Traditionally, potential profits to be made from serving people with lower incomes were slim or nonexistent. That is why banks essentially ignored them. Too many challenges for insufficient rewards.
That is beginning to change, thanks to technology and the popularity of the mobile phone. There are new and viable ways to reach the habitually underserved.
But it is far from a slam-dunk proposition. Careful attention needs to be paid to every aspect of platform design or a company runs the risk of failure.
Those are some of the considerations Michael Thiemann incorporated into Zebit, a fully automated, zero-percent interest lending platform for employers and employees.
Mr. Thiemann knows a fair amount about lending and analytics. Armed with a Harvard MBA and an engineering degree from Stanford, he was the CEO of several companies which developed big data products for online loan origination, real-time fraud prevention and Internet transaction analysis.
His team created payment systems fraud solution Falcon, which safeguards other than two billion debit and credit accounts worldwide.
When viewed through a traditional lens, Mr. Thiemann acknowledges lending small amounts to high-risk groups does not make much sense.
“I came from running a large online lender. If everyone paid back 100 percent of their loans and the process was highly automated, we’d still have to charge close to 10 percent (to recoup costs).”
“With compliance, record-keeping, customer service and account management, you incur the same costs on a $100,000 mortgage but you are lending them $400.”
Mr. Thiemann and his team wanted to create a product which reached with no fees, no interest and no penalties, he said.
“How do you furnish zero-interest loans to the highest-risk people?” Mr. Thiemann asked.
It can be done, he explained, if you strictly adhere to a few principles.
The first is keeping a low cost of acquisition. It is not uncommon for banks to spend between 50 to 100 dollars to find every single customer. Their first thought is how to make that cost back.
The solution is to acquire customers in bulk through their employers, who market it to their employees.
What is in it for the employers?
A happy and productive workforce, Mr. Thiemann explained. That is a topic receiving considerable attention post-recession.
“I think what has happened is people realize you can’t have health wellness of you don’t have financial wellness,” Mr. Thiemann explained. “It is a huge source of stress.”
Mr. Thiemann used the hypothetical example of a single parent whose washing machine breaks down. They need to wash clothes but they do not have the money to fix the machine, nor do they have the time to sit in a laundromat.
“Guess what they’re thinking about at work?” Mr. Thiemann asked.
“The most enlightened employers at once realize that you are never going to have health wellness or a focused and motivated workforce unless you supply good financial wellness help.”
Zebit provides a proprietary wellness score, along with free educational materials and some budgeting tools to financially underserved employees.
And there are the loans, which can range from five to 10 percent of a person’s salary. A five percent loan is typically paid back in six months, Mr. Thiemann explained.
Employees must have worked at an employer for a least of one year and customized products can be supplied with other data analysis.
At the beginning, Zebit is working with stable industries like health care, government and education. The plan is to expand the number of industries as time goes on.
But how are these services offered at no cost to employer and employee?
Retailers pay for it through the Zebit Market, Mr. Thiemann explained.
Just like banks, retailers want to lower their cost of acquisition, so they pay a fee to reach the people signed up through Zebit client companies. In addition to loans, people can buy appliances, electronics and other merchandise. Participating companies include Panasonic, Samsung, Canon, Garmin, HP, LG Electronics, KitchenAid, Cuisinart, Hoover, KidKraft, and Coleman.
And just like the banks, these companies hope that once they set up a relationship with you, you become a loyal customer.
The second factor needed to make the Zebit concept work is precise data, which the employer makes available, Mr. Thiemann said. They know current addresses, employment tenure and other data it takes underwriters time and money to assemble to meet Know Your Customer needs.
“It in addition helps to adopt the right mindset, Mr. Thiemann explained.
“This is about structural risk control, not analytical or statistical risk control.”
“You are going to find out statistically this is the riskiest group no matter what you do.”
The final consideration is keeping a high degree of automation. Mr. Thiemann said keeping account management systems for multiple employers is a complex process, as Zebit essentially has to create three unique systems – a payment system, an e-commerce marketplace and an account management system for each account.
“When designing account-management systems, self-service is a must,” Mr. Thiemann explained, citing Uber as an example, one that in addition works when discussing such topics as lower overhead and maintenance.
Mr. Thiemann believes Zebit will deliver an experience the financially underserved are definitely not used to.
The underserved often are made to stand in long lines to receive substandard service. The products at their disposal are ill-fitting, charge exorbitant fees, and are cumbersome to apply for. People take it since they have no other choice.
Zebit aims to flip that entirely on its head, Mr. Thiemann said.
“No one has ever treated this group with this level of customer service before. They have poor experiences since businesses do not have to serve them well.”