the Core Innovation Challenge. Unlike in recent years, there is no small-dollar credit provider on the list of finalists. There is no ZestCash or LendUp this year.
d) Lisa Servon was very critical of the way that banks are currently serving the underbanked household. The design of a typical check cashing store, where signs post prices above teller windows, is preferable to the normal bank branch. She praised the pricing of check cashing for its transparency. I can see her point. Really, check cashing doesn't attract a lot of criticism from advocates because it doesn't deserve a lot of criticism from advocates. But at dinner, I heard from some people who thought she was reaching to post a logo of a national payday lender on a presentation slide.
At one point, she referenced the story of a woman who paid a two dollar fee to cash a ten dollar check. The fee was worth it to her, Servon said, because her need for eight dollars was so great. She was being rational, albeit in a way that contradicts what a middle-class person might believe. Yet I have push back. Being chosen out of desperation does not make something a good product.
Bruce Murphy of KeyBank courageously responded to Servon by saying (paraphrased) that banks are never going to be able to serve everyone.
e) When asked to say what hurdle he saw in getting a successful Buy Here Pay Here business to scale, Todd Rice of TriColor commented that it is hard to find good talent. It turns out that a lot of smart folks hesistate before signing on to sell used cars. Ha! That made me laugh. Some things never change, I guess.