How do you get credit as a young person when you’ve never had it, and big banks are tightening their lending nets and leaving you behind?
As it turns out, a company called Pave recognized the earning potential of this large demographic, left out of the credit mix for so long.
Oren Bass said the original idea for Pave came in 2012, as the founders looked back on the recession. Young people with limited credit histories suffered the most as banks tightened lending standards and raised rates.
“We wondered what if, instead of taking on more credit card debt, young people could access their future earning potential?” Mr. Bass remembers thinking.
It was not a great leap to see that people in certain fields of studies and those looking to take additional training were likely to be the big earners and safest bets tomorrow, yet traditional lending models did not look at credit risk that way, Mr. Bass said. They were focused on the here and now.
Pave’s novel model proved to be more of a hit with borrowers than investors, Mr. Bass added. So while the Pave team decided to make some revisions to it, they were more tweaks than an overhaul.
This was because the online lending revolution was taking shape and Pave would be easily able to adapt to it, he said.
So Pave began to develop a loan product with an affordable repayment schedule that sought to reintroduce aspects of the borrowing process that had largely disappeared.
“The human touch had been missing from the borrowing experience,” Mr. Bass explained.
That sense only grew during the recession as tighter lending standards and bank misdeeds combined to further alienate millennials from the process.
Those misdeeds were partially based on products that were so complex that few could understand them. Even when they could, consumers were not told the entire story.
“We also had to make the system transparent, easy to use and personal,” Mr. Bass added.
This meant creating a simple experience without hidden and late fees, where people understand up front precisely how much they will pay and for how long.
Pave’s goal was to enable the success of the millennial generation through increasing their access to credit in three specific areas.
The first was increasing human capital through increasing the number of people working in demand professions. Many need further education, yet many millennials are boxed in by the combination of a heavy student debt burden and lack of access to credit. If they want to get further education or even start their own company, their avenues are few, Mr. Bass said.
“This keeps many in jobs they do not like,” he added.
“Thousands of great borrowers went to good universities and have fair salaries, but they have 680 FICO scores and have to pay 20 percent on their credit cards.”
The second is to make it easier for millennials to go where he good jobs are, Mr. Bass said. Someone with high personal debt often feels trapped in a job that is less than ideal because they need to service that debt. Make it more affordable to service it and it frees people up to move to a hotbed in their chosen field and pursue their dreams.
The third area is providing more affordable options for people to refinance credit card debt.
After 2008, many banks simply stopped lending to younger people. They were essentially saying an entire population was a poor credit risk, Mr. Bass said.
“They were saying there were no great bets,” he explained. “And we were saying there were plenty of good bets but they had no chance to prove it.”
When Pave looked beyond FICO score and payment history, education, employment and future employability became obvious, important and accurate determinants of risk.
“SOFI calls them HENRY’S, which stands for ‘High Earners Not Rich Yet,'” Mr. Bass said.
Their average age is roughly 26 to 29 and their FICO scores average between 680 and 775. While not often Ivy Leaguers, they attended one of the nation’s top 100 universities.
“We look at university graduates to identify people with strong earning potential,” he added. “They often have stable jobs in demand fields with steady incomes such as nurses.”
A huge group, one which will soon be the dominant sector of the population, has been marginalized by the manner in which they have been treated by traditional lenders and want to deal with a nonbank entity, Mr. Bass said.
He knows their pain. He recently called his bank to request a larger credit limit.
“After 25 minutes of waiting, I got to speak with someone, and then it became an awful experience,” he recalled.
Millennials want their financial platform to be very technologically advanced while also being user friendly, Mr. Bass explained. They have to trust the brand and know that brand shares their values, he added.
To be successful, the whole focus has to be on the customer first, Mr. Bass said, citing eyeglass platform Warby Parker as one company who perfectly captures the approach. Few in the consumer finance field are doing it successfully, he believes.
In addition to education and career plans, Pave also looks at an applicant’s cash management ability, Mr. Bass added. People who are living within their means and not on credit cards are lower risk borrowers. These people can increase their positive cash flow through a consolidation loan, for example.
Pave is fortunate to have David Rosen leading their underwriting efforts, Mr. Bass said. A research psychologist and statistician by training and a risk manager by trade, Mr. Rosen has helped refine Pave’s underwriting process.
The less credit history an applicant has the more that underwriting process has to depend on alternative data sets, Mr. Bass explained. This includes a person’s social graph and their education. A native of the United Kingdom, Mr. Bass said studies there have revealed significant correlations between a person’s credit graph and their credit performance.
That social graph proves especially helpful with identity verification and fraud prevention, he said.
Many in the marketplace lending industry say one way to vet a company is to check their website for different facts, including contingency plans in case the platform becomes insolvent and where deposits are held.
Pave states on its site that should they no longer be able to service loans, they have retained a back-up servicer with more than four decades of lending experience. Because the terms are identical, borrowers and investors will have a seamless transition to the new entity, the site states.
Pave also has a diverse set of advisors, including presidential consultants, academics, and people with alt-fi experience, Mr. Bass said. Former SoFi COO Adam Boyden, for example, has helped with building scaleable financial technology.
Another, Pascal Cagni is a former Apple executive from outside the United States.
Pave is taking a holistic approach to their growth plans. They are one of the few companies looking to grow with millennials as they transition through different life stages. With each one comes unique financial requirements, Mr. Bass explained, citing mortgages as one area they are exploring.
Shorter-term, the plan is to grow originations, while positioning Pave as the preeminent online lender for millennials, Mr. Bass said.
A key pillar is customer service, Mr. Bass explained.
“We want to build a relationship withe the user, not just offer a loan.”
Pave will offer education such as online chats to help people understand their credit score or learn different aspects of personal finance.
“Then when they are ready to make another financial decision, our team can grow and adapt with them.”