There’s an ever-present risk that’s familiar for anyone who invests in startups solving complicated problems in low-income communities: it’s possible for a business to become part of the problem, rather than solving it.
It can be a thin line between enabling access to hard-to-deliver or higher-risk services, and exploitative pricing, as evident by Google’s confusing ban of payday lender ads and simultaneous investment in a payday lender. Even well-intentioned companies can end up hurting their customers more than they help them, in search of a sustainable business model.
Last week payday lending alternative Fig Loans closed a $2.6 million seed round, following earlier funding from Village Capital, Access Ventures and others. Fig’s strategy for growth - working with nonprofits and community organizations to make sure they meet customer needs - sets them apart. Their model is also a good sign that they are helping solve the problem of predatory lending, rather than becoming part of it.
Cash lenders serve a real need. A survey last year found that more than half of American families don’t have enough cash to cover a $500 emergency expense. Cash advance companies - also known as payday lenders - are known to charge exorbitant interest rates (often above 400%) that can put their customers in an even deeper bind. Their defense is that this is what’s required to justify serving this market: the borrowers of these services are higher-risk, they can be costly customers to acquire, and default rates are higher. Their pricing needs to reflect this set of risks if they’re going to stay in business.
Fig Loans founders Jeff Zhou and John Li decided to offer an alternative using the predictive analytics approach they learned at institutions like Bridgewater and The Boston Consulting Group. The company offers small-dollar bridge loans to borrowers who would otherwise resort to payday, title or pawn shop loans. The loans build credit, and Fig’s mission is to help consumers transition into mainstream credit products. They charge enough to have a sustainable business model, but price their services at a significant discount to payday lenders.
Other startups have tried this. But what’s most interesting about Fig—and what made them an appealing company for our Fintech US 2016 program—was how they’ve gone about it: by partnering with United Way, Catholic Charities, and other non-profit community organizations to build trust within the community.
The path to Fig’s community partnerships was not easy. As Jeff and John recall, their first strategy of doing market research by standing outside payday lending shops with a clipboard did not have much success. So they decided to cold-call nonprofits and ask to speak with their financial coaches - the case workers who advise people who are having trouble paying their bills.
As John said, “We wanted to find out, if payday lenders are so bad, why do people keep going back?”
What they found was that even some of the financial coaches themselves were in debt to payday lending companies.
Now they go to meetings once a month. They work with the United Way, Catholic Charities and Memorial Assistance Ministries. They’re part of United Way THRIVE in Houston, which is a team led by United Way of Greater Houston to provide financial assistance to working Texans. Their goal is to help people access all of the non-profit options available to those who have bad credit - and to help refer them to traditional credit partners like local credit unions or Capital One.
This sets them apart from other cash advance startups, and the high APRs that can trap consumers ballooning debt.
In the same way that the press is considered the “fourth estate” for government, reputable nonprofits can be an “estate” that serves as a check for startups. But more than a check, the sector can be an ally to signal community-aligned products.
“Some startups go with ‘move fast and break things’ or ‘apologize rather than ask permission’,” Jeff says. “Our approach is more community driven. Our value is that we want to be a community player in markets where we’re present. That’s how we build trust.”
This process will likely take longer, but yield better results in the long term. And it’s important when dealing with the financial livelihoods of people who are one financial shock away from disaster.
For investors who want to make an impact in a complicated industry like alternative lending and don’t want to contribute even more to the problem, these endorsements can be useful. They can be a way to cut through the noise and find companies doing it right.