When more than half of Americans cannot be approved for credit by traditional banks, a new approach is needed, Vijesh Iyer said.
Mr. Iyer is the COO of LendUp, a fintech providing a better path to financial health for the 56 per cent of Americans with limited options within the traditional financial system due to low credit scores and income volatility.
“We’re a mission-driven startup in the space of providing credit to the underserved,” Mr. Iyer said.
That mission focuses on more than basic loan provision, Mr. Iyer explained. Employing experts in data science, LendUp developed a “ladders not chutes” model which reinforces positive behaviors while helping borrowers avoid the debt traps which can easily impact their financial health.
The first rung of the LendUp Ladder involves small dollar loans that are more easily paid back. The borrower develops a credit history and some confidence. Before the applicant provides any personal information, LendUp provides the cost and APR up front in the form of a movable bar that shows the true cost of each loan. Should the borrower later experience payment issues, LendUp works with them to provide a solution that does not penalize them or send them into a debt trap.
That is a crucial early step to help people progress, and is in stark contrast to the few alternative credit options available to people at this stage.
“The payday loan industry is one of the most egregious forms of lending in the country,” Mr. Iyer said.
It’s easy to get caught in the payday loan debt trap. According to data on the LendUp website, 47 per cent of Americans could not cover an unplanned, $400 expense. More than half have a sub-680 FICO score, meaning they cannot be approved for credit by most banks (according to a 2015 Federal Reserve Board study). That’s more than 150 million people left vulnerable to a broken transmission, medical bill, or even an expected bill that comes on the first when they get paid on the second.
The initial loans range from $100-$250. As borrowers repay loans they earn points that help them qualify for lower-rate loans in the future.
They also earn points by taking free education courses consisting of a short video followed by a quiz. Topics include budgeting, online protection and the true cost of credit. These courses fill a void in financial education, Mr. Iyer said.
“Many have misconceptions about how the credit system works. We are not educating youth about money, credit and the credit system (in school). We don’t prepare youth to deal with money and credit in school, and what are the good and bad things to do from a credit perspective.”
LendUp offers credit cards in partnership with issuing banks that have similar social values, Mr. Iyer said. There are no security deposits or over-the-limit fees, documents feature clearer wording and LendUp reports to the three major credit bureaus.
Taken together the combination of the loan ladder, credit cards and education are making an impact.
“This works well as people are climbing the ladder,” Mr. Iyer explained. “They are demonstrating the good type of behavior and as they do we are giving them more credit.
“We are really excited about how we use the power of a transactional product to drive the change in behavior.”
Mr. Iyer said fintechs have gained a foothold and will continue to do so for two main reasons. The first is because traditional players are for the most part technologically far behind the newer players. If they attempt to catch up through acquisitions, they face the challenge of integrating different technologies.
“That makes innovation and product development hard,” he said.
Thanks in large part to the recession and regulation, mainstream finance is steering clear of those deemed high risk. It’s too expensive to service them and the reward is not enough.
The startup culture is decidedly different, Mr. Iyer said. After working for large companies, he said he was drawn to LendUp’s culture, which was different than some of his previous stops.
“What struck me about LendUp is they are attracting people passionate about wanting to make a difference, there is a common desire to make an impact.
“We believe you can run a profitable entity and make a decent return. You don’t need to be super profitable and work at odds with the customer.”