Taking A Credit-First Approach To Alt Lending

Those who are fortunate enough to have access to credit often take it for granted. Imagine if your car broke down, your child needed school supplies or your father passed away and you couldn’t afford the funeral, but banks didn’t want to work with you because you either had bad credit or none at all. What would you do?

Many would turn to family or friends for an informal loan, while others would be too proud to do so. But imagine if all those people were in the same boat and had, at some point in the past, turned to each other (or to you) for an informal loan as well. At that point, it’s no longer a question of pride — it’s just how you get things done, for better or for worse.

This hypothetical is no game of make-believe. It’s a very real situation in the U.S., which is where Dominican-born LendingPoint CSO Juan Tavares now calls home. However, Tavares said the landscape is shifting, as LendingPoint and other alternative credit products lend their ears — and their money — to underserved populations.

In a recent interview with Karen Webster, Tavares and LendingPoint CEO Tom Burnside walked through the ABCs of their alternative approach and how their focus on the near-prime market is creating value for customers — and the economy — on a larger scale.

Philosophy

Why should only the most creditworthy have access to finance when they need it? Accidents, sickness and death do not differentiate based on who can afford them. Those without credit, or whose credit score is lower, still have emergency expenses that must be covered on the spot, but traditional lenders are afraid to serve them — what if they never pay it back?

Some of them might not. And some of them might. Burnside and Tavares said that looking only at a credit score gives insufficient insight into the level of risk. Their solution? Behavioral attribute analysis.

“This person may have had a fragmented financial journey,” Tavares said.

For instance, he said, maybe they had a secure payment card with an issuer and another line of credit worth $1,000. They’ve borrowed here and there as they’ve been able, but no one has taken the time (or perhaps no one has had the data) to look at their potential and help them unlock the capital they needed to make a meaningful purchase in their life.

It takes more than a credit score to reveal whether an applicant is likely to pay back a loan, said Tavares. He believes it also takes more than data — even good, rich data. It takes behavioral attributes, and an interpretation of that data over time, to show the customer’s financial trajectory.

That’s something most alternative lenders haven’t ventured into yet, giving LendingPoint an opportunity to compete in this very blue ocean. Most such lenders, said Tavares, post between 18 to 23 percent in write-offs; LendingPoint does about 25 to 30 percent better than that.

Here’s how.

Instead of staffing underwriters, the company uses output from its predictive system, which analyzes 56 core variables distilled from 3,000 data points pulled from every transaction it sees. It also feeds that predictive system raw data purchased from third parties to see how customers behaved before and after they left LendingPoint, especially if they chose not to take a loan.

The second prong of the approach looks at what Tavares called “synthetics,” or “cluster behaviors,” to obtain the next level of knowledge about how the performance of the asset will go. Taking that extra step, he said, is how LendingPoint can tell whether a customer is on the way up or down.

“We’re looking for the rising star,” Tavares said, “and not the falling knife.”

Back to Basics

Burnside got his start in small business lending. Shortly before meeting Tavares in 2009, he had successfully managed a $500 million portfolio, and his company was looking to grow outside the U.S. Five years later, Burnside and his LendingPoint co-founders had their eyes on the next ladder rung: growing beyond small business loans. The timing couldn’t have been better.

“A revolution was happening in personal loans and consumer loans,” Tavares said. Already the market was generating $1 billion in personal loans each month. “It was forces of magnitude bigger than the small business space,” said Tavares. “There was a big snowball to pursue.”

But you know what they say about a snowball’s chance in hell — it’s not very good. If you asked Burnside, neither were the chances of continued success if the personal loan model didn’t change.

Burnside said the model was “capital-light, credit-last” and lacked a balance sheet — a component he and Tavares agreed is critical to alignment of interest. They believed the traditional approach would ultimately prove unsustainable, and so, they set about building their own.

Tavares said the ABCs of LendingPoint’s approach are: Access, Balance sheet and Credit-first strategy. If that seems commonsensical, he said, that’s because it is. The whole point is to get back to the fundamentals and execute upon them to create value for the consumers and the economy.

By contrast, he said, traditional lenders are still charging a premium, despite the fact that fewer and fewer consumers want to pay it. The predictability those lenders promised hasn’t been delivered, he said, so why would consumers pay extra? Instead, they’re buying loans at par, creating price compression and profit margin issues for traditional lenders.

Tavares said that those lenders’ stubbornness has changed the marketplace in its own way, though, causing alternatives like LendingPoint to form in answer to consumer demand. Only now are lenders starting to introduce new pricing on premiums and advance rates.

As the market continues to reward performance, “eventually people will be forced to become more credit-centric,” Burnside said.

Use Cases

It’s been several months now since LendingPoint joined forces with ezVerify, a tech company powering real-time health insurance verification and benefits info, to build a solution to healthcare’s last-mile conundrum — namely, consumers turning down medical care they need because they can’t afford to pay their plan’s high deductible. Their joint solution, ezCarePoint, enables patients to access financing options (flexible payment plans and short-term loans) at the point of sale before receiving a procedure.

Tavares said this marks the beginning of the company’s next frontier at the intersection of payments and credit. The goal? To provide flexible financing at the point of need, especially for consumers who couldn’t normally access credit — and therefore couldn’t receive necessary care.

Another use case is weddings. David’s Bridal, for instance, offers LendingPoint flexible financing options for brides-to-be whose wedding plans outstrip their immediate cash flow.

Adoption agencies are also using this tool to help foster parents afford all the fees, legal and otherwise, associated with making a foster child a forever member of their family.

But those are all exceptional use cases, Tavares said. A customer’s need could be as commonplace as replacing the windows in their home, fixing that broken-down car, buying those school supplies or financing that funeral.

“It’s not only about access at the point of need and technology,” said Tavares. “It’s also amount and affordability.”