Offering Options: Niche lending and fintech cross paths in Silicon Slopes
Utah provides fertile soil for financial innovation. As technology infiltrates finance, a new breed of institution, known as fintech, grows out of the union. But innovation in lending is more than a technological phenomenon. It also results from capitalism’s signature dynamic: that of supply and demand. As it turns out, conventional finance leaves a lot of demand unfulfilled. So a ready market awaits the availability of alternative lending models.
People borrow money for a variety of reasons. Starting a business. Buying a new car. Replacing a refrigerator. Common to all borrowing arrangements: the borrower seeks liquidity. Maybe they can easily afford the desired item or endeavor, maybe they can’t—and for this article’s purposes we must set aside moral arguments for or against living within one’s means—but people often do, for a variety of reasons, want or need an infusion of outside cash.
There are, however, entire demographics not serviced by tried-and-true lending institutions. Often, these folks’ credit score fails to meet a bank’s minimum standards. Or they need unconventional terms on an equipment or business loan. Whatever the reason, these transactionally marginalized sectors find themselves at the mercy of high-interest lenders. Or with no access to capital at all.
“There is a significant population of U.S. consumers who can’t get a loan,” notes Nate Heward, CFO at Acima Credit, a company that provides a point-of-sale credit platform.
Capitalism abhors a void
From the ubiquitous strip mall payday lender to the world of microfinance, a plethora of entrepreneurial solutions has emerged to get cash in the hands of would-be borrowers cut off from other avenues. These alternative lending practices have various degrees of reputability; a wide spectrum exists between the purely predatory lending shop, on the one hand, and the creative value-adding venture, on the other.
For the underserved consumer, three Utah lenders offer financing on purchases. Snap Finance (based near downtown Salt Lake City), Acima Credit (formerly Simple Finance, based in Sandy), and Progressive Leasing (based in Draper) all cater to the under-capitalized would-be borrower seeking financing on consumer purchases.
EnerBank, based in Salt Lake City, fills a very different niche. The company offers easy loans to homeowners for home improvement projects. Their primary customer, however, is the general contractor bidding for a home renovation; the contractor can offer EnerBank’s financing solutions as part of their repertoire—possibly even differentiating themselves in a crowded field.
Based in South Jordan, Onset Financial considers itself “a leader in the equipment finance industry.” With its focus of “offering increased funding options to its clients,” Onset specializes in “mid-market and large-ticket transactions, from $250,000 to $50 million plus” (company website). The company’s list of equipment-lending options is extensive; from operating leases to synthetic leases, purchase-upon-termination leases, collar leases, tax leases, deferred-payment leases and wrap leases, its menu reads like a Denny’s of industrial lending.
Draper-based Prestige Financial helps “credit-challenged individuals obtain auto financing,” per the company website. With a “60-second online credit application” and “financing programs available for nearly every credit situation,” Prestige “allows dealerships to provide competitive financing on new and near-new vehicles to customers who might otherwise qualify only for high down payment loans on inferior inventory, or for no loan at all.” Translation: down-on-their-luck car buyers get a fair shake. At least according to Prestige, which was not available for comment.
Finally, Tab Bank, located in Ogden, serves the trucking industry as its original and core customer base and has expanded to business loans as well. On its menu: asset-based loans, revolving lines of credit, factoring and more.
Scratching the consumer itch
In the world of consumer borrowing, rent-to-own (or lease-to-own; the difference is semantic for this article’s purpose) is growing in popularity. “For the one-third of the U.S. population who are credit challenged,” says Ryan Woodley, CEO of Draper-based Progressive Leasing, “a lease-to-own purchase program with no credit needed” can be a viable option. Progressive has seen remarkable growth, “skyrocketing from $228 million in 2012 to $1.2 billion in 2016.” That’s more than 5X revenue growth over four years, or 130 percent averaged per annum. Not too shabby—the demand, apparently, is quite real.
“The tough fact is this: subprime customers exist—lots of them!” says a recent blog post on the Acima Credit website. Acima estimates this so-called “point-of-sale finance market” to be as much as a trillion dollars. Traditionally, these consumers, denied of conventional financing avenues, came hat in hand hoping for anything. Approval involved a lengthy process; denial brought humiliation. Fintech changes that.
“To build and maintain its competitive edge,” says Heward, the company “invests heavily in the development of front-end and back-end software.” Why? Because competition, that’s why. In the race to capture this vast market, says Heward, “I’ll bet the blue ribbon goes to the virtual provider who continues to deliver the buying experience with superior software and underwriting.”
Given the option, of course, both “retailers and customers want the buying experience to be fast and easy.” Heward describes how Acima “prioritizes a comprehensive set of observed data points on the customer.” Machine learning enables ever-better prediction. This allows the company to approve the lease “without having to rely on mainstream scoring like FICO.”
In practical terms, Acima asks four simple questions of the would-be borrower:
- Do you have a three-month history with your current employer or source of income?
- Do you deposit $1,000 or more into your checking account each month?
- Have you had a checking account for at least 90 days?
- Is your checking account free from NSFs, excessive overdrafts and negative balances?
Because these questions are prominently displayed on the company’s website, applicants can self-screen, avoiding the humiliation of denial if the answer to any of these is negative.
Progressive Leasing also uses “proprietary risk-analyzing software to determine whether consumers are good candidates.” The company created a portal, approve.me, that employs “a waterfall technology that … cascades through all the retailer’s finance and leasing partners to find the best program for that customer,” CEO Woodley explains. If Progressive rejects the applicant, she can, using the portal, “cascade” down through (what we can presume are increasingly poorer) financing options. The portal states that Progressive approves 75 percent of applicants and the approve.me approves an additional 15 percent.
Technological innovation is also redefining customer service in the consumer realm. Normally, when we think of customer service, we imagine saintly, unflappable corporate representatives. They listen to us rant; they keep their cool; they allow us to return our shoes; they send a repair person to tinker with our dishwasher at no cost to us. In short, customer service, traditionally meant humans good at dealing with other humans. That, and corporate policies aimed at keeping the customer happy.
But now, machine learning, proprietary customer service platforms and other programs matter at least as much as traditional people skills. “We have virtualized the lease-to-own process so customers can fill out our 100 percent automated, paperless application,” says Woodley. The application takes only a few minutes and applicants “receive an accept/decline decision in under a few seconds.” That’s customer service—and there’s no human interaction involved.
Improving the home
EnerBank offers “unsecured home improvement loans” with “unbeatable payment options,” per the company’s website. Homeowners can opt to pay a flat fee and zero interest with EnerBank’s “same-as-cash” option, which requires paying off the loan in its entirety within a specified duration. Or the borrower can have a low-interest, low-monthly-payment plan.
“Our entire focus is on helping home improvement contractors provide an attractive way for their customers to pay for their home improvement projects,” says Charlie Knadler, EnerBank’s CEO. Knadler claims his institution is the only lender in the world targeting home improvement contractors exclusively. Furthermore, the company has no plans to expand beyond that demographic. “We intend to stay 100 percent focused on the home improvement industry,” Knadler states emphatically. “That’s unique to us.” By staying narrow, EnerBank can be the global leader in its space.
Retaining a niche focus could serve EnerBank well. “The home improvement industry is projected to grow about 5 percent per year for the next five to seven years,” Knadler says. “Our goal is to double that. We want to grow faster than the industry.” Knadler describes a two-pronged strategy for achieving double-digit growth. First, he wants to “reach the contractors who aren’t already benefiting from the ability to offer payment options to their customers.” And, for the second prong, he aims to “have a service that meets or beats our competitors.”
It’s all fintech
The companies profiled in this article may not be considered fintech firms per se; they’re not using technology to create a new financial paradigm a la Paypal, Indiegogo or Coinbase. They’re merely offering tried-and-true solutions to untapped consumer markets. Viewed from another angle, however, they’re fintech companies through and through. Acima, Progressive, et al are racing to deliver the most convenient financial solutions to the most people in their target customer base. And to do so, they’re relying on technology all the way.